How Much Should I Pay Myself? Step-By-Step Process for Cash Based Practice Owners
Updated: Jun 18
Using The Profit First Method As A New Business Owner
Starting and running a successful business is an exciting journey, but it often comes with financial challenges, especially when it comes to paying yourself. Many physical therapists I’ve worked with struggle with determining how much to pay themselves and look for answers to this problem.
We all want to make money, right? Of course, we love helping our patients achieve a better quality of life with our services, but in order for us to continue doing what we do we have to ensure financial stability of our business.
When starting a business, or even a few months into it, the question of how much to pay yourself can be perplexing. It's a common issue that many physical therapy business owners face. Some end up not paying themselves because they're unsure of how to go about it. I've also met practice owners that are just getting started and refuse to pay themselves because they're struggling to have a consistent flow of income from their business. If you're struggling to create consistent income from your business, I may have a suggestion for you - check out my blog post here.
This uncertainty can lead to financial stress and hinder the growth of the business. However, it's crucial to remember that both you and your business need to thrive. So, how can you ensure that you pay yourself while managing your business finances effectively? In this blog post, we'll explore a practical approach to managing your business finances and ensuring that you pay yourself while maintaining your business’ financial stability.
Enter the Profit First Method
Full transparency with you guys, when I first started my own cash based PT practice, I didn’t know how to pay myself either. To be honest, there really aren’t a ton of resources out there to solve this problem we entrepreneurs face. It wasn’t until I came across the book, “Profit First.” This financial management system has been a game changer for managing my cash based physical therapy business finances.
Mike Michalowicz's Profit First method focuses on setting up different bank accounts to allocate your income and ensure you get paid consistently, an important part of any physical therapy practice management system. If you’re looking at starting a therapy practice, or are a seasoned business owner, this financial strategy could help you. Let's break it down step by step:
Establish a Regular Pay Schedule
The first and easiest step is deciding how often you want to pay yourself. Do you want steady income twice a month, once a month, etc? Common options discussed within the Profit First book are twice a month (on the 10th and 25th) or once a month (e.g., on the 1st or 15th). Make sure to choose a schedule that aligns with your financial goals and cash flow.
Personally, for my cash based PT practice, I have a monthly money meeting where I sit down and take the time to execute this system, paying myself once a month. You can find out more about my monthly money meeting here.
Create Separate Bank Accounts
The key to the Profit First method is having multiple bank accounts. I know this can seem intimidating and probably a little overwhelming, but this is one of the biggest pieces of the Profit First method. While some small business banks may limit the number of accounts you can have, it's essential to find a bank that accommodates your needs as a small business owner.
I often get asked “Morgan, how do you keep track of so many bank accounts?” To be completely honest, it takes time and organization. But once you get a system down, it is very easy to manage.
Common Small Business Bank Accounts
Income Account: This is where your revenue from various sources, such as payment processors (e.g., Stripe, Square, PayPal), gets deposited. All the money that you make from providing physical therapy, consults, wellness sessions, etc. get deposited into this income account.
Profit Account: For this account, you are going to allocate a percentage of your earnings that have been deposited into your original income account. The book suggests aiming for 1-5% of your income.
Taxes Account: We all dread paying taxes at the end of the year, but it’s important that we plan for this. Set aside a percentage of your income to cover taxes, typically around 15%.
Operating Expenses Account: This is where you keep the money for running your business. It usually accounts for around 30% of your income.
Implement the Profit First Method
On your chosen paydays, transfer the appropriate amounts into each of these accounts that we’ve just discussed. I like to use an Excel spreadsheet to help with the calculations, making it easier to manage my finances. If you choose to use a spreadsheet, it should include your income, profit, taxes, and expenses percentages.
For example, if you earned $2,000 in revenue over two weeks, allocate 5% ($100) to your profit account, 50% ($1,000) for your salary, 15% ($300) for taxes, and 30% ($600) for business expenses.
Quarterly Bonus
One of my favorite pieces to the The Profit First method is the Quarterly Bonus. This book encourages setting aside 5% of your income during each pay period for your quarterly bonus. At the end of each quarter, you'll receive a 50% bonus based on the cumulative amount you've set aside. How cool is that? You get to simply reward yourself for being a private practice business owner.
Benefits of the Profit First Method
This method takes some time to get used to and implement for your business, but once you do you can feel confident you are making informed decisions when it comes to your business finances. To summarize why you should choose The Profit Method to maintain your business’ financial health, here’s a list of benefits:
Ensures that you pay yourself consistently and sustainably.
Helps you allocate funds for taxes, reducing end-of-year financial stress.
Encourages financial discipline by setting aside profit and expenses.
Allows for financial planning and tracking your business's health.
Additional Tips for Success
Customize the Percentages: While the suggested percentages work for many businesses, feel free to adjust them based on your specific circumstances. For example, if your expenses are low, you might allocate more to your profit or salary.
Embrace Financial Discipline: The Profit First method instills financial discipline by making you prioritize paying yourself first. This mindset shift can lead to better financial decision-making. Check out my blog post here where I go into detail about the #1 mindset shift to ensure your practice's growth.
Keep It Simple: If having multiple bank accounts feels overwhelming, start with just a few, like an income account and a profit account. As your business grows, you can expand your account structure.
Consult a Professional: If managing your business finances becomes complex, consider working with an accountant or financial advisor who is familiar with the Profit First method.
In conclusion, mastering your business finances is crucial for long-term success. The Profit First method is a powerful tool that can help you navigate the challenges of paying yourself while keeping your business thriving. By following this method and setting up separate accounts, you'll ensure a consistent income, efficient tax management, and a healthy bottom line.
Remember that as a business owner, you deserve to be paid for your hard work and dedication. The Profit First method is a proven approach to ensure that you not only get paid but also build a financially stable and prosperous business. Start implementing it today, and watch your business and personal finances transform.
If you're feeling overwhelmed about your business finances and maintaining the financial stability of your business, get in touch! I provide 1:1 business coaching for physical therapy practices and would love to chat about your practice and goals. You can find more about the coaching program here!
Listen to this episode on my podcast!
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