The Financial Clarity Every PT Owner Needs Before Scaling
Julie Herres of Green Oak Accounting works with a wide range of practices, both smaller emerging clinics and larger multi-site groups. In this episode, Paul focuses on how smaller practices, in particular, can use her financial clarity approach to drive better performance and long-term success.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello everyone and welcome to another episode of Paul Martin's Crucial Conversations. I'm Paul Martin, founder and president of Martin Healthcare Advisors. And on this show, we continually bring leaders who can help physical therapy and rehab business owners grow stronger businesses, improve operations, and prepare for long-term success. Today, I am super excited to welcome Julie Harris, founder and CEO of Green Oak Accounting. Julie, welcome. So glad to see you, Paul. Thanks for having me. Absolutely. Absolutely. So Julie and her team, they specialize in accounting, bookkeeping, as well as CFO level support and tax planning specifically for private practices like what all of you out there have.
They have worked with hundreds of therapy and health care practices across the country. They help owners create financial clarity. They help owners improve their profitability as well as prepare for growth. And at some point an eventual sale of the company. So we are going to really focus on best practices for PT business owners like all of you out there. What changing what changes in accounting are needed as you scale and how you keep your financial house in order if you ever want to sell, partner or just do some form of a recap.
So Julie again, welcome to the show and welcome to our audience and if it's okay with you, we'll jump in with the interview. Let's do it. Glad to be here. Awesome. So Julie, you have worked with hundreds of practice owners. What tends to be the most common, let's call it financial fog that you see them operating in when they first come to you? Yeah, there is often some some form of I have to, right? And I'm using air quotes because I have to is not always true.
Sometimes it it's more of a feeling than anything else. And just one of my beliefs is that a practice owner's primary responsibility is to ensure the survival of the business. And I just think that that's in service to everyone, right? It's in service to the patients, the clinicians, the community, everyone that you serve ultimately. So when you when you look at every decision financial or otherwise through that lens right that the your primary role is to ensure the survival of the business of the practice it removes a lot of the emotion and then it also typically helps owners realize that the math has to math right the numbers have to make sense.
So if any one specific decision puts the business at risk or doesn't have a long-term return on investment then it's just not the right decision for the practice. So, it removes a lot of that emotion of like, oh, well, this person's been with me for 10 years, or oh, I really want this office because it's so beautiful, right? It just kind of removes a lot of that, like, is it in service to the survival of the business? Yes or no? That's usually a pretty clear answer.
And so, that's one of the pieces when it comes to the financial fog of like, is it is it really in service to the ultimate goal? It might feel good in the moment. Really, it's the art of delayed gratification. Sure. Sure. And these are, as you know, these are many of the physical therapy business owners out there are physical therapists. Many of them are still treating patients. So they're caregivers. Absolutely. Absolutely. You know, not CFOs or accountants. And so, you know, sometimes putting, you know, the practice last and kind of the people first is pretty natural until somebody comes in and shows them what they really need to do in order to really truly take care of those people.
Yes. Yes. And it's really easy to make a decision in the moment that feels like, oh, I'm doing this because it's best for this specific patient, right? Or this specific clinician. And that might be true, but it's not it's not necessarily in service to the bigger the bigger picture. And that's really a necessary progression of being a business owner, right? And I know a lot of a lot of PTs did not go to business school or did not take any accounting classes or leadership classes, right?
But ultimately, the owner has to become the leader that the business needs and deserves. And that means like putting on your CEO hat and saying some of these decisions that I have to make might make people mad and I have to be okay with that, right? I might not be able to please everyone. And and really for anyone who's led a team for more than 10 minutes probably you're not going to make everyone happy all the time, right? That's just not going to happen. It's not easy.
I I'm a natural p peopleleaser at heart. And yet like when you're in your CEO role sometimes you have to just accept that like that's just not how it's going to be. That's just not it. Sure. Yeah. Yeah. So, in some of our conversations we've had, you've shared some incredible turnaround stories. Yeah. For today, what would be the most dramatic transformation that you've seen when a practice owner finally gets financially clear and, you know, kind of that clarity, that financial clarity. Yeah. I mean, so over the years, we've we work with hundreds of practices.
I might even say thousands at this point. Like I I've just I've lost track of exactly the number and like there's some stories just that just stick out in my mind. I'm a little bit further removed that these days. We have a team of 40 accountants. So there's just lots and lots of of clients that we work with and that I don't necessarily work with personally, but I just remember some clients that for example came in and they they're like this it doesn't feel right. Something doesn't feel right.
And when we finally just untangled the numbers, right? Just looked at what is actually going on under the hood of this practice. They were they were losing about $10,000 a year, which like depending on the size. I mean, it's not the end of the world, but it's certainly not the direction that we want to go in permanently, right? Like ultimately, we want to make some money. That would that would be much better. And so, for this specific client, within 12 months of working together, I mean, they just turned that around.
They were willing to do the hard things and make the difficult decisions and really take action on the feedback that we were able to provide. And they within a year were doing much better. Within two years were do were doing about 500,000 in profit, not just net income, right? So they had grown their gross their gross income. But then profit went from negative10,000 to 500,000. Like that's a complete change in lifestyle for a business owner. Like that's a completely different absolutely life. And I mean that's a really beautiful thing.
So they've been able to do things like buy a new car, send their kid to college debtree. Like those are life-changing you know do renovations on their house. Those are life-changing things that can really make all the hard work of business ownership feel worth it. No, absolutely. And and there are many business owners that you know basically become an employee of their own business. Yeah. And they may be paying themselves a little bit of salary, but after that there's really nothing else. Not much less. And again, with some good sound financial practices and operational decisions, as you proved out, they could be on the success side of financial Well, and as you know, like the dramatic stories are great, but sometimes the most impactful stories are kind of the boring ones, right, of owners just showing up every day and doing the hard work.
They're making the difficult decisions, implementing the changes that, you know, can rock the proverbial boat, but move the business forward. And a lot of practice owners when they when they come to us, they are making decisions from a place of like, well, I think or I feel like this is probably the thing I should do. And that often tends to show up in the delivery of the information and the confidence that they have as a leader, right? When they're like, well, I think this is what I can afford, right?
But when the owner knows like they that they're solid in that knowledge of this is what the practice can do. This is the best offer I can make to a potential candidate, for example, or this is what we can afford in a new space. You're just showing up in a very different way energetically, right? Where you know it's not just like I think or I feel it's I know. Sure. And the confidence that comes through there really often allows owners to grow their business exponentially. Absolutely.
Absolutely. You know, and it's does seem like there's some business owners and businesses I should say that you know have fairly good revenue. Yeah. But they still don't feel like they're taking anything home on the bottom line. Do you find that as well? Yeah, definitely. Yeah. Well, and there's often kind of two things going on there. One is gross income or like all the dollars coming into the practice, right? That is a vanity metric that often does not have a correlation to profit. And so just because an owner is like, "Oh, I my business is doing five million." Like that's great and that's a great number, but like what are you actually getting to take home?
Right? That's what I really care about because there's plenty of one or two million dollar a year businesses and the owner is maybe taking home 50k, right? Like that's those margins are slim. That that there's a lot of risk involved in that, right? The bigger the income, the more the risk. So, I'd much rather see a $500,000 a year business where the owner is making $150,000, right? Like that might not be as like as big, but that is just a solid foundation. So growth for the sake of growth can be a little bit dangerous, but sustainable growth like it's not always as exciting, but it pays better.
And so like often when you're able to kind of pair those together, right, and look at growth of revenue, but also keeping margins level or steady, right, or not eroding the margin, then that is that that's positive. The other thing is that profit on paper is not what the owner gets to take home, right? And there's that's a really common misconception of like what where our practice owners will come to us and say, "Well, like your the report is showing me that this is the profit, but like when do I get to take that 200,000 home, right?" And and that's just not that's just not how it works.
So the profit on paper has some really heavy lifting to do. So that profit is what pays you, right? A distribution or a draw. It is what is used to pay income taxes, right? Quarterly estimated tax payments. And it's also what you will use to fund future expansion or growth as retained earnings, right? Or it might be that and in addition to debt service as well, but usually you're using some of your own cash to expand the business. So the profit on paper doesn't necessarily correlate to profit in your pocket.
And that's just a common misconception again like PTS didn't go to business school. It's easy to not realize that but like it's there's a lot of work for it to do. For sure. For sure. If you look at those practices that are, you know, maybe putting a good number to the top line, but a very low number to the bottom line. What seem to be the main leaks that you see? And how do you help owners kind of plug up those leaks? Yeah. There's a couple of places that are kind of our go-to like it's probably one of these items.
One is going to be clinician compensation. It's really easy for clinician comp to end up being higher than you expected. And when there's a profitability problem almost always there's a correlation there, right? Where we're typically aiming for a 20 to 25% profit margin. And sometimes that's going to end up being a little bit lower, but like if we if we see a profit margin at 13%, I can almost guarantee you there's something going on with with compensation. And not that it's not wellended, right? It it comes from a place of kindness, but it's often not holding people accountable, giving raises where raises are not necessarily earned or deserved.
Not filling a schedule effectively, right? There's a lot of different pieces that can go into that, but in most PT clinics, like your clinical payroll is going to be your single largest expense. So, if you're not controlling that single largest expense, you're just it's difficult to make money, right? That's always going to be something eroding the margin. So, that would be kind of my number one. That's most common. Number two would be space usage. So, if the space is not being used efficiently, specifically in more expensive markets, right?
If you're kind of in the middle of Kansas, it doesn't matter as much, right? It's not as big of a deal. But if you're in an LA or New York, I'm just outside of Washington DC, like in expensive areas, you've really got to be efficient with your space usage because it's just so expensive, right? And sometimes there are spaces where the math is never going to make sense, where you can never make enough money in that space to make that space make sense. And it might be gorgeous in a location that you love, but like it just doesn't make sense, but you have to run those numbers before you commit to a space and sign a 10-year lease rather than after.
Right? When we realize that like two years in, there's only so much you can do. And so looking at those numbers, and I think Paul, you're the one who gave me this rule of thumb and I love it. I think your rule of thumb is 15% of your square footage should be your number of sessions per week, right? Where if you So, if you have 2,000 square feet, you should be aiming for 300 clients per week, right? Plus or minus. Yeah. Y exactly. So love that.
So, a lot of a lot of times like as you're getting close to that number, the owners will start to say like, "Oh, it feels like we're really full. It feel right we're at 100 or 200 sessions per week." Like, yeah, it might feel that way, but that doesn't mean that it's time to add new space now, right? We don't ne we can start looking for another clinic, but like let's use this space efficiently before we just add more overhead to the practice. And then the third the third item I would say is like where money just kind of falls through the cracks is thinking that growth will fix money problems.
And if you run one location poorly with a low profit margin, adding a second location will only amplify that problem. It will not fix it. You could also say the same about adding another income stream, right? Like, oh, let me start coaching on the side. You're just shifting your attention to another location, another venture, and that does not help the location that is struggling. And so getting like that one the one or whatever you have existing like getting it running efficiently with great systems and a good margin is always time well spent before you then start sharing your attention in other directions.
Sure. Sure. Yeah. Is there anything you would add to that list? What would be what would be your time? We also look at a you know when you look at space to revenue you know our rule of thumb is somewhere between seven and 10% of the revenue as an expense you know so you got a million dollars of revenue you know your space rental should be somewhere in that you know say 75 to $100,000 not 200 to $300,000. So, that that's another way of looking at it.
But you're absolutely right. Owners also they don't want to make their staff come in at 7 o'clock in the morning or their staff say till 7 or 8 o'clock at night. But that's the way in 2500 foot spaces we were able to see, you know, 3 to 400 patients a week because we were able to spread patients out throughout the day. Yeah. So th those are some of the you know additional things that we find. When there's a practice that's you know just they're break even what's kind of the first step that you guys take on stopping the bleeding generating cash flow as quickly as they can.
Yeah. Yeah. So first of all looking at accurate financials right that's number one. Often when that is happening if you look under the hood there's a like oh well I do the you know the bookke the owner does the bookkeeping and they're six months behind right so there's often this the a narrative of what the owner thinks is happening and sometimes what is actually happening is a little bit different right so first step is always like let's get some accurate financials and look at what is actually happening instead of what you like maybe the story the owner has told themselves because then you can actually get to work right then you can diagnose like okay here are some of the problem areas which one is the most important which is the one that we are going to tackle first.
The next thing is like you can work with a great accountant but the owner has to be willing to take action based on the data right based on the data that the financials are going to tell you a story. You have to be willing to listen and sometimes do the hard thing, right? So, your accountant can be a great decision-making partner with you for that. Especially an accountant that has experience in your industry and they can tell you what they're seeing and what you can adjust, but ultimately the business owner is the one who has the agency and who has to do that hard work and make that final decision, right?
The accountant cannot run the run the practice for you. Often what we will uncover them is systems right so if you look at what are the systems in the practice you can sometimes fix the real problem so as an example like one of our clients was saying oh I need to be able like I want you to I were brand new to us they were saying like I need to figure out how I can increase my marketing spend because I need to spend a lot more we don't have enough leads coming in okay and when we got into the numbers like they actually were spending above average on marketing like that.
Something just doesn't feel right. You're not in a particularly competitive market. Something is not right here. So like if we if we need to increase marketing spend, great. That like we'll figure out how to do that. But we already know that this is high. So before we allocate more money, we asked the client like, "Hey, can you have a family, friend, a neighbor audit the intake process?" like have them find your practice online, reach out to your team, see what happens, right? And then provide feedback.
Don't coach them. Do not do not tell them what to expect. Just see what happens. Do not let your team know. Like have them report back how easy it was. So they were looking at like, is there a clear call to action on the website? Do they know what to do? Are there eight different ways to reach out? Was it obvious? Was it simple? Right? So they had a bunch of questions to ask their friends u after that was done. So what this particular practice realized is that they actually did not have a marketing problem.
They had a front desk problem. It took days to return phone calls, right? And and in this market, you don't have days anymore, right? People are expecting an answer. They they're expecting to call and really get almost live answering, right? And that's not always possible, but they they're expecting to hear from you really quickly. But the front desk was just not prioritizing. They're like, "Oh, yeah, it can wait till tomorrow. It's not a big deal." Like, "No, this is 911 emergency." Like, "We need to be on this." Right.
So, so then at that point, they did they I can't remember if they I think they retrained and then eventually let go the person because they were just not going to be able to prioritize that. But like, how cool is that? Instead of just doubling the marketing budget, like that would not have actually fixed the problem. They they had plenty of leads. They were not converting them and they were also not using the systems, right? So they were not even tracking like what are the phone calls that were coming in, what are the text messages or emails that were coming in.
And so what the owner thought was the problem was actually not the problem. Yeah. So you often, you know, I've heard financial clarity and you know we now have financial clarity. How does that change decision making? And in addition once they have that financial clarity how should they start thinking about paying themselves you know from the business also accounting for operation you know taxes and ongoing operations those kinds of things. Yeah. Well, so f from a financial clarity perspective when you have access to accurate financials and usually that means like fairly quickly after the month is over, right?
So you're not waiting six months to look at what actually happened in March, right? You you know pretty quickly after you when you have someone to bounce ideas off of that is going to give you a lot of information about your business. If you are even scheduling money dates with yourself, right, where you're looking at your money for 15 minutes every Friday morning, right? Or whatever time you decide where you're looking at how much money is in each bank account, what were we expecting this week, what are the deposits, right?
Just you really quickly learn the cadence of your practice and what is normal and what is not. And in accounting for every action and really in life, for every action, there's an equal and opposite reaction, right? If you take money from here, yeah, you can do that, but this is the consequence, right? So, when you have an accounting partner to bounce ideas off of and you say to them like, "Hey, hey, Paul, I want to spend more money on marketing." Your accountant will say, "Okay, that's great, but like that means your profit margin is going to go down.
Your distributions are have going to have to go down. Is that okay? Is that a decision that you're is that a choice that you're willing to make?" Right? And you could say, "Yes, I'm willing to do that." Or you might say like, "Oh, wait a second. I don't want to reduce my distributions like okay well then where else is it going to come from right like you can only spend 100% of what the practice makes like how are we going to make this all work and so understanding kind of that pushpull relationship of if you do something over here it's going to have an effect over there and are we okay with both of those those things happening yeah and honestly business ownership can be really lonely right usually with your team you're not able to say to them like hey I'm worried about money things are not going great this month, right?
Or like probably you don't want to say that. And so having a partner and I'm using the term accountant a lot just because that's what I do, right? But that could be an accountant, a business coach, right? Someone who's kind of in your corner where you can talk through and the tough times, but also celebrate the wins, the this is our first million dollar year, this is our first time, you know, x milestone. Like that's really powerful. So some of the strongest business leaders I know in the healthcare space they are not doing it alone.
They're surrounding themselves with an accountant, an attorney. They have an M&A adviser, a financial planner, a billing expert for issues. They they don't manage their own website, right? They are really more directing traffic in their in their clinic and they are having each expert kind of do what they are best at. The most successful clinic owners do that. Yeah. Yeah. Know surrounding yourself with that team that is accessible to you when you need them is just so important. Yeah. Invaluable, right? Where you can just tap them when you need them.
You don't need them all the time. You don't need your attorney every month. Hopefully right you don't but when you need them how precious is it to just be able to say like hey Jerry I need this thing like what's going on with this what should I do oh that's worth it weight and gold really absolutely so you know we see owners then go from a state of stress to confidence how does knowing their numbers then moving forward give owners kind of the courage then to make bigger strategic moves where when they're in this, you know, what I called it in the early aon is kind of that financial fog, they don't want to hire.
They're not ready to invest. They don't know if they're ready for a partnership or a sale. They're just kind of going along. How does knowing their number and getting, you know, very confident with their numbers change those change that way of thinking? Yeah. Well, when you're operating from a place of not knowing, it's often a place of fear, right? Where, well, what if I have this huge tax bill or I don't know how much a safer tax is, so I'm just going to not do anything at all, right?
Where where you're kind of making a lot of reactive moves because you don't have the knowledge around it. Once you know, you understand how it works, then you can make decisions based on that, right? It because all of these things are not unknowable. When you hire someone, you can establish like here's how much I should have saved up before I make that hire because it's going to take about this much time for them to break even, right? It's not going to be exactly the same for every practice.
Like there can be a formula to that. It might vary slightly from one employee to another. Like it's you're generally once you have it figured out like you'll know, oh, it takes about, you know, eight weeks for someone to break even. Okay, great. Then let's have eight weeks of their salary saved up so that you know with 100% certainty that you can pay them when they start with you. Great. A lot of our clinic owners will know like when I open a new clinic it's going to cost me $100,000 to get that off the ground.
Great. Now you have that number. So you either know you need a loan for 100,000, you need 50,000 in cash, 50,000 on a line of credit, right? Like you can decide how you're going to make that work. But it's coming from a place of knowledge versus a place of like, well, I think m I have 30,000. Maybe that's going to be enough, right? And you just kind of hope for the best. And hope and prayer is not really the best plan for a clinic, right? Not the best plan for growth.
Like things will go wrong. That's what I've learned working with hundreds of practices. It's not a question of if things will go wrong. It's really a question of when something is going to go wrong in the process. If you are expanding, if you are hiring, right? Like the more multi the more variables you add, the more challenging it's going to be. Sure. So, let's just plan for things are going to go wrong and like let's have a little money tucked away, an emergency fund for the practice, a line of credit, right?
Something to kind of mitigate that risk so that you can keep moving. Yeah. Sure. Sure. I like how you keep going back to decision, financial clarity, decision. Yes. How much is in the checking account? Decision, you know, and making without not making moves when it's foggy down here, but making moves when it's clearer. So if a PT owner that's out there listening today wanted to improve this financial clarity that we've talked about, what's the one simple action that they could actually take tomorrow that would actually start to move that needle from fog to full clarity on their financial picture?
Yeah. I would sit down and just look at look at what's going on financially in your in your practice, right? I would say just look at look at the numbers if you are working, you know, if you're working with an accountant, if you have your own QuickBooks, even just and if even if you don't even have that, I would pull out the bank statements. If you have a bank account, you have bank statements, right? Bank and credit card. I would just start looking at like where is the money coming from?
Where is it going? There's never a bad time to look at your numbers, but as we kind of round out the end of the year, I think looking at what has happened so far this year can help you get ahead of, for example, your tax bill in April, right? I know you I think we kind of drove around taxes, but generally speaking, most practices are going to need to save somewhere between like 20 and 35% of their profit for taxes, right? Somewhere in there. That's a that's a wide range, but it just varies depending on household income and also income of the practice, but somewhere in there.
So, if you're looking at it in December versus waiting until April, hey, you've got a fivemon head start. That's a great place to be, right? Today is always better than tomorrow. So, you can start saying like, okay, I didn't save so far, but I have some time to start working on that. But also looking in the rearview mirror can help you plan what you want to accomplish next year and set some milestones. And so a lot of our clients will say something like, well, I want to do like I want to get to 5 million next year.
Okay, I mean that sounds great. So we can set a forecast for that. And then but sometimes when we do that, right? Okay, that means that by, you know, December of 2026, you'll be at, you know, 3,000 visits a month, right? Great. And then the owner says like, "Oh, wait a second. I I'm not sure I can do that." Like, okay, that right? Like when you can break down a goal into this is what needs to be done every month for that to be possible. Are you able and willing to do that?
Sometimes the answer is yes. And sometimes the answer is like maybe that's too aggressive and maybe I have a kid who's going off to college that next, you know, next year and I want to be present. So like maybe I can't actually maybe that is not aligned with my personal goals. And that's perfectly okay, right? That's absolutely okay to say, you know what, I'm going to take a take the foot off the gas and maybe we're not growing as much this year because I have some personal priorities going on and maybe the following year is when we really pedal to the metal.
So aligning, you know, looking at what it takes to actually accomplish that goal means you're more likely to be successful, but you can also break it down into something that's much more manageable, too. Sure. Sure. And you know, we've always said that Thanksgiving, Christmas, this is a time for family. This is a time for giving. This is a time for gratitude. And it is a time for all that. It's also a time that you get a little bit more time to just kind of, you know, isolate yourself.
And I think what I hear you saying is, you know, yes, your accountant can help you with your numbers and your consultant or who your adviserss, but actually looking at your numbers yourself and thinking through what can I accomplish, I think is exactly what you're saying. And I think this is a great time to start that. So don't wait till quarter one of next year. Let's start this right now between Thanksgiving and Christmas. Is to start that process. Julie, this has been up. No, go ahead.
What were you gonna say? Well, so when you have that plan, too, right? I' I've been down this road with so many clients at this point. When you have a plan and you say like, "Okay, we're going to grow by 100 visits a month every single month." And that's how we're going to get to whatever goal, right? Like, let's say that's the that's the goal has that has been set. Add a zero, take away a zero, right? Whatever whatever the number is. Yeah. When you make that strategic decision and it is intentional, I am 100% sure at some point in the year you are going to wonder like was this the right thing?
Did I do the right thing? Are we on track? Right? There's always that moment of doubt of like this is too much. I'm not sure I can do it. But then when you go back to kind of the plan and the forecast and you've already planned out how are we doing this? Where's the cash coming from? Right? Where you have that strategy. It can help say like, okay, we are on track. We are doing the right thing. It's okay that we're spending a lot of money right now.
We had planned on it. We knew this was going to happen. We're working towards it, right? But when you're just kind of winging it, it's hard to know like, are you doing the right thing? Is it going to be okay? You don't quite you don't quite know. And so, a plan is a plan is always helpful. And the plan's always change, right? I like to joke with my team, a forecast is basically always wrong. It's just a forecast. We're just trying to crystal ball it, but it still informs a lot of the decisions that you make as you go along because you have a plan.
No, for sure. It's like saving future TV shows or, you know, whatever. You've done it. You've put it in place. You know it's going to be there when you need to check on it. And as you said, many times you check on that forecast and you think the sky's is falling, but hey, we're not that far away. Yes. Yes. And you're never going to be exactly on it, right? But like, how far are you? Let's just readjust. Let's course correct. It's not a big deal, right?
A forecast doesn't mean you can never change it. Just change the forecast. You're the business owner. Change the forecast. It's completely right. Like adjust it. It's it's absolutely fine. But that can be really really reassuring. Absolutely. Absolutely. Well, Julie, this has been absolutely awesome and I really appreciate you have given our listeners today a lot of information and some very valuable information and tips. And for all of you out there who watch today, if you would like to have a conversation with myself or Julie, just click below and we will talk.
And so I promise you that as we move forward in this time, this is a great time for planning. Again, thank you, Julie, and we'll see you all next week. Thank you. Thanks so much.
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