The four financial numbers you need to understand in your practice to do your best work

I want to talk about the 4 financial pillars that you need to be familiar with in your practice, because as this tax year comes to an end and the new one begins, you might be looking at your numbers and thinking how did that happen? Maybe you got a tax bill that's bigger than you were expecting. Maybe you are getting to the end of the year and realising that you didn't make as much money as you wanted to, or maybe it's more positive than that and you've got a bigger tax bill than you were expecting because you made more money than you wanted to.

Full show notes for this episode are available at The Business of Psychology

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Shownotes

Revenue

Revenue is the simplest metric in your business. It’s gross income, the money that is coming in with nothing deducted. On its own it’s a vanity metric. I see lots of people sharing their revenue without being honest about the other numbers, and it troubles me, because the revenue in your business can be very high, but the other numbers in the business will change as a reaction to that revenue. It's the other numbers that give us much more crucial information about the health of the business and the lifestyle that it's actually going to give you, and the good that you're able to do for your clients.

Revenue is important to know because it gives an estimate of growth and impact. If you are making a lot of revenue, it's likely you’re helping a lot of people and you can track the trajectory of that. Tracking your revenue should include tracking the specific sources of that revenue. Go into a bit of detail, looking at how many therapy sessions, online courses, and supervision sessions you are selling, and breaking it down into individual services that you offer so that you can see how much money you are making for those activities each month. This is helpful because it allows you to predict what might happen in the future if you put effort into increasing revenue in one of those areas. It’s important to know exactly where that income is coming from. If you're very busy, you might not realise that you are doing more supervision than you were last year, and that a bigger proportion of your income is now coming from that. Even if that overall revenue figure hasn't changed much, the place it's coming from might have changed, and for tax reasons it can be significant to understand that.

It's up to you how many categories for different types of revenue you want to create. Go with what's useful for you to have a good understanding of your revenue. For associate practices, you might want to break it down by associate so that you know how much money each associate is making you each month. If you have a really large associate practice, that might be cumbersome and you might break it down into your therapy income and associate therapy income. What I would say is that if a service has specific expenses attached to it, then have that as its own line so that when you do your expenses, you can do some spreadsheet wizardry and make those things dependent on each other.

For example, if you've got an associate practice and you know that for every £140 an associate makes you, you are going to pay out £90 to them, you can create a formula in your spreadsheet that calculates an expense line to take £90 for every £140 that is listed in the income for an associate. It’s definitely worth separating out your services, at least in that much detail. Revenue tracking and getting granular with it can help you to see which aspects of your business are really healthy and which ones might be declining or struggling.

Expenses

You need to consider this alongside revenue. You need to know how much money you are spending every month in order to keep your business running in the way that it needs to support your lifestyle, and you have to be honest with yourself about it. People always ask me for an estimate of how much the expenses should be for an independent practice, and I can't give one because it depends on your values, the services you are providing, what that client group needs in terms of support, and what you need in terms of support. This is why I would never share my revenue figures with you because if you saw them, you'd get a false impression, because in order to keep my business going with all the stuff that I have going on in my personal life, I have to pay for a lot of support. You can't look at somebody's revenue figure and have any idea about what their overall take home pay is going to be, because you aren't going to have a realistic impression of their expenses. Don't be impressed by those online gurus who share their revenue figures with you. I think that's irresponsible unless they're also willing to share the expenses and profit.

When looking at your expenses, I recommend getting your banking app out and dumping this into a spreadsheet. If you are in Startup or Evolve and Thrive or the network, you'll have access to our Cashflow Forecast spreadsheet. You go through your banking app and literally note down all the expenses over 3 months, accurately transposing them into the spreadsheet. Then go back through the year and see if there are any big expenditures which don't go out every month that you make on an annual basis and pop those in. This is really boring, and if you have a bookkeeper, it may be that they can do this for you, but it's worth doing because once you've got that, you can categorize your expenses and have a look at what expenses are investments in either the quality of your service or in the growth of your service.

I invest in stuff like practice management software because that creates a better quality service for me and for my clients, and I invest in advertising spend, and that's because I expect that will enable the business to grow. Those are both investments in quality and growth, so they go in the investment side.

You may find that there are some expenses which don't easily fit into a quality or growth category. When we have those expenses we need to consider whether they are adding another kind of value or are they draining the business? Often I'll find that I've got software packages that double up. I could be using one tool to do lots of things, and actually I'm using lots of tools and paying lots of subscriptions. I would highlight that and think about reducing those. It's a really useful exercise because not only are you getting to know this number, which is really important for planning your business going forward, but you're also getting an idea of what you could cut.

Things that fall into the investment category are clinical supervision, business coaching, high quality legal templates, practice management software, CPD, training that you're going to be able to use to support your clients better. You're looking for anything that sits on the periphery that you don't use often or you don't use very well, and thinking about whether it might be time to cut that.

Once you've done both those exercises and you've put them into your cashflow forecast spreadsheets or a spreadsheet to track your income and expenses, then you see what the gap is between the two.

Tax

Tax is something which can be confusing. I was told a lot when I started in business that it wasn't confusing, but I think it is confusing, especially considering it's not something that we are taught in school. So, I'll give you a really brief overview of the taxes you need to keep an eye on. You should consult an accountant to get proper advice on your tax situation. If you are in Startup or Evolve and Thrive or the network, we have a class with Mahmood Reza from I Hate Numbers, and we've got one with Sally Farrant where we talk about VAT. If you are not in any of my programs, and you're not in the network, I'd recommend having a consultation with an accountant, so that you can get a clear read on what tax you should be expecting to pay for your specific circumstances.

Self-Assessment Tax on your income. If you're a sole trader, this is the only one that you need to worry about, but you will be taxed on all of your revenue. It's not done on profit, it's not done on revenue minus expenses, it's done on your revenue. That is how your tax is going to be calculated. It's sensible if you're a sole trader to be putting away a third of your revenue and saving that for your tax bill. When it comes to the end of the tax year, you'll be able to list all the business expenses that you've had, and that should be deducted from your overall tax bill. That's difficult to work out as you are going along, so to be on the safe side, saving a third of your revenue is the advice I've always heard being given to sole traders. Double check with an accountant because that can differ if you have other sources of income, or if there are any changes in tax rules. You'll also have to deal with self-employed national insurance contributions.

Corporation Tax If you form a limited company you’ll have to keep an eye on what corporation tax rates are. Corporation tax is worked out on the profit of the company, and it's usually at about 20%. This one can be tricky because every month you'll probably make a slightly different amount of profit. The way that I do it is every month I look at what the profit is, and I put 20% of that into my corporation tax savings account. Have a look at the rules around corporation tax, talk to your accountant about what they think the best savings strategy is for you, but be aware that you will have to pay it. You will also have to do your self assessment and pay tax on the money that you pay to yourself from your company. You may be paying yourself as an employee of the company, and then the company will pay PAYE, and NI contributions for you through that. But if you're a limited company, I would strongly advise you to talk to an accountant about tax advice.

VAT We ran a class on this in PBS with Sally Farrant because the VAT threshold is something which has been tripping up a lot of my clients, and that’s because we have a slightly bonkers VAT system in this country. VAT is a tax that you collect on behalf of HMRC. You collect (usually) 20% of the price that you are charging to the customer, and you have to give that to HMRC about every three months. The thing that makes this difficult for people in our professions is that there are strange rules about what is VAT exempt and what isn't. The first thing is you don't have to start charging VAT until you hit a threshold, which at the moment is £90,000 in any rolling 12 month period. If you're safely under that, then you don't need to worry about VAT yet. But if there's a chance that you could tip over it in any rolling 12 month period, you need to be keeping an eye on it. The second reason it's confusing is that health services delivered by certain qualified professionals are VAT exempt. Therapy that is delivered by a HCPC registered clinical psychologist, for example, is exempt, but that same therapy delivered by a fully qualified psychotherapist or CBT therapist is not exempt. The reason this trips people up is quite often psychotherapists who take on associates won't realise that they're going to go over the threshold and then they get caught out. Psychologists like me tend to get caught out when our revenue from things that are not direct therapy start to go up quicker than expected. If you’re offering supervision, training, consultancy, coaching, none of those are VAT exempt. So you can go from one year having the majority of your income come through therapy so you're safely under the threshold, and then the next year you get a few big consultancy contracts and you've tipped over. You need your own tax advice around this to help you plan for the threshold. For VAT planning, I really recommend Sally Farrant, I'll drop her details in the show notes.

Profit

Profit is really simple; it's what's left when you've taken out your expenses and your taxes. Profit often gets a bad rap. People will talk about people being profit hungry or obsessed with profit, profiting from other people's misery. It's something we hear a lot in the mental health space because it's got these associations with greed, but actually a business can't survive without profit. Profit is the bit that makes a business sustainable.

There are lots of things that you can do with profit. You can pay yourself a bonus, which is a really good idea, you should be rewarding yourself for being the excellent employee that you are, and it’s no bad thing to feel well compensated for your hard work. There’s no shame in that, and you should absolutely be using some of your profit to make sure that you feel well looked after by your business.

But there are other things that you need to use profit for. Your profit is the emergency fund in your business. None of us know what might happen. We might be faced with another pandemic, there could be a global crisis that means that our businesses don't operate as usual for a period of time. If you have profit in the business, you are likely to be able to sustain through that, and the bigger your business gets, the more important that is. If I couldn't make any money tomorrow, then I want to know that I can still pay the payments that I make to my team for a couple of months, because otherwise I could be in a position where not only can I not pay my mortgage, but my VA, my social media person, my operations manager, none of them can pay their rent or their mortgage, and that doesn't feel ethical. Having some profit is responsible in your business to make sure that you're not going to be letting people down, defaulting on payments. Profit is really important as an emergency fund, and you should have some set aside to cover those key expenses for a couple of months.

Profit is also your ability to innovate. When you've got profit to play with, you can look at things like developing a new piece of software, setting up an online course, or seeing whether you can make that community group work, without the pressure of it needing to make money immediately. Often people want to start groups in their communities, but they're not sure whether people will pay for them to start with. If you've got a bit of profit, you could decide to run that group for free for a few weeks, and then people start paying once they've seen the value of it. You can't do that if you're operating on no profit.

I want to share with you a concept which I came across in my MBA. It’s the triple bottom line; the idea that a business can be a force for good without sacrificing its financial health. It's a term that was originally coined by John Elkington, he suggested that business success should be measured by three Ps: people, planet, and profit. I think that’s a really helpful way of thinking about business, but I’ve made slight adaptations for working with mental health and thinking about my own business. The way that I think about it is sustainability, impact and profit.

Sustainability If you are not making good money, you are not going to provide a sustainable service for our client groups, and you're going to have to make choices which are worse for the planet. If you are up against it financially, you can't afford to pay for the AI models that are more environmentally friendly. If you've got a bit of profit, you get to choose the more ethical company to work with. There's loads of examples where a bit of profit allows you to be more environmentally friendly in the choices that you make.

Impact When you've got money in the business, it's easier to accelerate whatever it is that you're trying to do. With some of my profit, I pay for some Meta ads. It's a tiny amount, but they show my posts about SEND parenting to more people than I would be able to reach organically. I'm consciously using the profit from PBS to do that. I'm not selling anything, but I want that message to reach more people, and I've got a little bit of profit that I can use to make that a reality.

Thinking about these three things together, profit fueling the sustainability and the impact of your business, you get to choose how that looks. It's worth acknowledging that profit gives you the freedom to run your business according to those values that you set at the beginning. When you are operating on no profits, you will often find yourself having to compromise on sustainability, impact, or your values.

I hope I've made it clear why you need a good grip of the numbers in your business. If you can track where you are at the moment, if you know your revenue, your expenses, your expected tax bill, and your profit, then you can start to model out going forward. What would happen if I spent a bit more money on A, B, C? What impact would that have on my overall profit on that triple bottom line? Is it going to increase my impact, is it going to be sustainable, is it going to increase the profit in the business that enables both of those things? You can track that like a story going forward and make a plan around whatever your goals are.

Hello and welcome to the Business of Psychology podcast. Today I wanted to talk about the four financial pillars that you really need to be familiar with in your practice, because I know as this tax year comes to an end and the new one begins, a lot of you might be looking at your numbers and thinking, oh my goodness, how did that happen?

00:00:43 Either way, the thing we want to avoid is the unexpected in business. And so many of my clients at all different stages of their journey in independent practice come to me because they've been surprised by something in their numbers. And it's happened to me as well. I've had horrible surprises many times over the past nine years of running a business, and so I just wanted to share the four numbers that if you understand them really well, make up your business story as my lovely accountant, Mahmood Reza from I Hate Numbers, always describes it. Because if you know those four numbers that are driving the story of your business, then you are in such a powerful position to plan for next year, to plan what you want those numbers to look like next year, but also what you want your service to look like and what you want your life to look like around it.

00:02:16 Okay. Right, so let's dive in. Pillar number one is nice and simple. Revenue. When you hear accountants talk about revenue, it can often sound like they're talking about something complicated, but actually revenue is the simplest metric in your business. This is just the gross income, the money that is coming in with nothing deducted from it at all. So to be honest, revenue on its own is a vanity metric. And I see a lot of people sharing their revenue without being honest about the other numbers that we're going to talk about today. And it really troubles me, because if I was to share my revenue with you, you would probably get the impression that I'm living a lifestyle that I really am not, because the revenue in your business can be very, very high, especially if you've got team members, you've got associates, you've got lots of passive products, then revenue can go sky high. But actually the other numbers in the business, will also change as a reaction to that revenue. And it's the other numbers that are much more important that give us much more crucial information about the health of the business and the lifestyle that it's actually going to give you, and the good that you're able to do for your, your clients as well. So revenue is important to know because it gives you an estimate of growth and impact. If you are making a lot of revenue, it's likely that you are helping a lot of people and you can track the trajectory of that.

00:04:24 This is really helpful because it's going to allow you to predict what might happen in the future if you, you know, put lots of effort into increasing the revenue in one of those particular areas. So really important to know exactly where that income is coming from.

00:05:13 It's up to you how many categories for different types of revenue you want to create. I would say go with what's useful for you to have a good understanding of your revenue at the moment. So for a lot of associate practices, you might want to break down the revenue by associate so that you know how much money each associate is making you every month.

00:06:12 So for example, if you've got an associate practice and you know that for every 140 pounds an associate makes you, you are going to have to pay out 90 pounds to that associate, you can create a formula, and actually AI can now do this for you, in your spreadsheet that calculates an expense line to take 90 pounds for every 140, that is listed in the income for an associate.

00:07:49 So it's worth going into enough details to be able to make that assessment.

00:08:01 You need to know how much money you are spending every month and also across the year in order to keep your business running in the way that it needs to run to support your lifestyle, and you have to be honest with yourself about it. There isn't a way, people always ask me for an estimate of how much the expenses should be for an independent practice, and I can't give you one because it really depends on your values, the services that you are providing, what that client group need in terms of support and also what you need in terms of support. And this is why, if you saw my, I would never share my revenue figures with you because if you saw them, you'd get such a false impression, because in order to keep my business going with all the stuff that I have going on in my personal life, I have to pay for an awful lot of support, probably a lot more than somebody who had the same business but was able to work five days a week in school hours would have. So, you know, you can't look at somebody's revenue figure and have any idea about what their overall take home pay is going to be, because you aren't going to have a realistic impression of their expenses.

00:09:32 So, when you're looking at your expenses, I really recommend just getting your banking app out and dumping this into a spreadsheet. If you are in Startup or Evolve and Thrive or the network, you'll have access to our Cashflow Forecast spreadsheet. This is the perfect place to do this. You just go through your banking app and literally note down all the expenses over three months. Just accurately transposing them straight out of your banking app and into that spreadsheet.

00:10:41 So for example, I invest in stuff like practice management software because that creates a better quality service for me and for my clients, and I invest in advertising spend, and that's because I expect that that will enable the business to grow. So those are both in my mind, investments in quality and growth. And so they go in the investment side.

00:11:59 So things that would definitely fall into the investment category are things like clinical supervision, business coaching, high quality legal templates, practice management software, CPD, training that you expect you're going to be able to use to support your clients better. All of that is really obviously investment. You're just looking for anything that kind of sits on the periphery that maybe you don't use that often or you don't use very well, and thinking about whether it might be time to cut that.

00:12:46 And out of that gap between the two, we then have to take tax. And that's our number, number three. And this is something which actually I think can be quite confusing. I was told a lot when I started in business that it wasn't really confusing, I was just making a fuss about it. But actually I think it is a bit confusing, especially considering it's not something that we are taught in school, and I really think that we should be. So, I'll give you a really brief overview of the taxes you need to keep an eye on. Obviously, you should really consult an accountant to get proper advice on your tax situation. Again, if you are in Startup or Evolve and Thrive or the network, we do have a class with Mahmood Reza from, I Hate Numbers, we talk about tax, and we've got one with Sally Farrant where we talk about VAT specifically. But if you are not in any of my programs, and you're not in the network, then I'd really recommend having a consultation with an accountant, so that you can get a clear read on what tax you should be expecting to pay for your specific circumstances because it will be different.

00:14:38 When it comes to the end of the tax year, you'll be able to list all the business expenses that you've had, and that should be deducted from your overall tax bill. But that's really difficult to work out as you are going along. So to be on the safe side, saving a third of your revenue is the advice I've always heard being given to sole traders.

00:15:23 You'll also have to deal with self-employed national insurance contributions, but if you're saving a third, you should probably have enough to cover that, but again, talk to an accountant about that. Don't take my word for it.

00:15:44 So if you form a limited company, many people will do that because you'll end up paying a little bit less personal tax than you do through self-assessment, because of the way that you are likely to pay yourself if you operate as a limited company, but it means that you have to keep an eye on what corporation tax rates are.

00:17:02 You may also be paying yourself as an employee of the company, and then the company will pay PAYE, and national insurance contributions for you through that. But if you're a limited company, I would really strongly advise you need to talk to an accountant about tax advice. And really the purpose of talking about taxes in this podcast episode is mainly to convince you of that fact. And if I haven't convinced you so far, I probably will with the next one because the next tax you need to consider is the VAT threshold. And like I said, we recently ran a class on this in Psychology Business School with the wonderful Sally Farrant because the VAT threshold is something which has been tripping up a lot of my clients, and that is because we have a slightly bonkers VAT system in this country.

00:18:52 So the first thing is you don't have to start charging VAT until you hit a certain threshold, which at the moment is 90,000 pounds in any rolling 12 month period. So if you're safely under that, then you don't need to worry about VAT just now. But if there's any chance that you could tip over it in any rolling 12 month period, you really need to be keeping an eye on it.

00:20:08 And psychologists like me tend to get caught out when our revenue from things that are not direct therapy starts to go up, maybe quicker than we expected it to. So if you are offering supervision, training, consultancy, coaching, none of those things are VAT exempt. So you can go from one year having the majority of your income come through therapy so you're safely under the threshold, because the threshold only applies to non VAT exempt services, and then the next year you get a few really big consultancy contracts and you've tipped over and you maybe didn't even have an eye on it. So again, you need your own tax advice around this. You need somebody to help you plan for the threshold, and I really recommend for VAT planning, Sally Farrant is brilliant and I'll drop her details in the show notes of this episode. But I wanted to raise your awareness to it now because I know that it's something that many of us don't know anything about and could kind of stumble over that threshold in ignorance, and that's happened to me before. So I don't want it to happen to you because you can get a big fine and it's really stressful. So avoid that please!

00:21:43 You should not work with an accountant who makes you feel like this is the dark arts and you'll never understand it. That's just wrong and it's no way to run a business. So make sure you understand your taxes, guys, and hopefully that's given you a good overview of the ones you need to be aware of and why.

00:22:46 There are lots of things that you can do with your profit. You can, of course, pay yourself a nice little bonus, which is a really good idea, I have to say, you should be rewarding yourself for being the excellent employee that you are, and it is no bad thing to feel well compensated for your hard, hard work. That makes your hard work sustainable for you for the future, and it helps you to give your family the lifestyle that you want. So there is no shame in that, and you should absolutely be using some of your profit to make sure that you feel well looked after by your business. That's really important.

00:23:55 So if I couldn't make any money tomorrow, then I want to know that I can still pay the significant payments that I make to my team at least for a couple of months, because otherwise I could be in a position where not only can I not pay my mortgage, but my VA, my social media person, my operations manager, none of them can pay their rent or their mortgage either, and that doesn't feel ethical to me.

00:24:50 Profit is also your ability to innovate. So when you've got profit to play with, then you can look at things like, you know, developing a new piece of software or setting up an online course or seeing whether you can make that community group work, without the pressure of it needing to make money immediately, and that allows so much more creativity.

00:26:25 So regardless of how you are planning on running your business, whether you are going to run it as a social enterprise or whether you are running it for, you know, your lifestyle and your family, profit has to be there. Otherwise you can run into trouble and you'll end up with interrupted service for your client groups, which isn't what any of us are aiming to do.

00:28:20 That's just one example, but there's loads of examples where a bit of profit allows you to be more environmentally friendly in the choices that you make. So I think that kind of sustainability piece is really, really important.

00:29:22 So again, it's like thinking about these three things together, profit fueling the sustainability and the impact of your business. And you get to choose how that looks, which I think is really exciting. So I think it's also worth acknowledging that profit really gives you the freedom to run your business according to those values that you set right at the beginning. Whereas when you are kind of operating on no profits, you will often find yourself having to compromise on sustainability, impact, or your values.

00:32:09 So I hope that's convinced you to dive into your numbers. Have a bit of fun with some spreadsheeting. Like I said, if you are in one of my programs, you'll have access to the cashflow spreadsheet already and I'd really encourage you to use it. If you're not, then have a look for a cashflow template. There are loads of government versions available, any of them will do it. It's a nice and simple activity, just make sure that you are honest with yourself about those expenses, because that tends to be the bit that we get overly optimistic about. So I really hope that's been useful. I'd love your feedback on this episode, do reach out to me, I'm @RosieGilderthorp on Instagram where I talk about all the stuff related to Psychology Business School, or if you want to have a look at my stuff on SEND Parenting, I'm @DrRosieGilderthorp on Instagram too.