Do you know the difference between investments and expenses in private practice physical therapy? It’s not always intuitive.
We recently worked with a client who was thinking about adding a PT to their team and viewed the move as an expense rather than an investment. It costs money to hire and retain personnel, which is why many practice owners are quick to say that hiring is an expense. For new practices that are struggling to get off the ground, this may be true.
But a seasoned PT practice owner who has grown and scaled their practice will be the first to say that your personnel is one of four major investment categories that will help you take your practice in the direction you want to go.
The difference between expenses and investments lies in a simple question: Can you reasonably expect to see a return on what you paid?
Let’s explore further.
In a private practice, investments are viewed as assets, while expenses are liabilities. If you’re a PT practice owner wondering where to best allocate your budget, there are four key categories that should give you a return on what you spend. They are:
When you put money into any of these four buckets, you have a reasonable expectation that you will get more in return. A bigger space and more personnel both mean more customers to serve. Information and marketing help increase your visibility and attract patients to your practice, which means more patients to serve. Each of these categories should be considered essential assets in helping you get closer to your goals.
If you’ve ever written or learned about business plans, you know that most of them include abstract ideas, like how you’ll differentiate yourself in the marketplace, what your USP is, and your company’s mission statement is.
But a successful business plan comes down to being able to keep your doors open. No bank or lender is going to hand over a check if you don’t have a tangible plan to stay in business.
Part of your business plan should include a pro forma (example below) that places your current expenses side by side with a guess of how healthy your finances will look in the future when you invest in your practice.
Let’s focus on the Today column:
To calculate the income, we based that number on a reimbursement of $80 per visit. Some PT practices or areas may be higher or lower, so try to be as accurate as possible here.
For payroll, we calculated the entire payroll cost of a PT and receptionist, including the employer share of payroll taxes, benefits, and IRA contributions. The example also includes billing as an external function.
For internal and external marketing, your cost should be about 10% of total revenue coming through. In the example, 10% of $26,000 is $2,600, which is the combined total for marketing activities.
For reserves, Greg Crabtree’s book, Simple Numbers, Straight Talk, Big Profits, recommends keeping about 10% of your revenue in reserve for expansion. This is one of the four major investments for private practice physical therapy owners.
The pro forma example uses conservative figures, totaling $19,600 in expenses and a net profit of $6,900 per month. In this example, the owner takes a $60,000 salary. They have a reserve account, and they are more than 10% profitable, so the practice is generally healthy.
The pro forma tool can be valuable in helping you see where to increase your investments, but if you want it to be effective, you must also consider the impact of that investment on your income.
Here’s a real example from one of our clients:
If you’re thinking about hiring a new PT, and you deduct the extra payroll cost from your profit without also increasing your number of visits and monthly income, you’ll have a skewed vision of the real impact on your financials.
But think about what adding another therapist will buy you. Hiring a PT, even part-time, could mean more time freedom for you (something truly invaluable), more business stability, and the ability to see more patients in the same amount of time. If the PT is only working part-time, as was the case with our client, then the number of patients you can see each week goes up—and so does your income.
Using the Future column in the pro forma example, hiring another PT might bring another 35-40 visits a week, or about 160 per month. At $80 per visit, that’s an extra $12,800 in revenue, but the practice owner would be spending about $5,000 per month for a part-time PT, 25 hours a week.
You’ll also need to go back through your pro forma to make additional tweaks. The payroll line obviously changes. Billing will also change because you’re seeing more patients each month. Marketing and reserves will change because you now have more revenue, and marketing should be roughly 10%.
Now, do you think you could afford it?
Once you have a side-by-side comparison of now versus the future, you can start to get a feel for which one you’d be more comfortable with. Whichever one you pick becomes the plan, and from there, you can start working backward and asking yourself better business questions to get to where you’re going.
This is exactly what we did when opening up a second location, and we were quickly able to become profitable, start hiring, and expand into a new space, all from doing these same calculations.
Look at your numbers today and make a calculated estimate of where you’re going to be once you make an investment in personnel, direct access marketing, space, or information. It’s growth with some sense of control rather than rolling the dice and seeing what you end up with.
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