E645 | Cash Flow vs Business Value

In this episode of the P.T. Entrepreneur Podcast, we delve into the crucial distinction between making decisions based solely on cash flow versus prioritizing business value when operating a physical therapy business. While cash flow is undoubtedly essential, Doc Danny enlightens us on the fact that relying solely on cash flow does not necessarily cultivate intrinsic value within the business.

After all, if the business heavily relies on the owner's labor to sustain cash flow, its value becomes diminished if it cannot function in their absence.

To truly establish genuine worth, Danny recommends investing in crucial infrastructure elements such as hiring a dedicated staff, securing exclusive office space instead of subleasing, and implementing cutting-edge technologies. These strategic investments serve to augment the revenue-generating assets of the business by alleviating tasks from the owner and enabling the generation of non-active income. Furthermore, these infrastructure investments enhance predictability, mitigate risks, and optimize efficiency.

As the podcast continues, Danny advises business owners to carefully ponder whether they desire a high-cash-flow lifestyle business that necessitates constant management or a business with tangible value that can run independently or be sold.

For those aspiring to achieve the latter, decisions must prioritize bolstering business value through the acquisition of skilled personnel, suitable workspace, and advanced technology, even if it means a temporary reduction in cash flow. This approach is particularly crucial for businesses generating mid-six-figure revenues as it paves the way for sustained growth, eventual exit strategies, or passive ownership.

The key lies in striking a delicate balance between immediate cash flow needs and long-term value-building aspirations for the business.

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Danny: Hey, real quick before we get started, head over to Facebook and join the PT entrepreneurs Facebook group. If you haven't done so yet, we have monthly live trainings going on there. There's an opportunity for you to join in the conversation instead of just listening to what I have to say on this podcast, as well as the people that I bring on.

And it's a really cool place to join about 6, 000 other clinicians that are. Honestly, trying to change the landscape of our profession through these cash and hybrid practices. One other thing that's really cool is we have a guide in there. That's a quick start guide. When you join, you can go and check this out.

There's about seven videos that we've curated that are the most common questions we get in the best case studies that we've found to really help you start, grow, and scale your practice up to seven figures. So if you haven't done so yet, head to Facebook request to join the PT entrepreneurs, Facebook group.

You have to be a clinician. We're going to check you out. We don't just let anybody in. But if you are head there, go ahead, get signed up. We'd love to have the conversation with you in that group.

So here's the question. How do physical therapists like us who don't want to 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 is Danny Matei and welcome to the PT entrepreneur podcast.

What's going on everybody. Doc Danny here with the PT entrepreneur podcast. And today I want to dive into something that has to do with your business and it's a different way in which you can look at the decisions that you make. In your business and um, I just we just came off our september Mastermind event.

So we do two of these events a year One's in the spring and one's in the fall sort of I guess september is kind of the fall or maybe it's not I don't know. It's close to the fall. So Technically the fall event and uh, I had a lot of great conversations with um, you know with different clinical entrepreneurs that we work with we had a About a little over 200 people there, which is always just crazy.

Uh, and I'll dig into a separate podcast, sort of my big takeaways from that, uh, from that time. But I wanted to do today was, you know, take a second to talk about the difference between, uh, decisions that you make in your business, particularly when they have to do with cashflow versus value of your business.

So, um, some people call that enterprise value or like the value of the actual entity itself. Aside from you, right? So when we look at cashflow versus the business value, they could be pretty different. Now, the more cashflow you have, the more your business is worth, the more value it has, but it has to be non active cashflow.

So if we look at cashflow, cashflow is, you know, basically how much money do you have left in the business? Is it a cash positive business? So if the answer is, let's say you're generating 15, 000 a month in gross revenue or revenue before expenses and everything is taken out and you're keeping 13, 000 of that, like you have very high profit.

Numbers, right? You're like 90 percent close to 90%. So you would think, Oh yeah, okay. I have a lot of cashflow that's worth a lot. Well, that's actually worth nothing because if it wasn't for you, there's no revenue being generated. So you basically, you've created a job for yourself, which. There's nothing wrong with that if that's what you want to do.

But if you're trying to grow a business that you can either sell and or, um, have as a passive business at some point in time where maybe you wanna be very inactive in it, but yet still, you know, run it to some degree or manage it, um, then you need to make decisions slightly differently. So the decisions that you need to make are based off of, uh, infrastructure more than anything else.

So when you look at the value of a business, there's a few things that go into it. First of all, it's the revenue, right? So is there profits in the business? How tied is that? Profit to the actual owner, right? Or if you're the only one doing it, like I said, in my example, where you're making 15, 000 and you're keeping 12, 13, 000 of that and in a profit, like it's not really worth anything, but you have, but you have over six figures a year in profit and cashflow, which is awesome.

Like it's great, but there's no intrinsic value to that business. So the profit has to come from. Other elements. And in these types of businesses, that's typically through, you know, services and services are rendered by other people. So you have to have people in your business that are providing these services.

So that's an investment in its own right. And I don't think we really look at that the same, maybe in that lens. Uh, as much as we should, we, we, we often we view people as liability. So all these people are liabilities have to pay their salary. Well, maybe they're a liability for a short period of time, but if you hire the right people and you have the right things in place, they become an asset really quickly and they should be, you know, revenue positive, uh, members of the team.

Same thing. If you look at like administrative. Uh, support. You may say to yourself, well, I got to pay these people each month and they're not even generating any revenue. So what's the point? Well, the point is that they're taking tasks away from you so you can focus on other things, but also you're building a team of people that adds revenue or adds value to the business, right?

So you're, you're creating an entity that has more value whenever you have these assets in the business that you're reinvesting in. So you're reinvesting in people, you're reinvesting in a space, just a standalone space versus a sublease space. Like if you look at risk mitigation, if you're in a sublease space and if somebody is like, all right, I'm going to, I want to buy this business.

Well, they probably feel a lot less comfortable doing that than if you have your own standalone space, because you're basically built your business. On somebody else's foundation. Well, what happens if that business goes out of business? This has happened to me more than once with a subleased office. And, uh, you know, moving to a standalone space makes a lot more sense.

Maybe you own the property, right? That's an investment in the infrastructure of the business. The other big thing is technology. Right? So it's, it's people, it's infrastructure and technology. So technology that can help you have clarity in your, your numbers. Technology can help you do a better job of marketing or, uh, creating better messaging with your people, tracking the people that are coming your way.

Uh, being more efficient with running the business on a day to day basis. Like these things that are, uh, viewed as. You know, as a cost sometimes, so we're talking software in this case, really, it's an investment in the business to be able to create more non active revenue, more predictability in revenue, which increases the value of the business and in the end, right?

And even if you decide that you don't want to sell the business, which is totally fine, you may not want to do that. Um, at least you put yourself in a place where you could sell it. And that's a much better place to be then. All of a sudden you have to try to sell the business because of some life event or something that happens And now you have nothing to sell and this is where most people end up in businesses They'd be lucky to get anything for their business.

Let alone, you know a significant amount of money that they can Walk away with to the next thing that they want to do um because they just don't have They don't have any value in the business. And if that sounds like your business right now, like don't take it the wrong way. You just need to know where you're at.

Like if you want to build towards a business that has intrinsic value, you have to start making decisions that are not just based off of cashflow, but off reinvesting in your business to build infrastructure through people, space and technology. And if you can do that, then you can really build a business that you can either a sell or you can.

do what a lot of people end up doing these businesses, which is really what we consider more like autopilot that the entity. So meaning maybe you're treating patients like once a week, if at all, maybe you don't want to, maybe you're running the business, um, you know, from a remote location or you're just not in the business every single day.

Maybe you're there once a week, twice a week. Maybe you do want to be completely remote. Like we work with practices. They don't even live in the same areas where their business is. Once they get everything set up in a, in an effective manner. Uh, and they've reinvested in these, these key areas. So I think the first thing you to ask yourself is, are you creating a cashflow business to be able to have a predictable income?

That you want to then invest in things outside of it. Maybe that's what you want to do. If that's the case, then the smaller lifestyle businesses, higher cash flow, less people to, you know, manage and, um, you know, less complexity as the business grows, there are some advantages to that. It's never going to have as much revenue come out of it and it's never going to be.

You're never going to be able to be passive in that business. Um, but that may not be what you want. And if you want a business that you can run pretty passively and or sell, then you really have to start looking at decisions based off of the business value and not necessarily cashflow. So. I hope that makes sense.

This is something that I had a lot of conversations, like I said, with different entrepreneurs that are different stages of their business. They're kind of multiple six, kind of working towards the seven figure range in their practice. We have a lot of people that we're working with that are at that stage, which is cool because it's an exciting stage.

But also when you're, you know, when you're top line in your business, when your gross profit or your gross revenue is like three to 500, 000, you know, it's kind of a, you're kind of in a spot where it is. It's challenging to reinvest in the business you're making pretty good money, but it's hard to like not take that home as well because your lifestyle maybe has, uh, adjusted somewhat, but in order to get to a stage where, you know, you're really, you're growing as significantly more and, and able to sell potentially exit that business or to autopilot, like you really have to, you really have to reinvest in that stage in the right things.

And that's why I wanted to bring this up. So if you're in that stage, just keep in mind, make the decisions based off what is important to you is either cashflow or is it, uh, business value? Like you obviously want both. You don't want to sacrifice all your cashflow, which is a terrible idea. Obviously don't do that.

But, um, don't make all your decisions just based off of, you know, how much money you can bring home each month. When, if you're playing a game where you're trying to like have something bigger that you can exit and, or autopilot, like you have to make decisions based off the value and not necessarily just cashflow

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Podcast Transcript