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?
00:00:24 Maybe you've 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. Maybe you've got a bigger tax bill than you were expecting because you made much more money than you wanted to.
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.
00:01:37 So the four numbers we're going to talk about today are revenue, expenses, taxes, and profit. And then at the end I'm going to talk a little bit more about the social impact that we can have with profit, and hopefully maybe for some of you reframe the way that you think about the concept of making profit. Because if you've only been exposed to it via The Apprentice or Shark Tank or other kind of business focused language, then often profit can sound like something it isn't really, in terms of business.
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.
00:03:53 Speaker: Tracking your revenue should also include tracking the specific sources of that revenue. So you want to go into a bit of detail, looking at how many therapy sessions you're selling, how many online courses you're selling, how many supervision sessions you are selling and breaking it down basically into any individual services that you offer so that you can see how much money am I making for those activities each month and across the year.
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.
00:04:43 And sometimes that can be surprising. If you're very busy, you might not have realised that you are actually doing loads more supervision than you were last year, and that a much bigger proportion of your income is now coming from supervision than it was last year. So even if that overall revenue figure hasn't changed very much, the place it's coming from might have changed quite a bit and for tax reasons that we're going to discuss later, it can be really significant to understand that.
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.
00:05:37 If you have a really large associate practice though, that might be a bit cumbersome and you might just break it down into your therapy income and associate therapy income. It kind of depends what you need to work out. What I would say though, is that if a service has specific expenses attached to it, then you definitely want to have that as its own line in your spreadsheet so that when you do your expenses, you can do some clever spreadsheet wizardry and make those two things dependent on each other.
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.
00:06:40 So it is definitely worth separating out your services, at least in that much detail. But however much detail you need to go into really. So I know one of my clients at the moment is really interested in tracking the growth of her, CBT for anxiety business versus the, therapy that she does for CBT for OCD. Because she wants to grow the anxiety work and slightly reduce the OCD work that she's doing. So she might want to separate out those two types of therapy. Now that's quite involved and that's going to take, a little bit of doing for her every month to go through and track what revenue came from anxiety referrals and what revenue came from OCD referrals. But because that's a real business objective for her at the moment, that might well be worth her doing. So revenue tracking and getting quite granular with it, really helps you to see which aspects of your business are really healthy at the moment and which ones might be declining slightly or might be struggling, a bit more.
00:07:49 So it's worth going into enough details to be able to make that assessment.
00:07:53 So number, number two, this is the one which you need to consider directly alongside revenue, always, expenses.
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.
00:09:18 So yeah, don't be impressed by those online gurus who will share their revenue figures with you. Really, I think that's irresponsible unless they're also willing to share the expenses and the profit, which we're going to talk about a bit later in this podcast.
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.
00:10:00 And then go back through the year and see are there any big expenditures which don't go out every month that you maybe make on an annual basis and pop those in as well. This is really boring, I'm not going to lie, and if you are lucky like me and you have a bookkeeper, it may be that they can actually do this for you. Because I've done it myself lots of times, and it is like back achingly boring, but it's so worth doing because once you've got that, you can then categorize your expenses and have a look at what are the expenses which are investments in either the quality of my service or in the likely growth of my service.
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.
00:11:04 You may also find that there are some expenses there which don't easily fit into a quality or growth category. And when we have those expenses we need to consider are they adding some other kind of value or are they just draining the business? So often I'll find that I've got software packages that double up. So I could be using one tool to do lots of things, and actually I'm using lots of tools and paying lots of subscriptions. That becomes a drain. So I would highlight that and think about reducing those. And so it's a really useful exercise because not only are you getting to know this number, which is really, really important for planning your business going forward, but you're also getting an idea when you do it, of what maybe you could cut, because it's always going to be the case that we end up with bloated expenses when we've been in business for a while, so it's always useful to go back through and have a look at that.
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.
00:12:30 So once you've done both of those exercises and you've put them into your cashflow forecast spreadsheets or a spreadsheet that you are making to track your income and expenses, then you get to see what's the gap between the two.
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.
00:13:55 So just as a really brief overview, then you've got your self-assessment, which is the tax you pay on your income. So 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. So it's not done on profit. It's not done on revenue minus expenses, it's done on your revenue. So that big number we were talking about at the beginning, that is all of your income, regardless of expenses, that is how your tax is going to be calculated. So, it's really sensible if you're a sole trader to be putting away a third of all your revenue and saving that up for your tax bill.
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.
00:14:58 So make sure if you're a sole trader, you're just saving a third of all of the revenue that comes through, and then it should be happy days when it comes to your tax bill. You should have overs saved, hopefully. But again, do 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, which there are frequently. So that's something that you need to worry about.
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.
00:15:37 So the other tax that you'll need to consider if you are a limited company is corporation tax.
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.
00:16:04 Corporation tax is worked out on the profit of the company, and it's usually at about 20%. Or that's what it is at the moment. So this one can be really tricky because every month you'll probably make a slightly different amount of profit. And again, profit is just your revenue minus your expenses. And so the way that I do it is every month I look at what's the profit this month, and I put 20% of that into my corporation tax savings account. There's probably a better way of doing it. My accountant usually manages to get my tax bill slightly lower than I expect it to be, but that is how we do it. So have a look at the rules around corporation tax, talk to your accountant about what they think the best savings strategy for you is, but I just want you to be aware that you will have to pay it. And then you will also have to do your self assessment and pay tax on the money that you pay to yourself from your company.
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.
00:17:54 So VAT, it's called value added tax, and this is a tax that you collect on behalf of HMRC, so the money doesn't belong to you ever. You collect, it's usually 20%, 20% at the moment. You collect 20% of the price that you are charging to the customer, and you have to give that to HMRC about every three months. So that's why you'll often see prices given both with plus VAT written on them, it's because that plus VAT bit, the extra 20% you pay, the person that you are buying the product from, never even really gets to see that. It just goes into their account and straight back out again. It's really frustrating and the thing that makes this really difficult for people in our professions is that there are strange rules about what's VAT exempt and what isn't.
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.
00:19:15 So the second reason it's confusing is that health services delivered by certain qualified professionals are VAT exempt. So that means for us that 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. I mean, how bonkers is that? And so 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 by that, which is not their fault. I think it's such a bonkers system that it's really easy to trip over, especially if you've taken on team members.
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!
00:21:23 Know your numbers, be confident with tax, and make sure you've got an accountant that respects you enough to make you understand your tax arrangements. I work with Mahmood for all my tax stuff and he's brilliant at not letting it go until he knows I've understood and because he knows I'm capable of understanding.
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.
00:22:01 So now we're onto the fun bit. I've mentioned profit already a couple of times, and profit essentially is really simple. So it's what's left when you've taken out your expenses and your taxes. The little bit that's left over. Now profit often gets a bad rap. People will talk a lot about people being profit hungry or obsessed with profit, profiting from other people's misery. It's something we hear quite 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.
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.
00:23:24 But there are other things that you need to use profit for as well. For a start, your profit is the emergency fund in your business. So, 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 not just for you.
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.
00:24:24 So having some profit is responsible in your business to make sure that you're not going to be letting people down, defaulting on payments that you owe people, because of some unforeseen catastrophe that we hope doesn't happen. But you know, we've all lived through COVID, we know that it could. So profit is really important as an emergency fund, and you should have some set aside that you think would cover those key expenses for a couple of months.
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.
00:25:17 Like for example, often people really want to start groups in their communities, but they're not sure whether people will pay for them to start with. And often people do need a bit of time before they trust enough to pay for a service. If you've got a bit of profit, then it's at your discretion. 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, people have got to pay immediately. And you might be thinking, oh, but if I'm going to run a community group, I'm going to do that with grant funding. Well, that's brilliant too. But what if there's a gap between the first grant that you receive that gets the group often up and running, and the second grant that you apply for, which maybe you don't get. And there's, you know, three months before you can apply for another one. We see so often really great initiatives running on this extremely stressful cycle of grant funding where, you know, the service just doesn't exist for three months while everybody scrambles around trying to get funded again. If you've got profit, you can fill that gap.
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.
00:26:47 So I wanted to share with you a concept, which I came across in my MBA and I found really interesting. So the concept is the triple bottom line or a different way of thinking about profit, and it's about 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, I think back in the early nineties. And he suggested that business success should be measured by three Ps, people, planet, and profit. And I think that this is a really helpful way of thinking about business, but I have made slight adaptations to it for working with mental health , and thinking about my own business. So the way that I think about it is sustainability, impact and profit. Because as I've just explained, if you are not making good money, you are not going to provide a sustainable service for our client groups, and you're also probably going to have to make choices which are worse for the planet. So if you are really up against it financially, then you can't really afford to pay for the AI models that are more environmentally friendly. You are going to go with the cheapest or the free options, which have so many negative implications for the planet, and also for people, because of the way that they're running their businesses. If you've got a bit of profit, you get to choose the more ethical company to work with.
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.
00:28:35 Impact. Again, when you've got a bit of money in the business, it's so much easier to accelerate whatever it is that you're trying to do in the world. So with some of my profit, I pay for some Facebook ads, well, Meta ads I should say, I think they're mostly shown on Instagram, actually, which I mean, and it's a tiny amount, but they show my Dr Rosie Gilderthorp posts about SEND parenting to more people than I would be able to reach organically. And that, you know, I'm consciously using the profit from Psychology Business School to do that. I'm not selling anything on that account. There's no way of me monetizing that particularly at the moment, 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, and it really, really works.
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.
00:29:54 So, yeah, I hope that in this episode I've made it really clear why you need a really good grip of the numbers in your business. Because if you can track where you are at 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 into the future. What would happen if I, you know, spent a bit more money on marketing and sold a bit more of my coaching packages, or I took on another associate and sold lots more therapy sessions. What impact would that have on my overall profit on that kind of 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? And you can track that like a story going forward and make a plan around whatever your goals are. So if you look at the status quo and you think, oh goodness, having listened to Rosie's podcast, there is not enough profit to be sustainable or have the impact that I want to have going forward, then you get to look at those numbers and think, okay, how do I generate more profit here? And there's only two ways to do it really. You either make more revenue without increasing the expenses particularly, or you cut expenses. And having it all in front of you on a spreadsheet, it really enables you to understand how best to do that. It might be that you look at it and think, okay, we can make a little bit more profit with cutting some expenses, but we're also going to need to increase our revenue. And that could look like price increases, it could look like adding in additional services, it could look like being innovative and putting services together in different ways and changing what the customer journey through your business looks like. But knowing your numbers is where all of that thinking starts. And if you don't know them, it's really easy to kind of sleepwalk into a situation where one day you realise that the business that you've built isn't sustainable and isn't allowing you to live 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.