The profit first method is popular with small business owners, but is it the right choice for your therapy practice?

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If you find that, even as your practice earns more revenue, you struggle to make a profit, the profit first method can help you get your business spending under control. And it helps ensure you enjoy some of the benefits of running a successful practice. Namely, profit—some of which you pocket and some of which you reinvest in your business.

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But like any other financial method, profit first has its drawbacks as well as it benefits. Here’s how to decide whether profit first is right for you and—if it’s the right fit—set up profit first for your therapy practice.

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What is profit first for therapy?

The profit first method was popularized by Mike Michalowicz, a popular business author and entrepreneur.

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Michalowicz identified a general trend among businesses both large and small. As their revenue increased, they tended to find new ways to spend it: for instance, on hiring new staff, launching new marketing campaigns, or expanding their operations. 

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The result was that, even as revenue increased, profits remained the same. Businesses struggled to save retained revenue and pay out dividends to investors. For small businesses, this often meant that the owners earned just enough to scrape by without benefiting from the financial success of their companies.

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In contrast, profit first—true to its name—prioritizes profits over expenses.

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Following a traditional accounting approach, you prioritize spending your business revenue on expenses. Any cash you have left after paying for expenses counts as profit. You can either keep that profit in your business as working capital, or take some or all of it as personal income.

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Following the profit first method, however, you prioritize paying yourself a profit, then use the remainder of your revenue to cover expenses. If you find you struggle to cover expenses after paying yourself a profit, you look for ways to decrease your expenses rather than cutting your profits.

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To help with this, the profit first method requires you to split up your revenue into different bank accounts. When you earn revenue, you put a certain percentage of it into each bank account. Some of those accounts hold money for covering operating expenses and paying wages. Importantly, at least one of them is designated for profits, and receives a fixed percentage of your revenue every payment period. 

Can therapists use the profit first method?

As a therapist, you have devoted your career to helping your clients overcome challenges, navigate crises, and grow as human beings. So, is it really appropriate to be preoccupied with profit?

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“Profit first” may sound like it’s all about the money. And it’s true, the profit first method is focused entirely on how you manage your revenue and spending. It’s a system designed to be used by any business, from therapy practices to hardware stores to international corporations. Profit first doesn’t concern itself with the day-to-day ambiguities and difficult decisions you face when running your own therapy practice.

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But by putting profit first, you aren’t neglecting your duties as therapist. You’re simply adopting a new method of organizing your money that helps your practice stay in the black. 

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The profits you earn may result in personal financial rewards. That’s not a bad thing: one of the leading causes of burnout among therapists is the feeling that they aren’t being paid what they’re worth. Profit first may help you to derive more satisfaction from your work, so you’re encouraged to do your best and stay in practice longer.

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Some of those profits are also retained by your practice. Building up savings protects your practice from unexpected dips in revenue, for instance if you need to take time off work or if the economy goes through a rough patch and fewer clients are crossing your doorstep.

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You need to be satisfied and motivated in your work in order to continue treating clients. And your practice needs to be financially stable in order to keep operating. In the end, it isn’t only you who benefits from putting profit first. It’s also people who are looking for help from a great therapist.

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All that aside, a number of factors affect whether profit first is a good fit for your financial needs. That’s why it’s important, before making any major changes, to consider the benefits and the drawbacks of the profit first method.

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Pros and cons of the profit first method for therapists

Profit first has its benefits as well as its drawbacks. And whether profit first is right for your practice depends on specific factors affecting it.

Benefits of profit first for therapists

• Profit first may make managing your money easier. Once you’ve opened the necessary bank accounts and settled into a regular workflow, profit first helps you keep track of your revenue and spending and makes it easier to see how your money is being used. While a solid bookkeeping system is essential for detailed insight into your financial operations—and for other things, too, like taking advantage of tax deductions—profit first gives you daily insight into your spending and makes budgeting easier.

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• Profit first helps you cut back on unnecessary spending. If you find that as soon as your revenue increases you manage to find new ways to spend it, profit first can help you get control of your expenses. It does this naturally, by forcing you to cut back on expenses before anything else.

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• Profit first may make private practice more rewarding. Many therapists who run their own practices feel as though they are treading water. They keep making just enough money to stay afloat, without seeing their savings increase or their personal income grow. That can lead to a sense of hopelessness. Profit first guarantees your retained revenue steadily increases, and you enjoy some financial reward for your hard work.

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• Profit first can help you get your finances in order. If you’re used to doing your accounting on the fly, profit first may be just the impetus you need to slow down and look more carefully at your finances. It can serve as the gateway to more careful and deliberate financial planning.

Drawbacks of profit first for therapists

• Profit first may demand unrealistic cuts to spending. If you have already reduced your business expenses to the bare minimum and don’t have much revenue left over at the end of each month, you will be limited in what you can do with profit first. The profit first method partly relies on reducing spending in order to set aside a profit. If you don’t have the financial wiggle room you need to implement it now, you may need to wait for your practice to grow before trying profit first.

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• Profit first is easily misinterpreted. Some business owners treat profit first as an excuse to suck all the money they can out of their businesses without reinvesting it in growth or building up savings. To be clear, profit first is about prioritizing profit, not putting it on a pedestal to the detriment of the rest of your business operations.

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• Profit first introduces new complexity to your finances. While it’s true that profit first gives you more insight into how your business is run and may make it easier for you to make financial decisions, it also introduces a new level of complexity. You have to distribute revenue to different bank accounts based on fixed percentages and according to a regular schedule. Especially as you’re just getting the hang of profit first, that can mean more time spent each month dealing with your finances.

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• Profit first takes a while to set up. Besides the work of creating new bank accounts and a schedule for distributing funds, profit first takes time to fully implement. It’s not an overnight change. You should plan to spend one year fully converting your business to profit first.

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• Profit first may not agree with your accountant (or vice versa). Not all accountants are fans of profit first. Having multiple bank accounts for one business makes their job more complex. And some accountants disagree with the principles of profit first and prefer a more expenses-first approach to financial management. Whether this is a serious problem depends on the degree to which your accountant is involved in managing your business and helping you make financial decisions.

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The four key principles of profit first

To get started with profit first, it helps to understand the four key principles that make it up:

Many small accounts instead of one big one

Profit first takes advantage of the psychology behind spending. The more cash you have on hand, the more likely you are to overspend. The less money available, the more conservative you will be with your spending.

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Rather than putting all of your revenue into a single bank account with a high balance, profit first directs it into multiple bank accounts with lower balances. That not only makes it easier to designate funds for specific uses. The lower account balances help you to keep your spending in check.

Clear priorities

With profit first, you prioritize which accounts get cash. Since profit comes first, your number one priority each financial period is to make sure a certain percentage of revenue goes into your profit account. After that come expenses and wages.

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What happens if you fall short of covering expenses? Ideally, when you set up the system, you correctly anticipate your revenue so that you always have enough to put in each account. But in case something goes awry, profit first has a solution built in: by retaining a set amount of profits, you build up savings you can use to cover shortfalls.

Minimal temptation

Through the combination of multiple accounts with relatively low balances and a straightforward list of priorities, profit first minimizes the temptation to overspend. 

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When it’s time to pay operating expenses, you only look at the account designated for operating expenses and the money it contains. All other funds are off the table—you can only spend what you have in your operating expenses account. So you’re less likely to dip into your profits or even your tax savings and spend money that would be better left unspent.

A fixed schedule

Profit first follows a fixed schedule for distributing revenue to your accounts, usually weekly or biweekly. (More on setting a schedule below.) Even if payments for operating expenses, wages, and taxes need to be withdrawn at different points in the month or quarter, your schedule guarantees you have enough in each account to cover these withdrawals. 

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This routine not only ensures you have enough to cover expenses while setting aside profits, it sets a rhythm whereby you regularly assess your finances and see how your money is being spent.

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Profit first bank accounts for your therapy practice

The first step in setting up profit first for your therapy practice is to open new bank accounts.

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These should all be checking accounts. Savings accounts return a miniscule amount of interest at the cost of limiting your number of debit transactions each month. Checking accounts guarantee you’ll always be able to withdraw funds without being penalized.

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For each account, get a separate debit card from your bank and, if necessary, a checkbook.

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Your bank may allow you to open multiple accounts online, via their website or app. But you may need to phone your bank to speak to a representative or physically travel to a branch location in order to open new accounts.

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Make sure you specify a nickname for each account so that they are easy to keep track of.

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The profit first system requires five to six separate accounts, depending on whether you have employees on payroll. You also have the option of opening one or two “vault” accounts for long-term savings.

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The core profit first bank accounts are:

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• Income 
• OpEx (operating expenses)
• Payroll
• Owner’s Pay
• Tax 
• Profit

The Income account

Your already-existing business checking account becomes your Income account. This is where you deposit all the revenue you earn before withdrawing funds for profit, operating expenses, taxes, or wages.

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Each of your other bank accounts will be topped up with funds transferred from the Income account. Besides those transfers, no money should leave the Income account for any reason. You can think of it as a resting place for your money before you put it to work.

The OpEx account

Money designated for business expenses goes in the OpEx account. The funds in OpEx cover every expense you need to pay to keep your practice running. It includes rent, liability insurance, subscriptions, continuing education, and every other expense you incur in the course of doing business.

The Payroll account

The Payroll account is where you keep funds to pay employees or contractors. If you don’t have any employees or contractors and you are the only person being paid by your practice, you do not need a Payroll account. All your earnings will come from Owner’s Pay.

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The one exception to this is if your practice is an S corporation and you pay yourself as an employee. In that case you can choose to keep either a Payroll account or an Owner’s Pay account from which you pay yourself. You do not need both.

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Wages and salaries for employees, and fees for contractors, are technically operating expenses. But they comprise such a large expense that they get their own account. 

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This also makes it easier to sync your banking with your payroll system. Many popular payroll platforms only allow you to link one bank account to their system, and for simplicity’s sake that should be a bank account dedicated to payroll.

The Owner’s Pay account

The Owner’s Pay account is where you transfer funds to pay yourself. These funds may either take the form of an owner’s draw or a salary, depending on your business structure. For more on this, check out our article on how to pay yourself as a therapist.

The Tax account

All funds you withhold in order to pay federal and state taxes go in the Tax account. In most cases, you will withdraw funds quarterly in order to pay your taxes in installments.

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If you have employees and you withhold taxes from their paychecks, you put the funds here and remit them to the IRS according to your remittance schedule.

The Profit account

All profits you retain in order to pay yourself, reinvest in your business, or save as retained earnings go in the Profit account.

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The amount you transfer to this account each period will depend on the allocation you have set for profits. (More on that below.)

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Some of the funds in the Profit account will remain there, to serve as emergency coverage in case of a dip in revenue, and in order to build equity in your business. Having equity in your business can help you to qualify for loans or lines of credit, allowing you to secure more working capital for your practice and build up a business credit history.

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But some of the funds will also go into your personal account in the form of bonuses or distributions. This money is a reward for your hard work and allows you to enjoy the benefits of a successful practice.

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As a general guideline, plan to withdraw 50% of the profit you earn each quarter as a personal bonus or disbursement, while leaving the rest to accumulate in your Profit account. 

Optional: vault accounts

If you have a history of struggling to keep your spending under control, you may opt to open one or two vault accounts where you set aside funds to cover essentials.

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A Profit Vault account acts as overflow for money you take out of your regular Profit account for safekeeping. A Tax Vault account serves the same purpose, except for taxes.

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It’s a good idea to open your vault accounts at a financial institution separate from the one where your other accounts are kept. It’s even better if that separate institution is a small bank or credit union that doesn’t offer online banking.

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The goal with vault accounts is to make your funds as difficult to access as you can. Difficult, not impossible: you will still need to occasionally withdraw funds. But the vault accounts help to reduce any temptation to dip into funds that should be left untouched.

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How to use your profit first system

Once you have set up your profit first bank accounts, you use them following a fairly simple routine:

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1. Revenue comes in. All revenue your practice earns gets directly deposited in Income.
2. You start distributing funds. A percentage of the revenue in your Income account will be transferred to each of your other bank accounts.
3. Transfer funds to OpEx and Payroll. Profit comes first when it comes to planning where your money goes, but when it comes time to actually distribute the funds, your priority is transferring money to OpEx and Payroll.
4. Transfer funds to Profit and Tax. After putting money in OpEx and Payroll, transfer funds to Profit and Tax. You withdraw funds from these accounts less frequently than from the others.
5. Stick to your schedule. Depending on how you have set up your system, you make distributions from your Income account on a weekly or biweekly schedule.

How much money should you put in your profit first accounts?

The amount of money you transfer to each of your bank accounts each period is set as a percentage of your revenue. These percentages are called allocations.

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The exact allocations for your accounts will depend on the size of your practice, as well as on your needs and preferences.

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Review the four business size tiers below, and determine which one your practice fits into. Then consult the allocation table to help determine the appropriate allocation for each account.

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(Note: These allocation guidelines and the table at the end of this section are based on information in Profit First for Therapists by Julie Herres.) 

Solo therapy practice

A solo group practice consists of just one therapist: you. 

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You may have a virtual admin assistant or a marketing contractor working for you, but beyond that your practice does not have any employees.

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A solo therapy practice may earn up to $250,000 gross income per year. Private pay practices, which don’t accept insurance, are more likely to be at the higher end of the earnings range.

Small group practice

A small group practice employs one to two full-time team members or two to four part-time team members. In most cases, if you run a small group practice, the owner ends up being responsible for 50% of the clinical hours being served.

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It is typical for a small group practice to have one administrative employee or contractor working full- or part-time. This individual is in charge of scheduling appointments, managing communications, and organizing meetings.

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Small group practices usually earn $150,000 to $400,000 gross income per year. 

Medium group practice

A medium group practice employs five to eight therapists, usually a mixture of full- and part-time employees. It also has at least one full-time employee handling administrative duties.

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Typical gross income for a medium group practice is $350,000 to $1 million per year.

Large group practice

A large group practice has from eight to ten clinicians, a mixture of full- and part-time employees. It also typically employs more than one admin assistant.

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Large group practices earn $750,000 to $5 million gross revenue per year.

Profit first target allocations for therapy practices

A target allocation is the amount you plan to allocate to a particular account in your profit first system.

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Because it takes some time to convert your practice to the profit first method, you will not immediately start allocating funds based on your target allocations. Rather, you will gradually transition your current allocations (your allocations when you first set up profit first) to target allocations based on your practice’s size.

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Allocations to your Tax account aren’t based on the table below. They’re based on the amount you owe in income, self-employment, and other taxes each year. For help with this, check out our guide to tax brackets for therapists.

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How to set a profit first schedule for your therapy practice

Once you have your profit first bank accounts set up and your target allocations planned, it’s time to set a schedule.

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If every time you earned revenue you distributed it among your various bank accounts, you could soon find yourself overwhelmed by extra work. So profit first specifies that you set a schedule—usually weekly or biweekly—for distributing funds.

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In his original profit first book, Michael Michalowicz recommends distributing funds on the 10th and the 25th of every month. But that may not work for your practice, particularly if you plan to sync employee paychecks with your profit first schedule. The 10th and the 25th sometimes land on weekends.

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So you have three alternatives:

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• A biweekly schedule. Every fourteen days, you make allocations.
• A bimonthly schedule. Twice per calendar month, you make allocations.
• A weekly schedule. You make allocations every week.

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If your practice is new and your revenue is low, a weekly schedule can help keep cash flowing. Later on, when you’ve built up more of a cushion in terms of retained profit, you can make the switch to biweekly or bimonthly.

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Whether you follow a biweekly or a bimonthly schedule will depend on your payroll. If you have employees, you should match your profit first schedule to your payroll schedule.

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If you don’t have employees, it’s up to you to choose based on your preferences. While it has to do with paychecks, our article on payroll for therapists offers a comparison between bimonthly and biweekly schedules that applies to profit first, too. It can help you make a decision about which schedule is right for you.

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How to transition to profit first 

Your bank accounts are set up, you’ve determined their allocations, and you have a schedule planned. But converting to profit first doesn’t happen overnight. Unless your target allocations happen to perfectly match how you are already allocating and spending your revenue, you will need to make adjustments to how you run your business.

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For instance, you may not have enough revenue coming in to cover your expenses while also paying yourself a reasonable profit. If you jumped in now and tried to cut expenses all at once, you might be making major changes to your practice that have unforeseen consequences.

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Plan to spend one year transitioning from how your finances currently operate to the profit first model. It will soften the impact, and give you the chance to make adjustments and correct course along the way. 

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Here’s how to do it.

Determine your current allocations

The first step is to figure out how you are currently using your revenue. That means creating a monthly budget listing both revenue and expenses.

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Collect your profit and loss statements (P&Ls) for the past 12 months. If you don’t have P&Ls for the past 12 months, collect them for the longest period possible.

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If you don’t have P&Ls, you may be able to get the same data by reviewing bank statements, credit card statements, and payroll reports.

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Next:

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• Add up your revenue for 12 months, and then divide that amount by 12. This gives you your average monthly revenue.
• Add up your operating expenses for 12 months, then divide that amount by 12. This gives you your average monthly operating expenses.
• Add up your tax withholdings for 12 months, then divide that amount by 12. This gives you your average monthly tax withholdings.
• Add up your owner’s pay for 12 months, then divide that amount by 12. This gives you your average monthly owner’s pay.
• Add up your payroll expense for 12 months, then divide that amount by 12. This gives you your average monthly payroll expense.

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With these numbers, determine how much your revenue, as a percentage, needs to be allocated to cover all your expenses, tax, and profit.

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These are your current allocations.

Plan how to get from current allocations to target allocations

There is a good chance your current allocations are considerably different from your target allocations.

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Now it’s time to calculate those differences exactly.

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For instance, your target allocation for profit may be 10%, but your current allocation is 2%. So you need to increase your profit allocation by 8% to meet your goal.

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Similarly, your current OpEx allocation may be 40%, but your target is 30%. In that case, you need to decrease your operating expenses by 10%.

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The good news is that, as you decrease allocations in some categories, you will free up revenue to allocate to other categories. This is the time to sit down and crunch the numbers, and figure out how each allocation needs to change in order to match the plan you have for profit first. 

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You may find you need to make adjustments to your targets. For instance, if decreasing your OpEx by 10% isn’t feasible, you might have to settle for a change of 8%.

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Alternatively, you could find you have more wiggle room than you expected, with the opportunity to decrease OpEx by 15% rather than 10%. In that case, you could increase your target allocation for profit.

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The one allocation that doesn’t change is your tax allocation. In most cases, this is fixed to the amount you have to withhold to pay your taxes.

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That being said, by combing through your expenses you may be able to find tax deductions that lower your tax bill.

Plan your transition over a four-quarter schedule 

To go from your current allocations to your target allocations, you’ll plan to make changes over the next four quarters.

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In the first quarter, you will stick to your current allocations. That may seem counterintuitive. But giving yourself three months to track your money and adapt to your new profit first schedule will make it easier to make changes later on.

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For the second, third, and fourth quarters, you will make incremental changes to your current allocations until you reach your target.

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Here’s an example transition schedule:

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Note that the total percentages for each column add up to 100 percent of your total revenue.

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Your own transition schedule will vary depending on the changes you are able to make and when you are able to make them. 

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For instance, you may find you are able to decrease your OpEx right off the bat by eliminating a large, unnecessary expense. That will affect how quickly you increase allocations to Profit and Owner’s Pay. 

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On the other hand, you may need to chip away at a lot of smaller expenses, resulting in an uneven transition for OpEx: a decrease of 1% in the second quarter, a decrease of 3% in the third, and so on. The schedule for your increases to other allocations will reflect that.

Follow your transition schedule and make notes as you go

Do your best to follow the transition schedule you’ve set, but don’t be too hard on yourself if you have trouble meeting your goals on the way to reaching your target allocations.

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Keep notes of the changes you make to your spending, so you can see what works and what doesn’t. If it seems unlikely that you will be able to hit all of your target allocations by the end of four quarters, you may choose to extend your transition schedule to cover six quarters, or even eight.

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That’s okay—but make sure you create a definite plan for how you’re going to use the extra time. Create a new schedule covering the extended transition period. It will keep you on track, and help ensure you eventually make the changes to your practice that you want to see.

Key concepts

• Traditional approaches to money management prioritize covering expenses, whereas profit first prioritizes paying yourself a fixed profit.

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• If your revenue is growing but you still struggle to earn a profit, then profit first can help you keep expenses under control and make sure you enjoy the benefits of a successful practice

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• There’s nothing wrong with focusing on profit. Retained profits make your practice more financially resilient, and paying yourself bonuses or disbursements can increase job satisfaction and prevent burnout

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• Profit first divides your revenue between multiple accounts with smaller balances rather than putting it all in a single account with a high balance, helping you control your spending

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• You may find it difficult to transition to profit first if your revenue is low and your expenses are already down to a bare minimum

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• Plan to spend at least one year transitioning your practice to using the profit first method

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Want to learn more about budgeting and allocation? Check out our guide to budgeting for your therapy practice.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.

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