E700 | Cash-Based Practice Business Finance 101

In this episode of the podcast, Doc Danny dives deep into the world of profitability and finances in a physical therapy business. He shares his expertise and insights on the different stages of growth and how they impact the overall profitability of the business.

Doc Danny starts off by discussing the monthly finance call he conducts for his mastermind members. During these calls, they tackle important finance-related topics such as profitability percentages, leveraging debt, pricing structures, and even mergers and acquisitions. He stresses the importance of understanding the language of finance, even for those who may not be financial experts.

Moving on, Doc Danny focuses on the stages of profitability in a cash-based or hybrid physical therapy practice. He reveals that the most profitable stage is actually at the beginning, when the business is just starting and the owner is the sole provider. This type of "lifestyle business" can yield net profit margins of around 70-80%.

However, Doc Danny cautions that the next stage, the "growth stage," is the most challenging and least profitable. This is the phase where the business expands from a solo practice to a standalone clinic with additional staff members. It is during this period that overhead costs increase significantly, leading to a temporary decrease in net profit margins. Doc Danny compares this stage to buying a larger house before having children, emphasizing the necessity of preparing for the challenges that come with growth.

Despite the temporary decrease in net profit, Doc Danny highlights the importance of developing "non-active revenue" generated by other providers within the clinic. This type of revenue contributes to the overall value of the business and enhances its appeal to potential investors or buyers.

As the business continues to grow and attract more clinicians and staff, Doc Danny explains that profitability and resilience improve. Fixed costs are spread across more revenue-generating providers, making the business more appealing to potential employees and easier to attract and retain talent.

Doc Danny concludes by encouraging physical therapy business owners to view their business as an investment vehicle and asset. He advises embracing the challenges of the growth stage as it ultimately leads to the development of a stronger and more valuable business. He also recommends seeking out resources and support, such as his mastermind program, to navigate the different stages of business growth and profitability.

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Podcast Transcript

Danny: Hey, real quick, if you were serious about starting or growing your cash based practice, I want to formally invite you to go to Facebook and join our PT entrepreneurs Facebook group. This is a group of over 6, 000 providers all over the country. And it's a pretty amazing place to start to get involved in the conversation.

Hope to see you there soon. Hey, are you a physical therapist looking to leverage your skill set in a way that helps you create time and financial freedom for yourself and your family? If so, you're in the right spot. My name is Danny Mattei and over the last 15 years I've done pretty much everything you can in the profession.

I've been a staff PT I've been an active duty military officer physical therapist. I've started my own cash practice. I've sold that cash practice And today my company physical therapy business helped over a thousand clinicians start growing scale their own cash practices So if this sounds like something you want to do listen up because I'm here to help you what's going on?

dr. Danny here with the PT entrepreneur podcast and Today, we're going to talk finance. We're going to talk about profitability in the business and really the way that I like to look at cash in performance based practices, but really businesses in general if you're trying to grow. What I would consider a true business.

Okay. So first let me set the stage by telling you where this comes from. And I do a monthly finance call for our mastermind members where we're getting to all kinds of things that are, finance related that could be, looking at Profitability percentages in different stages of the business that could be looking at leveraging debt to be able to expand it could be price points and payment structures for staff members and compensation.

It could be equity exchanges and purchasing businesses, selling businesses, all kinds of stuff. And I actually really like this stuff. I didn't think this would be something that I would be interested in. I, coming out of school, I just was clinically obsessed with trying to learn as much as I possibly could.

And over the last 10 years of being in business, I've realized that just how important it is to understand the language of finance. And if you don't understand those things, you're a liability to your own business. Not to say that you need to be like, a financial wizard or a CPA or whatever, a CPA.

CFO level understanding of finance, but you do need to have a basic understanding of what what the game is, how you're playing in the scoreboard really comes down to revenue. And that's just basic math, right? So all you really need to be able to do is add, subtract, multiply, and divide, and then understand how those apply in real words, real world situations.

There's a book, the lemonade stand I believe is the name of it. Hang on. It's behind me. Yeah, I'm sorry, the accounting game but it's about a lemonade stand and it's a really easy read. Literally kids could do it, but just basics of understanding some basic accounting math I think is a, is beneficial if you're trying to get better at understanding these things.

But what I'm gonna talk about really comes from a question that I got from one of our mastermind members about profitability, and she basically asked what stages are most are the most profitable in in a cash based practice or a hybrid practice, excuse me. And so if we're looking at like purely, what stages are most profitable.

And then I want to circle around to a couple of things that I like to think about in terms of not just profit, but other ways of looking at what's important in the business from a financial standpoint. But if we look at what stage is most profitable, really, it's when you first start.

So when you're just starting, it's just you. So you're doing everything, you're fulfilling everything. You're the administrative assistant, the physical therapist, the clinic director, the director of HR, maybe you're doing your own accounting to start with, whatever you're doing, everything.

So your profit, your net profit is the highest whenever it's just you and you're just starting. So if you want to stay. In a what we'd consider a lifestyle business or a stage of business that really is just primarily you not growing past yourself, but just replacing your income and having more.

Flexibility in your schedule and say over what you do for work, that's a lifestyle business. So that's that's plenty of people want to do that. And that's fine. You have to understand what you want to build before you build it. Otherwise you can build the wrong thing. And that sucks because it doesn't align with the life that you want.

So if you want a lifestyle business, you would stop there and it's very profitable, right? So this is where we spend You have seen people, be able to, let's say they want to spend more time with their kids. So they go from working five days a week to two days a week, but they are running their own small practice.

And let's say they're seeing, 12 people a week or roughly like 50 visits a month, say they're somewhere in that range, but they're charging 200 a visit. So they can go in two days, a week of actual work clinic work. They can, make 10, 000 a month. And have very little overhead if that's all that they want to do.

So that's a lifestyle business. Very profitable typically are going to be 70, 80 percent profit margins, depending on, um, factors of what your overhead is or is not. So that's the most profitable stage, the least profitable stage, which is. The next stage, if you decide that you want to grow past yourself is the, it's the hardest stage.

In my opinion, it's the growth stage. It's the first growth stage where you go from yourself to then growing into a standalone space and then hiring on additional staff members. Because I think of it like, imagine if you had to, let's say you decided you wanted to start a family. So you couldn't just decide that and then, you could move into a house that you needed space wise when you needed it.

What if you had to go from just like you and your partner, you decide to start a family and then but then you have to buy like a four bedroom house before you can have a family. Like it's expensive, right? And you have all this additional overhead and spaces you don't need and all that. Most people aren't going to do that.

They're going to move into the house once they have kids. You can't do that in a business. You can't say, okay I'm going to move into a bigger space. Once I have the employees to justify it, you actually have a hat. You have to have a space for them to grow into. So you have to do it in reverse.

And this is why this second stage is this first gross growth cycle is just so hard. And I didn't know this when we went through it. But man, I remember just being like the most stressed out that I've ever been. Growth cycle, because I didn't understand that I would take a step back on the net profit side.

So gross profit or gross revenue would be how much money your clinic makes. So let's say your gross revenue is a hundred thousand dollars a year. Let's say that you are. Working by yourself. So you have 80 percent net profit, so that would be 80, 000 of the a hundred thousand dollars you would keep.

So you'd have 20, 000 that goes out in overhead. So just as a simple scenario, the difference between gross and net gross is what you make net is what you keep. So when you move into this first growth cycle. Your net margins suck. They go down. You'll make less money during this time, typically net than when it was just you.

So your take home will be about the same, if not less for a period of time. And the reason that happens is you go from, let's call it a sublease space that maybe is going to cost you a couple hundred bucks to a thousand dollars a month to now all of a sudden, maybe you have, three to 6, 000 a month in rent, right?

So you've just increased your rent overhead. Now you have utilities that you have to account for in a bigger space. You have a build out loan, usually maybe a construction loan or you have to pay for that out of pocket. So that really taps into your cash reserves. Then you have to hire people. So you have to hire a, another clinician to help fulfill.

You have to typically bring on administrative staff as well to help on the operation side of a practice. So now you have this increased overhead both in your physical space and in your staff and in the insurance and all the things that go along with that, that you need as a business owner and taxes to then, be able to get through this first growth cycle where you have to, Build the schedules of yours and your clinician's schedule, your first hire to where it justifies the ability for you to bring on a second person.

And the first person, like I said, it's just not all that profitable because you have the shared space for most people. That's going to be a shared space that would account for probably four people for. Clinicians, and it's just two of you and the second person's schedule is really not busy when they first come on.

It's going to take you in most cases, three to six months to really build that person's schedule up and going, getting through that can be tough, especially, and here's where it gets really hard if you have turnover. So if you have turnover in your staff, while you're going through this first glow growth cycle, it is, it's a huge.

Deflator of momentum in your business and it really slows down your progress because then you have to go out and find another person and train that person up, get them in, get them indoctrinated into all the systems and all that stuff and start to build their schedule up and it's, you're not starting over from square one, but you're definitely, you're losing a lot of, positive gains that happen if you have turnover during that time.

So during this time, not only are you going through all these build outs and you're hiring administrative staff and you're training them up, but you're also have a clinician that you have and you have to make sure you're doing quality control with that person and making sure that they're seeing people the way that you want them to, and that they're getting mentorship as well, so they don't feel like you're just leaving them by themself.

And you're the smallest that you've been. So it's not as appealing to move into a company where it's just you and one other person. They're taking a risk on you as well. So not to scare you off from this phase, but the reality is you can't freaking skip it. Like it doesn't work that way.

You just can't go from yourself to then all of a sudden four clinicians at once. It doesn't work that way. You have to build, one brick at a time. And this stage is really, I think the toughest one on your business skill sets and on your time. You're going to feel the most time poor and stretched during this time.

You're also going to have the least amount of profit, true profit, like net profit during during this time. But what you are making progress towards is something that's really important to keep in mind. And that's what I call non active revenue. So there's. There's net profit that you earn and you have the highest profit percentage when you first start, but all of that is produced by you.

So again, if we come back to this test that I talk about, which is the hit by the bus test, if you were hit by a bus tomorrow, would your business bring in any money? Or would it not? And if it would not, then you don't have a business. You have a job, you've created a job for yourself. And it could be a lifestyle business, but it's still a job.

And if you get hit by a bus and you have that, you have one clinician that is seeing people, Hey, you're still making money. So you've taken a massive step forward in terms of non active revenue. And what is easy to forget is the fact that you have you have. What we call enterprise value being developed within your business, meaning.

You have value that someone else would want to. Invest in the company for or, and, or buy it. And that enterprise value is really important. Think of it like equity in a home. You are building equity in a home that can be transferred, to somebody else one day for, a monetary amount.

And we have now seen plenty of these cash based practices grow and sell or grow and partially sell to internal partners. Or to people that maybe they want to bring on as a partner is going to help with expansion. And they assign value to those based on primarily how much non active revenue is being generated.

So the net profit that you generate. Your business generates that you're not actually earning is more valuable than if you do it yourself because technically if it's just you And you have let's say 80 profit margins and you're making you know 20 20 000 a month and you're netting 16 000. That's a lot of money But no one's going to buy that they might buy your list of clients, you know they might assign some value to that but to because you're going to leave And then now they've just inherited a job.

They've just bought themselves a job. No one's going to do that. That's an outside investor. It's not going to happen. And like I said, you might have some value in some of the assets you have, but it's negligible in comparison to building a business that has non active revenue being generated by other providers within a clinic.

So in order for you to get to a stage where you have three to six clinicians, and you have a practice that's doing. Between 500 and a million and a half to 2 million in revenue on an annual basis. You got to grow past yourself. And that first stage is what crushes a lot of people because it's really hard.

But once you have gotten past that, Hey, sorry to interrupt the podcast, but I have a huge favor to ask of you. If you are a long time listener or a new listener, and you're finding value in this podcast, please head over to iTunes wherever you listen to the podcast, and please leave a rating and reviews.

Actually very helpful for us to get this podcast in front of more clinicians and really help them develop time and financial freedom. So if you would do that, I would greatly appreciate it. Now back to the podcast, things become easier in certain ways. So number one, you can start to limit your schedule, get some of your time back to really focus more on the business.

You become more appealing to other clinicians as well, because when you have, when it's just you, it doesn't look as appealing as when it's you. And you have a couple other employees. You look like more of a legitimate business when you have a couple of employees. And I can't tell you how many of our mastermind clients that we work with have seen this firsthand where they like struggle like crazy to get their first hire in the door because it's just them and they don't, it doesn't really look that safe.

In terms of an employment opportunity. And that's what people don't realize is you're a startup, you have a lot more inherent risks than a bigger company. And as soon as you add another provider and an admin and now all of a sudden you look a lot more legit, people are like, wow, okay, I'm not the first one.

This looks like a better spot to be. And let's say you have three, four clinicians all of a sudden, like it's much easier for you to hire. It's much easier for you to find talent and staff because you look more legitimate. You also have your, put yourself in a far more resilient position by having Multiple staff members.

So as you grow past that first staff member into, a phase where you're going to grow into outfitting the entire facility. So let's say you have, three treatment offices. You could really have four staff members in yourself and and you'd be able to fill out that, that clinic with that number of staff members if you're running a closed treatment model.

For you, that means four people and yourself. So you got five of you, plus probably, somebody at the front desk. So administrative person, and now you have a team of six. That team of six is really important. If you think about if one of your clinicians leaves. That means one out of five, if you're including yourself as a clinician leaves, that's 20 percent of your workforce.

If you have turnover when it's you and one other staff member, one other clinician, that's 50 percent of your workforce. Half your workforce is gone. What if half the workforce of Amazon left tomorrow? Like it'd be a real problem for that company, but that doesn't happen because they're massive and the bigger they are, the more resilient they are to certain employment changes that happen.

So for you, like growing past yourself actually creates safety and stability. So you got to think about that first stage as, proof of concept. You're very profitable. You can really save a lot of cash and then you got to go through the crucible that is the first growth cycle. And you're going to learn a lot of really.

Important lessons. You're going to learn how to, manage finance, how to hire people, how to manage people how to deal with build outs and equipment and vendors and all that stuff that you need to learn how to deal with to be able to grow into that space. And it's a challenging phase, but if it's coming, it's better than if you don't, right?

If you're going to. It's if you're going to run 10 miles, like you're like, okay, 10 miles, pretty far, it's going to suck. But if somebody says, okay, I want you to run and I'll tell you when to stop psychologically, that sucks. That's way worse because you don't know when the end is going to be there.

You don't know what's going to happen or what you can expect or how to pace yourself. So at least if you know that growth cycle is really hard. You can, brace yourself for that. You can go into it knowing, okay, cool. I'm going to lean into this. I know this is going to suck versus I didn't know.

No one told me I didn't have anybody to ask and it sucked. And I would say, it was way worse because I had no idea what to expect and we thought we were maybe doing things wrong, but we weren't really, although we did make a lot of mistakes, but anyway it's way better to know than not know that you have this sort of big challenge coming up and that you can't get past it.

There's no way to get past that without going through it. You have to you have to beat that level before you can go on to the next one. And then after that, it becomes you. I wouldn't say you have like clear sailing, but it's way Less bumpy than than when you first get started, because you're going to grow, you're gonna have more security more staff, more revenue to share across all the overhead that you have.

So you have let's call it five clinicians that are bringing in revenue versus one or two, but the fixed cost is the same, the overhead, the administrative side, the technology side, it's all the same. So now you're spreading that across far more clinicians that are bringing in revenue. And that's where you look at your non active revenue and it really starts to outpace what you're able to produce as a clinician, producing your own revenue, seeing patients.

And that means you're adding massive enterprise value to your company. That means you can either take a step back and you can run it, I wouldn't say like remotely. You could do it remotely if you wanted to, and you could live somewhere else. We've seen people do that. You'd have to really be good on the operation side in order to do that.

But you could also bring somebody on to manage the clinic and then that takes some burden off of you. We've seen people do this and then get back into more patient care. We've seen people literally bring people on to manage the clinic, but then they just like treating patients so they get back into treating patients, but they don't really wanna deal with the management side as much, which is funny.

That just means they just love being a clinician. But we've all seen people take a step back and really focus more on the business and growing the business and allowing them to be more of a business owner than a clinician that owns a business. So it depends what you're trying to do, but as you grow past yourself and you have more non-active revenue.

You're developing enterprise value in your company, which means you are building the equity in the company, just like a house. So as your home increases in value, you have more equity. You could sell that to someone else. You might not, you might just live in your home for who knows how long. And and then, eventually have that thing paid off, but it has intrinsic value.

People will buy it. You can sell it, to somebody else. Same thing with a business, and if you can look at your business as an investment vehicle, as an asset that it is and make decisions based on that, you're going to build massive enterprise value. That's going to allow you to a either take a step back and have a lot less direct impact.

Work in a business where you're generating revenue for it, but it's still very profitable. And you're also able to have an asset that you can build into something like a retirement strategy. If you want to sell your practice, we had practices that have sold for, seven figures that are, cash performance based practices.

Like these are really like, businesses. These are entities that people find value in and outside investors and strategic partners will buy these, or you can autopilot, take a step back and really have a much more of a less active sort of business role, but still have a good income stream coming in.

Which in a business, that's really hard to kill. If you think more people are going to like. If you think injuries are going to go away anytime soon, then I wouldn't start one of these clinics. If you think that injuries, people are still going to continue to get injured and need help with health and wellness, then, you probably have a pretty freaking resilient business to own and to grow.

And I'll take the latter. Cause I don't really think that our population is getting healthier and less injured. Overall, I think it's, if anything, it'll stay the same or maybe get a little bit worse. That's it. That's what you got to think about. So where are your most profitable?

The very beginning, but it's all active revenue. You're doing everything, get hit by a bus. You had nothing's coming in the second stage, that first growth cycle. It's tough. It's a bitch. But Hey, at least, it's going to be a bitch and you can brace for that and be aware of it. You're going to be, you're going to feel like you're the least profitable.

Why did I do this? It has stayed in my little office and not made this adjustment to where I'm taking on more overhead. Danny was wrong and, but I'm not wrong. Okay. You just can't skip this step. You have to go through it. And then once you get on the other side and you have your second, third, fourth clinician, you're going to look back and think to yourself, Oh my gosh, thank God I actually did that.

And I learned so much doing it and you can appreciate what you've built so much more. And you have a far better business by that point, a far more robust business by that point. And but getting there for some folks is really it's a challenge, and we saw the same things ourselves.

So it's not unique to you. It's just a difficult stage to go through. And don't forget your business is an asset. You're building enterprise value in it. If you do it the right way, and that can really create a life changing, exit for you. If you decide you want to do that and, or create a business that really supports you and your family.

For a very long time, as long as you decide that you want to be a part of that business, you can be as active or inactive as you choose to be if you set it up correctly. So from a finance standpoint, I hope you enjoy this finance sort of high level 30, 000 foot view of what we're looking at with some of these first stages in the business and the profit side of it, or the net revenue versus non active revenue.

And how I look at those two things and how you should really look at them too, depending on what you want to do. If you want to do a lifestyle business, cool, just keep it as profitable as you can, take that money and put it into assets outside of the business. You can invest in other things outside of it.

You don't need to double down on that business because it's literally, it's just a, it's just an income stream for you. And then invest in things outside of it to be able to make sure you're diversifying outside of just, your lifestyle business. But if you're going past yourself, It's an investment, look at it like that, put money into it.

Like it's that, but damn near any money that you can, save and you don't need for your family back into the business, especially during those growth cycle stages, because it's going to allow you to really scale that business up faster, put you in a more stable position faster and build more enterprise value in the business along the way.

If you like stuff like this, and you are a business owner that has a practice that whether you're, Sub leasing a space and you're just getting started or you're going through a growth cycle. Like I just talked about, or you have a couple of clinicians and you're trying to really optimize the business and grow it even more.

You got to go to physical therapy, biz. com and check out what we got going on, especially our mastermind program. Like we have. Some of the best clinicians, the entire country that we are fortunate to work with in that community. It's one of the just coolest communities that I've ever been a part of them, obviously quite biased considering that that I started it.

But every time I get together with our mastermind, it's just shocking to me just how amazing the group of people is and how great the business owners are that are in that room. And you trying to figure this out all by yourself is possible. It's not the best way to do it. I can tell you that from experience.

I respect the fact that people want to try to do that. And there's a lot of lessons you can learn the hard way. But man, misery loves company. And this is a long race. And if you want to be around a group of people that are on the same path as you, both personally and professionally, And you want to actually Get help on your business from people that do this day in and day out and have helped over a thousand clinicians grow cash performance based clinics like.

That's us head over there and take a look at what we have going on. If you want, grab a call with one of our advisors and they can have a conversation with you. It's not a pushy, sales process by any means, we got to make sure we can help you and that you're the right fit to work with us.

And if so, they can talk to you about what that looks like. And if not, then they'll help refer you to what might be a better fit for you and your clinic, because there's plenty of people out there that can help you and we may not be the best fit for you. So if that makes sense to you and it feels right, Head over to physicaltherapybiz.

com. Take a look at what we got going on. We'd love to have a chance to hopefully help you with your business. And if not, thank you so much for listening to podcast as always, and I'll catch you next week.

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