E465 | Why You Need 3 Months Of Cash Reserves

Today, I am talking about the importance of why you need cash reserves in your personal life, but more importantly your business. I explain what happened at our practice recently and how this came into play in this situation. Enjoy!

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Podcast Transcript

Hey, I've got a question for you. Do you know if you're tracking the right data, the right metrics to the right key performance indicators in your practice? This is something that's huge for us and really helps us make solid decisions within our business, but the prior software that we're using to run our practice made it really challenging.

To actually get that data out and use it in reports. Since we've switched to PPG everywhere, this has actually become way, way easier for us to be able to have the right data. We have a dashboard of all the things that we actually want to see, the metrics that we want to pull, and it makes our life a lot easier to pull the information that we need to make the right decisions within our business.

So if you're running blind and you're not tracking the right things, or you're. Hard time actually pulling everything together. I highly recommend you check out our friends at PT Everywhere and see what they've got going on with their software platform. It's what we use for our practice. It's been a game changer for us.

You can check 'em [email protected]. I think you really like it. So here's the question. How do physical therapists like us who don't wanna see 30 patients a day, who don't want to work home health and have real student loans create a career and life for ourselves that we've always dreamed about?

This is the question, and this podcast is the answer. My name's Danny Mate, and welcome to the PT Entrepreneur Podcast.

What's going on, guys? Dr. Danny here with the PT Entrepreneur Podcast, and today we're talking about. The importance of cash reserves and why you need to have this in your business as well as personal. But in this context, we're gonna talk about business and I'm gonna fill you in on a little difficulty we were having with our practice recently.

We have a couple docs. I don't really see people much at all. Occasionally I'll pop in and I'll help out with somebody. But one of our docs was sick last week. So this was Wednesday the Wednesday. Before Christmas to put in a timeframe for you. So he's yeah, my nose is a little, I got a little head cold.

My nose is a little runny, whatever. I think just, just to be safe, let's go ahead and let's reschedule people today. And I'll whatever. He's gonna get a test and see, if he's positive for covid or not. So he comes back. Te pop's hot. He's positive for Covid, so he stays stays home.

And and then we find out one of our other docs has as well. And so at this point we have two that are gonna be out for entire schedule. On the books the last week of this year. So you're talking about 50 patient visits that we're, we have to reschedule, that we just aren't gonna have for that week and we shouldn't be able to reschedule, everybody.

And it'll just push it down the line a little bit, but it's not necessarily ideal, but it's the thing that we have to do and it's the right thing to do. To, for the, honestly, for the safety of our patients and not just passing a bunch of stuff along.

With that, it's about a $10,000 loss in terms of revenue for that week and end of year payroll, for us was submitted Monday of the last week of the year, which for us was about $25,000. So we're we're down. Of what we're supposed to bring in. Plus we have fir first payroll of the year, which would be for January is always bigger because it includes bonuses and so now we're minus another 25,000, right?

So we're sitting ne negative negative 35 from projections of where we're at. Now, put yourself in this situation. If you have a business and you're redlining your cash reserves the entire time. Let's say you, you are keeping like a couple thousand dollars of cash on hand.

You're in big trouble. You're going to have to tr try to figure out a very creative way to pay your people. Especially if you're like banking on that cash coming in. Oh, I'll, cause I'll have this cash gonna come in, then I can cover my payroll, so I'm good. All of a sudden, a couple people get sick.

You have to reschedule everybody and boom, now all of a sudden, Y you're in trouble. You gotta put on your credit card or you gotta borrow money to try to figure out how to pay your people. And I see this happen frequently in businesses, not just in the physical therapy profession, but other business businesses that I've had a chance to consult with.

Outside of the industry that are just putting themself in an incredibly sketchy position by harvesting all of the cash that they have. So what I mean by that is, if let's say they have $10,000 in profit in a month, they're just paying themself, literally all the profit that they have because they're gonna spend it on.

Lifestyle or whatever else they're doing with that money outside of the business. And they don't keep anything as far as cash reserves go in the business. And you would think that after 2020 people started to be a little more fiscally conservative about how they managed their cash flow in their business.

And I actually don't know if they did or not. The people that were managing it, in a conservative way, they stayed in business. The people that weren't, they went outta business and probably went off and, got a job somewhere else or whatever they did. So my. Is for you to try to keep three months of cash reserves in your business and that's your overhead, right?

So what you're paying out in terms of, your rent and utilities and insurance your payroll, what you're paying your people, the taxes for them, all of that, you have to roll that into what's your monthly overhead. And if you don't know that number, that's a pretty important number for you to figure out first, because you need to figure out what three times that is for you to actually be able to be in a safe position to be able to.

Enough cash reserves. And I know other businesses they will say six months. So even this is a little bit, it's conservative, but it's not ultra-conservative. I actually have a friend, he keeps two years of cash on hand. And that's super excessive. But the reason he did that is cuz he he owns a real estate related business and he almost lost his business in 2009 or whatever the the year was 2008, 2009.

Cause all his business dried up and he had at the time, six months of cash reserves. And it's the only reason that kind of kept in business. He's just like fearful that will happen again. So he keeps two years of of cash on hand, which is an extraordinary amount that he probably could do many other things with, but it makes him feel safe.

So we recommend having three months of cash on hand so that you can weather some of these things that happen. So for us, if we're gonna be like negative 35, thousand, if you include these things into it, then we know, all right, we're gonna build this back up over the next couple months to where we get back to where we're gonna be from our cash reserves.

We're not gonna take profit distributions until we're at that point. And then from there we'll start getting back to regular profit distributions. Cause we want to have a buffer, a base of three months and some pretty bad stuff has to happen. Dwindle that down past, three months, but it's gonna make you feel a lot a lot safer.

You're gonna sleep a lot better at night. And if you don't have that built up yet, which many people don't, the strategy that you can take to do that is not necessarily not paying yourself any profit because you might pay yourself a small salary and then have a distribution that you pay yourself. As far as like how you pay for your livelihood In order to get to that point, what you can do is you can just split it in half, right?

And you say, okay, I had $2,000 in profit this month. I'm gonna take a thousand dollars. I'm gonna pay myself that, and I'm gonna put a thousand dollars in the, or leave a thousand dollars in the business account as cash reserves and do that until you build up three months of cash reserves.

Now the funny thing is as the business gets better bigger and makes more money, You actually have to keep more cash on hand. It's like it's constantly compounding and growing. Cuz if your overhead is $5,000 a month by yourself and now all of a sudden you have, you bring somebody else on and your overhead is $10,000 a month you went from having three months at 5,000, which would be 15,000 cash on hand.

If it's just you to now you need. 30, you actually need twice that. So you need three months at 10 to have 30,000 in cash reserves. So you have to start that process all over again and get to the point where you have your cash reserves in place. Once you do that, you can really pay out your distributions however you want.

A after you're in a solid cash flow position. So anyway, I hope this makes sense. I've had to deal with this more times than I would like to. Like to have had to do with people that we work with in our Mastermind and other businesses that I have. Able to consult with. And it just seems like a very simple step that people can take, but it takes some some fiscal discipline.

I think that's the challenge. You see that and you're like, oh man, I wanna do X, Y, and Z with it. And I'm all for reinvesting in your business. But put yourself in a place where you're. You're in a safe position first before you go and look to expand into a bigger facility before you go and look to, buy that piece of equipment that maybe is gonna add some cash flow to your business or to hire that person that whatever, like you, you can go as fast as you want.

If you put yourself in a place where you have a safety net first, you're gonna be a feel, you're gonna feel a lot better as you go through that and you're gonna be able to make smarter decisions. And if you're wrong, let's say you're wrong about something, it's. It's not gonna actually ruin your business.

It's just gonna put you in a place where you have a little setback, but you're still in the game. That's what it's about. This is a, this is an infinite game. We wanna be in as long as we can, and the only way you're outta the game is if you run outta money. So if you don't run outta money, you can stay in the game as long as you'd like.

Hey, Pete, entrepreneurs. We have big, exciting news, a new program that we just came out with that is our PT Biz part-time to full-time, five day challenge. Over the course of five days, we get you crystal clear on exactly how much money you need to replace by getting you a. Ultra clear on how much you're actually spending.

We get you crystal clear on the number of people you're getting to see, and the average visit rate you're going to need to have in order to replace your income to be able to go full-time. We go through three different strategies that you can take to go from part-time to full-time, and you can pick the one that's the best for you based on your current situation.

Then we share with you the sales and marketing systems that we use within our mastermind that you need to have as well. If you wanna go full-time in your own practice. And then finally we help you create a. Page business plan. That's right. Not these 15 day business plans. You wanna take the Small Business Association, a one day business plan that's gonna help you get very clear on exactly what you need to do and when you're gonna do it.

To take action if you're interested and sign up for this challenge is totally free. Head to physical therapy biz.com/challenge. Get signed up there. Please enjoy. We put a lot of energy into this. It's totally free. It's something I think is gonna help you tremendously, as long as you're willing to do the work.

If you're doing the work and you're. Information put down and getting yourself ready to take action in a very organized way, you will have success, which is what we want. So head to physical therapy biz.com/challenge and get signed up today. Hey, real quick before you go, I just wanna say thank you so much for listening to this podcast, and I would love it if you got involved in the conversation.

So this is a one one-way channel. I'd love to hear back from you. I'd love to get you. Into the group that we have formed on Facebook. Our PT Entrepreneurs Facebook group has about 4,000 clinicians in there that are literally changing the face of our profession. I'd love for you to join the conversation, get connected with other clinicians all over the country.

I do live trainings in there with Eve Gigi every single week, and we share resources that we don't share anywhere else outside that group.

So if you're serious about being a PT entrepreneur, a clinical rainmaker, head to that group. Get signed up. Go to facebook.com/groups/ptentrepreneur, or go to Facebook and just search for PT Entrepreneur. And we're gonna be the only group that pops up under that.