Transcript for Podcast Ep. 168 – How to Actually Enjoy the Profit Your Practice Creates with Eric Levenhagen, CPA

Introduction

Evon: Hey, everybody. Welcome back to the Optometry Money Podcast, where we’re helping ODs all over the country make better and better decisions around their money, their careers, and their practices.

I’m your host, Evon Mendrin, Certified Financial Planner practitioner and owner of Optometry Wealth Advisors, an independent financial planning firm just for optometrists nationwide. Thank you so much for listening today.

On today’s episode, I am joined by Eric Levenhagen. Eric is a CPA and owner of ProWise Financial Consulting.

Eric and I dive into how practice owners can get better control and clarity and confidence in managing the finances and cash flow that your practice creates, how to align your family lifestyle goals with your business goals, actually enjoy the profit of your practice, and so much more.

And you can find all of Eric’s contact information and other resources that we talk about in the show notes, in the [00:01:00] podcast app you’re using or at the

education hub of my website, www.optometrywealth.com. And while you’re there, check out all of the other episodes and educational resources we’ve put together.

And if you’re listening to this episode and you’d like some help navigating these same cash flow decisions we talk about, reach out. You can schedule a no-pressure introductory call either through my website or in the link in the show notes. We can talk about what’s on your mind financially and we can share how we help optometrists all over the country navigate those same decisions and more.

Without further ado, here is my conversation with Eric Levenhagen.

Conversation with Eric Levenhagen, CPA

Evon: Welcome back to the Optometry Money Podcast. And I am excited to welcome onto the podcast, Mr.

Eric Levenhagen.

Thank you so much for coming on, Eric

Eric: Hey, thanks, Evon. Thanks for having me

Evon: Well, it’s great to have you here. before we dive into a lot of the fun stuff,I wanna get to know you a little bit.

Tell us a little bit about your background. tell us a little bit about the work [00:02:00] that you’re doing for optometry practice owners

Eric: Yeah, sure thing. I, so I’m a CPA. I’ve been, a CPA since, uh, 2008, and been in accounting for well over 20-plus years. started the practice about 15 years ago, and about six years ago, I, made the decision to, niche down to independent optometry, practice owners, mainly because I had some of them, and I really loved helping them as people, right?

And it was just kinda born from that and,so yeah, 2018 was when I went to my first vision expo and,got to meet a lot of great folks there and stuff like that. we started out… Back 15 years ago, I started out as mainly, a, a tax strategist, right? A tax planner. And that was, like, the only advisory service at the time that we offered, and advisory in the accounting space was pretty, pretty new, especially for, small business owners at the time. everything I’ve done [00:03:00] since then and built out has been pretty much in direct relation to just, seeing the additional needs that were not met.

I knew early on, before I even started, my own practice, that, small business owners needed help, more help with, their taxes, right? And just understanding things,and how to try and minimize that tax bill or the emotion or the hit of it, right? So

Evon: Yeah

Eric: two things in there. But, yeah, then,we started… Obviously, they weren’t getting as much help on the cash flow side, profitability, being able… There’s, so it was like we just kept adding on different services and then blended it all together into something today we call Financial Harmony, which is, has three main aspects of it.

It’s prosper, profit, and protect. we’re making sure, that you’re running a business that wanna run, That’s a lot of what’s in the prosper section. Profit is all about profitability, [00:04:00] cash flow, and those types of things. And then protect is mainly about tax planning still. This is a, one of the core elements. so when we combine all those together, led by, making sure that the business is serving you as the owner, we get, we tend to get some really good results

Evon: I really like that word harmony a- and I like that framework because these things are all related. the, the tax bill really is, the tax planning’s really about keeping more of what you earn in the practice. A- and the practice generates the lifestyle for the practice owner. it sh- should serve the practice owner, and it allows the practice owner to do basically everything else that he or she wants to do in their life.

And so all of these things are related, and I really like the, the word there because it all needs to harmonize, right? Everything needs to work together to get to our desired end results.

What are the most common areas of improvements for optometry practice owners?

Evon: And w- when you meet with these practice owners for the first time, looking under the hood of all these businesses a- and talking with the owners and getting to know them and understand them, w- what are some of the things that you [00:05:00] see over and over again where you think, “Okay, we can make this better”?

what are those usual suspects, we’ll call them, for just areas o- of opportunity to improve?

Eric: Sure. Yeah. think, I think leading with– in that framework that I just shared and the three elements to it, you’re right in saying that this is all interconnected, right? They all have to work together. it’s pretty in my experience, at least, to start to think about that in terms of putting you as the owner first, right?

So a lot of times people come in and they have… They may or may not have revenue goals,that are into something. Like sometimes it’s just, I’ve got this size of practice. I’m the only doctor, or I have an associate or two, or whatever the case is, and somebody tells me we should be– or I have it in my head somehow that I should be making this.

It’s like top-line revenue or collections. And when I ask them why [00:06:00] that’s– like if I ever ask them why that’s important to them and what that’s gonna help them achieve personally, they can’t really answer that. So we’re really working like from the get-go to try and connect those dots. So that’s why we lead with the prosper of that framework, right? and so we should be able to get to, a top line, revenue number that makes sense for them, that’s not going to overextend them and their entire team, but still gets them to where they wanna be in this stage of their life, knowing that this is either a growing or ongoing process that’s gonna change and evolve over time,

So getting them realistic about,a revenue projection and then like some of the other usual suspects that I’ll see are a lot of times their own compensation, right? You may have seen this or had discussions about this, [00:07:00] but, I, I see it quite a bit. Like a lot of times it’s compensation is almost treated like a leftover. it’s– it ends up being the last thing that gets paid out. Let’s say that like in, in a lot of, in a lot of practices, especially early on we just– we obviously don’t wanna see that. We don’t want the owner to be ending up like a creditor in their own business. they need to be, they need to be taken care of. so that’s a big one. I would say, independent optometrists are probably, like we’ve worked with a lot of different industries over the years and we still, like we’re not… we focus on independent optometrists and that’s where I- we do our best work. we still do have a couple other, you know, some other clients in other industries but would say independent optometrists are probably the most, the industries we’ve worked with, one of the more savvy groups.

And I’m not, that’s, is what it is, right? It’s just so [00:08:00] they can read their profit and loss statement to a degree, some better than others, but really they’re not, and this is common amongst a lot of business owners, they’re reading the profit and loss to manage their entire business. And even at that at times is strange and we can get into that is. But,just the reports, the reporting structure that lead, then leads into like what do we do with those reports, right? Because the reports are great, but they gotta lead to decisions that improve the business, that improve your Like there’s that interconnectedness coming back, right?

So it’s all gotta, it’s all gotta feed itself and, if we’re only looking at, of the picture or half of the picture,we’re not gonna get there

Evon: interesting. Some of the things you’re saying are, are not having a clear revenue goal that’s tied to something, I would say, s- tied to something meaningful,

Eric: Correct

Evon: There, there’s no why behind it. maybe you’re seeing… I’ve heard this [00:09:00] too, “My peers are doing this, therefore I should be doing this.”

why?

Eric: Yep.

Evon: does that do for you?

Eric: Right

Evon: that do for the family? or if you have no revenue goal, if you want to establish one, what is, what are you gonna tie it to? And, and so you’re seeing that a lot. I definitely see that as well. owner’s compensation being last, I like how you put that, put it, being a creditor to your business.

You’re basically just taking what’s left over. just thinking of a recent new client relationship, a new family I’m fortunate to serve, there basically was no process or system around, around paying themselves through the practice. They’ve got a m- a minimum wage that they have to pay, a- and then they take distributions as needed just to pay the credit card off.

there’s no real serious or proactive planning. And what does that lead to? For, for me, what I see is that it leads to uncertainty around what to do with cash in the business. E- either they’re not sure about what’s really there or what’s available or what to do with it. It leads to uncertainty around how to plan for dollars in the household, because if there’s no consistent amount of [00:10:00] income coming in, then we’re not really sure what lifestyle you could afford.

We’re not really sure what to do with extra dollars if there are any. So that, that lack of paying yourself ha- there’s sort of a domino effect if you’re not consistently figuring out a way to pay yourself in the business and not just be a creditor, right? Not just be attached and take out when you feel like you could.

How does a practice owner know how much to take out of the practice and how much cash to keep in?

Evon: how do you help an owner, on that thought, on owner’s revenue, on o- owner’s compensation, how do you help an owner think through what is available in, in, in order to take out of the business to enjoy as the owner, and how do you help them think through how much cash needs to actually be in the business and stay in the business?

Eric: Yeah, that’s a good question. a lot of it, so we’re pr- I’m a Profit First certified firm, so a lot of the things we look at are through that lens. Even if, we have clients that are all in on Profit First, set up the system, do the allocations, the whole nine yards. And then there are others that [00:11:00] not needed it, and we can tell by the number.

So they don’t really need to do the allocation part of it. they’ve got a system that’s working for them, and so we don’t force a replacement there. But we will still look at it through that lens, and, run their assessment and help them just put all of their buckets of cash into perspective, right?

Based off of what the business is doing. Because, there’s a limit to this. I could say that I wanna make X amount of dollars, but I need to build the business to support that, right? And our clients are no different. So the business has to support, ultimately support what, what the owner can make and have some left to, fund future growth. those are… It’s just, so in this process of, okay, part of… We can reverse engineer o- off of a couple of different things. One of the things is figuring out, what do you want need, [00:12:00] for yourself in coming into the household from this business on a regular basis. we can take a look at that number and,reverse engineer and see, what kind of revenue is needed to support that.

If everything else is running as it should, and we can generate, a, a positive income, net operating income, and we don’t, we’re not overloaded by debt, we have those things in, under control. what should the business be able or what does that business have to look like rather in order for you to achieve X amount, whatever that

amount is for that owner. So that’s kinda how I attack it and work through it with people. and when you do that reverse engineering, we come up with one of, one of probably a couple scenarios. either, you need to grow or you’re really over, overpaying, in other areas. you’ve got… bringing in a bunch of revenue, but you’ve got it leaking out. A lot of times it’s a combination of both of those [00:13:00] things and/or, you’re already there and you just didn’t have the clarity to know that you could take more. Sometimes it’s that, right? Sometimes it’s just the, the system brings a certain amount of clarity to it that, you know- People just are– Sometimes the owners just get, overly cautious that

they don’t wanna make a mistake or they don’t wanna, pull out too much, and they’re just, A l- a lot of our clients are not bad at saving, and so at least in, my client list. And so it’s like,they just tend to go that too far down that route and over-save into the company. So it’s And that’s one of the things like, one of the things I could have added to the last part about the common, things that we look under the hood. But one of the things that Profit First solves, a-and again, no matter if you’re doing the full version or some modified version, which a-almost everybody’s [00:14:00] on some sort of modified version of it that works for them. but this whole idea of operating everything through one bank account. Now, it might sound crazy to some people to have ten bank accounts like some of our clients do, or even seven. but if you have three or four, be surprised how much clarity that gives you when you start to utilize them in a right way you didn’t have before.

I usually… my go-to line in this is if you’re running all of your operations out of one bank account, you get to any point in the month and you really don’t know if you’re coming or going, right? Without having– I-in terms of the business, without having somebody, either yourself or an accountant or opp– somebody who’s number savvy, get in there and, do some work on it.

It’s usually like cash flow forecast or something similar to kinda know you’re sitting. w-what… see a, a number in a bank account, but what does that mean? And then other go-to [00:15:00] phrase that, people… and at one point in time before I learned Profit First, I was guilty of this too, the, the mental earmarks is what we call them, right?

So we’re trying to hold… We’re– We look at that number, and let’s say we get a decision that comes across our desk today. somebody’s something, we wanna take advantage of it. We gotta know, do we have money for this? if you look at one account and say, “Okay, I’ve got this amount in there, but let’s see, I’ve got payroll coming next week and I’ve got this lab bill that’s usually due this time. And oh, I just saw, my accountant email me a reminder about estimated taxes. I don’t even know how much that is yet, but I know I’m gonna have to pay them.” it’s all these things that we just… And mental earmarks are never gonna hold up. There’s gonna be a time and a decision and a day because you’re not just sitting there thinking about this constantly.

Evon: It’s in the middle of everything else you’re doing that day, of course, you’re gonna forget one, and you’re gonna, it’s gonna come back to bite you or it’s gonna, And the, it seems like those mental earmarks are just stre- it just leads to stress, and it leads [00:16:00] you to be overly conservative, right? And you just start building up cash and cash. And I would agree, the optometrists that I’ve talked to and work with are conservative, just around the c- the amount of cash they keep, especially in their practices.

And, to a point it makes sense, especially if they’re cold starting a practice, just purchased it. There’s a lot of uncertainty around how to own a business and operate it. a- and eventually though, you get to the point where there is real cash flow coming in a- and you just gotta make some decisions.

And the awareness part of it, or you mentioned the clarity part of it, I think i- is really that starting point. It’s so important because if you’re not aware of what’s coming in, what’s going out, and what’s left, you’ll never make decisions around what to do with it. it will just continue to grow in the bank account.

And, a, a lot of that for me,it starts with just good bookkeeping. if you don’t have good, accurate bookkeeping that’s updated on a regular basis, you’ll never know what’s going on. You’ll never be able to make good decisions. And,that’s not me just selling your services, Eric.

I think anytime the word bookkeeping comes up, I [00:17:00] always pounding this, that th- there’s just gotta be good, consistent bookkeeping, and it should be formatted to fit your business as an optometry practice, not an alphabetized list of categories. And once you have that awareness, then you can start to make decisions and project and s- and start to do things, right?

You can have more confidence i- in the decisions you’re making.

What are the most common improvements practice owners should make to their practice bookkeeping?

Evon: And, are there any changes you would suggest or most often see required in the way that books are done when you first take them on for a client and you start to, your firm starts to improve them? what are your thoughts on that?

Eric: a lot of times we do see… I usually, I refer to it as the useless alphabetical listing of all the rest of your expenses in that middle section of the profit and loss. that is nine times out of 10 the first thing that we are changing. and, to, to your point, there, there is an element like the, the cash flow systems and the [00:18:00] multiple bank accounts we were talking about before is a system that runs alongside of good bookkeeping.

you definitely need both, or at least some version of both. But good bookkeeping is, like a minimum requirement, right? and it needs to be updated regularly, like least like weekly if, and then closed out monthly. that’s probably at a minimum

Evon: At least monthly. Practice owners, please, at least monthly, get them updated

Eric: yeah. And,look, could sit here and talk about, as far as, bookkeeping issues,we could probably fill the whole episode with just that. But there are things like… it goes back to, back to,paying attention to the balance sheet as well as the profit and loss statement.

So we… So I mentioned before, we organize the profit and loss so that we have good, clear categories in there, grouping some of those line items together so that it’s easier to, it’s easier to manage, easier to check your results, to [00:19:00] forecast if you know those, those buckets. We’re talking things like, just separating out between your expenses between, marketing and occupancy costs and staff wages separate from doctor wages, separate from associate wages. Of course, you have your cost of goods sold. We gotta make sure those are being accounted for properly, right? once we get that structure in place, then also look- we take over all kinds of, things. Some files are better than others, but there is still a certain amount, depending on who had been doing the bookkeeping in the past, some level of balance sheet negligence, I just call it. and the biggest thing that we, the biggest thing that we find is really, not to get, overly technical on this, but bank accounts not being balanced properly. It’s like the… Should be the simplest thing

Evon: Yeah

Eric: if you start to look at those, and the reason why, the main reason to focus so much [00:20:00] on the balance sheet, that sheet and the profit and loss statement, I tell our clients, that’s a closed loop into, into all the transactions in your business, right? so if over half the time, probably between, 50 and 90% of the time, something is wrong on the balance sheet,

Evon: Yep

Eric: a direct impact to something on the profit and loss statement. So your profit and loss is not right if your balance sheet’s not right most of the time. But you’re only looking at this, and you’re trying to make decisions off it, but it’s gonna lead to bad decisions, right?

Evon: So when you talk about bookkeeping and accounting, that has to be, that has to be… That’s like the minimum requirement,the, in terms of fi- financial vital signs, the balance sheet is a huge vital sign. If something’s wrong there, something else is going on improperly in the other financial statements.

How goal-specific bank accounts help the practice owner proactively manage practice cash flow

Evon: And, a- and you talk about the, the bank accounts and the importance of [00:21:00] that, seen through the Profit First framework, which is, based on the Mike Michalowicz book.

Which I’ll throw into the show notes as well. what does that help the practice owner do? Does it help them to proactively place cash towards certain purposes and goals? what does that help the practice owner do?

Eric: Yeah, absolutely. I mean, you, you hit it. So instead of trying to, before we were talking about, one account and these mental earmarks, we’re trying to figure out what to do with that cash. What Profit First is really great at doing is Pre-determining what’s gonna happen to your cash the moment it hits your practice, right? So we can look at how your practice is performing. w-we always, we start off with an assessment, say, “Here’s where you’re at now. is where you need to be to get to your goals.” And, the, the core Profit First system is just broken out into, four main categories, [00:22:00] right? Profit, tax, owner’s pay or compensation, and then operating expenses.

But not all of those… And terminology-wise, not all of those are related directly to items on your profit and loss statement. Operating expenses is going to be essentially all of your cash outflows that aren’t in one of the other three buckets. So that’s going to include things like, depending on how you’re accounting for your inventory, but it’s gonna include your inventory purchases, it’s gonna include debt payments, all those things that would live on your balance sheet. So we’ll get the total nugget of cash going out the door that’s not directly for what we call the owner’s benefit or for future growth. Profit, the who-the whole idea of calling it Profit First is so that we can take, predetermine what the practice should, be generating or is generating now, and instead of waiting for that to become a leftover, you set that aside [00:23:00] first.

and it’s never gonna be… in the Profit First sense means simply that. it’s basically the last chunk of… I shouldn’t say last. That’s contradictory. But it is that chunk of, cash flow that is not earmarked for one of the other purposes, right? it’s actual cash that’s set aside instead of looking at a net income number or any other version of profit from your financial statement and looking at that number and saying, “That looks great, but why don’t I have any more cash in the bank?” We’re gonna take a chunk of that and set it aside in a profit account before it has the opportunity to be spent or to leak out one way or another, right? So we’re setting that aside usually for somebody, just getting up and going. m-minimally, we’re looking at 5% to 10% of top-line revenue or collections as the profit allocation, right?

And then it can grow from there. the tax account is there so that your taxes are set aside, [00:24:00] so that April filing or estimated tax payment due dates become a non-event it also– all these things, we don’t have time to get into all of it today, but it really helps psychologically as well. We’re leveraging a behavior that you already have, which is looking at a bank account and trying to make a decision off it.

But now, we’ve got those other important things accounted for, your profits set aside, your taxes are taken care of, as the owner are taken care of, in the owner’s pay section, all we’re left with is what the business has to spend to continue supporting itself, right? Keep the doors open.

and when that account…

If that account is running dry or running low before the end of the month or before the next allocation, in a mature Profit First system, you have a real-time feedback loop. You don’t have to wait for an accountant a bookkeeper or anybody else to look at– You don’t even have to look at your own financials to know that [00:25:00] something’s wrong, I better stop and figure out, at least figure out what it is.

At least gives you the warning sign without waiting for… even the best run bookkeeping system is gonna get financial statements out to you probably five days after the end of the month at the soonest, ’cause we gotta wait for banks to us, we gotta wait for something, to happen there.

And so– And then that could be, anywhere from five to 35 days away from the event that, that caused the downward spiral in the first place. So it’s an early warning system, is what it, what that amounts to. I’m sorry, I forgot your original question. I’m not sure if I answered

Evon: No, that, that definitely answered it. it’s what does th- what do these bank accounts, this system help us to do, help the practice owner to do? And I think you, you answered it well, right? It gives them a proactive way to set aside cash for specific goals and give them an early warning system for stuff going wrong.

And w- what I really appreciate about the Profit First system, I’m a huge fan [00:26:00] of any system or process that helps us move forward, and if it’s Profit First, great, awesome, I’m all in. And what I really appreciate it is that it’s … And if I were to, overly grossly oversimplify it, it’s an envelope system for businesses, but it’s really effective because of that behavioral side of it.

It’s, there,you are, hedging yourself against our own worst tendencies. If we are proactively setting aside for these specific goals, we are, we’re taking bad behavior out of our hands.

So the behavioral side of it’s huge. but I also think just that focus on the profit and the focus on that the business owner, the practice owner should be benefiting from the business. it should be serving them and their lifestyle, and we’ve heard this throughout just the way you’ve talked about starting first from that lifestyle and what they need in the household, and then solving backwards from there.

I think we forget about that. I, as, as we’ve talked about, the, very often that, that profit, the enjoyment of the profit is last, and whatever happens [00:27:00] to be left over may be what the practice owner really enjoys. A- and flipping that on its head changes the mindset. It, I think it can create a better relationship with the business, less stress around the business, by rewiring us to say, “Oh yeah, we should be enjoying the profit of the business.

We should be having this business serve us rather than the other way around.” So I re- really appreciate that about the, the whole process there. anything to add or to touch on from that perspective?

Eric: Yeah, no, you’re– I agree with all of that. And, I just think, you mentioned about improving relationships with the business, but, there, there’s a lot of times it also improves relationships at home. that business owner… Like I know myself,the very first year I was in business, we had a lot of big life changes happen at the time. We were going from a two-income household one income, and that income was me running this practice. And I was like, “Oh, okay.” So there was a lot riding on [00:28:00] this. We had a certain amount of savings and runway that we had dedicated to, ’cause we knew there was gonna be a time to ramp it up. but this was well before I learned about Profit First.

And literally every day I’m updating cash forecast I’m an accounting nerd, so I had a pretty good structure to it. But I’m just looking at it every day. the mental earmarks were on a spreadsheet because,I just,I just needed to make sure that we were gonna be okay.

But there was so much stress with that, and I didn’t stop thinking about issues or, ways to solve those issues and when I went home, so that led to me being less present at home with my family. it could have easily derailed into, a lot… our, my relationships took a hit it is just from what I’ve described, but we’ve seen those things spiral into much bigger issues at home. I think just giving a business owner the awareness and the clarity that they need to be able to make the decision, the right [00:29:00] decisions themselves and for the business solves so much stress and on the emotional side, and it just improves relationships all around.

Like there’s so much that comes from that

Evon: Yeah. And you hear a lot of talk around burnout within independent optometry, practice owners no- many practice owners no longer wanting to own practices anymore, wanting to get out of ownership. Now a lot of that’s more on the a- administrative side of that, dealing with vision plans, billing, things like that.

That’s not necessarily something you and I can tackle, but I think a lot of that too is the handling of the finances and just having confident of how well the practice is doing and what to do with the dollars that are coming in. And there’s a lot of stress tied up in finances, whether it’s in the household, whether it’s in the business.

There, there’s so much stress that can be caused by uncertainty around finances. And i- you know, if you and I can help solve that, I think that’ll help practice owners feel more confident of staying within practice ownership and keeping optometry independent [00:30:00] a- as a lot of us are wanting to see.

Why can profit and actual cash flow be so different in optometry practices?

Evon: y- you mentioned something interesting you mentioned that in your viewpoint or in the Profit First framework, we’re really dealing with cash flow profit. profit’s really net cash flow available, not the net income necessarily that’s on the profit and loss statement. And there, there can be differences, sometimes dramatic differences between the profit that you see on the profit and loss versus the actual cash flow available.

Talk to us about why that is. Why can a practice be profitable but feel tight with actual dollars available?

Eric: Yeah. So like simply put, let’s say we’re running simple cash basis books as well. We can still have that difference. and it goes back to like all those other things that, are not showing up on that profit and loss statement, for a lot of folks, debt is a big one.

You have the debt service. That cash has gotta come from somewhere, [00:31:00] but it doesn’t all show up on that profit and loss number. so usually the prin- the principle that we’re talking about that would be showing up on, on the balance sheet, that, that comes out of the bank obviously. Equipment loans are probably the big one, there, but it could be working capital, it could be anything. depending on how you’re doing your accounting, there’s, we touched on inventory purchases before that don’t always hit the P&L, so they’re not all, again, not all worked into that number. could have some sort of cash gap in terms of timing differences. So again, depending on what type of profit and loss you’re looking at, there could be timing differences, between the time accounts receivable comes in the door versus when you had to pay those related lab fees and, where you touched on inventory, but other cost of goods, sold type of, bills. That timing difference, creates, creates a gap there ’cause a lot of times those bills are gonna be due before you might get the money in through the [00:32:00] receivable. all of those items, there are more cash flow items, that exist in a business besides what’s worked into that profit and loss number, So that- that’s the main, that’s the main reason.

Evon: There’s, so there’s dollars coming into the business and out of the business, and it’s not all represented in that profit and loss. there’s this third statement that really no one’s familiar with or ever looks at called the statement of cash flows. That, you’ll see it there, but there’s all this stuff that, like you mentioned, principal portions of debt payments.

if that’s on your profit and loss, please talk to your bookkeeper and accountant. but you have those principal portions, owner’s distributions if you’re distributing dollars out of the business. If you’re buying equipment, you’re seeing a big amount of cash leave the business, but maybe you’re depreciating that over five or seven years, so the way the profit and loss shows that doesn’t match up with that.

So you have all these, these cash outlays out of the business that isn’t reflected on that profit and loss. On the other hand, you also have depreciation and amortization, which is a deduction on the profit and loss, but is [00:33:00] not actually dollars leaving the business. So that, that can have a positive impact on, the differences there.

But, how do you help… Uh, I guess it really is through this profit first framework, right? Helping them to see and utilize actual cash dollars rather than relying on the profit and loss, as you mentioned, to run the business. I-I-Is that the way you help them to reconcile these differences?

Eric: Yeah, for sure. Or even that plays a big part in it. And even,when you’re talking about cash flow statements. Okay, let me now back this a little bit. So I used to be an adjunct faculty, and I used to teach third and fourth year accounting students. and th- this was years ago, but the statement of cash flows and how…

I started out in the first year teaching it the way I remembered it being taught to me. I was not that far removed from college when I was doing this, and it was confusing the accountants, So it’s like, okay, the [00:34:00] way that… cash flow statements can be presented in a very simplistic way. They can also be presented for the non-finance person looking at it to say “We’ve got all these additions and subtractions, and, it’s like this one’s being added up here because my accounts receivable did this, but my

Evon: A-

Eric: cards or my liabilities

Evon: is how most financial, that how most accounting softwares will do. At QuickBooks, it’s that confusing method which really doesn’t make much sense

Eric: Yeah. And so it’s not a surprise to me that not many people pay attention to it because how do you read the darn thing, So we could teach that, but… and we do in certain ways. But, if we couple that with like the physical allocation of funds through the Profit First system, we can get to the same, relatively the same end goal, which is ensuring that we know what, what is impacting that cash balance, and we know how to fix it.

that’s really what it boils down to. and we can call out, like I said, there’s [00:35:00] one-time items, like non-recurring items like equipment purchases if they’re paid for with cash. owner distributions, hopefully there’s a certain level of those that are regular. But there’s also, even in the Profit First system, certain level of those that only happen once in a while, once a quarter, eh, different things like that.

being able to lay that out and, And then we can expand it a little bit ’cause, like in that OPEX bucket, the operating expenses, that really captures, like I said, all the all the cash outflows in the company. And then we can break that down into here’s your operating sections that come from the P&L. Here are the other kind of non-recurring things. Here’s your big ticket purchases. We can visualize all that pretty much in the same way a cash flow statement does, but it just, it makes sense ’cause we’re tying together terminology from statements and from other reports and places that they’re already looking at,

Evon: Yeah.

What should practice owners be watching on a regular basis?

Evon: If, i- if I’m an optometrist listening to this, a practice owner, and my practice is doing well, like I [00:36:00] have a great financial system around it, what should I actually be looking at every month? What should I be tracking, watching?

Eric: If you have a good financial system already,

is that what you said?

Evon: Yeah. There’s no major gaps, there’s really no major issues to solve. Like we’re rolling, practice is doing well. What should we be watching on a regular basis?

Eric: there’s the basics that everybody, whether you’re doing well or not, there’s basic metrics that everybody’s gonna wanna be looking at. And that, so I don’t know how granular you want me to get on that, but In terms of, making sure that your production levels and the number of patients and the number of recalls and all those types of things are at a level that, that is, consistently steady or improving. if you’re already doing well financially, and we- were to look at it through the lens of you’ve got cash reserves set up that you could, that your business could survive a [00:37:00] few months if revenue went to zero. y- you have this additional cash in the bank. the first thing we’re gonna do is go back to your and growth goals. L- life being for the owner and growth for the business and see what is the next thing to tackle here? do… we’re gonna go back to that prosper piece and revisit. That’s why this, this whole interconnected is also cyclical, right?

Evon: Yeah

Eric: you’re not gonna… just like if you were working somewhere else, you’re not gonna work for the same wage forever. So you shouldn’t work for the same,owner’s comp forever either,and profit.

that’s really where the conversation goes, is, what else, what are your next life goals that you wanna tackle? What are we working towards? is the business still able to support that as your personal goals have evolved or changed as you get older in life? we can take a look at those things and run the whole system [00:38:00] again in terms of if they’re not, if you’ve got bigger goals now or you need to, more s- more savings or more funds to invest or you wanna take better vacations or whatever the goals are, right? You wanna start building, some sort of legacy that you have something to pass on to your kids It’s that whole reverse engineering again. What does the business need to look like in order to achieve that? And then do you want to build that? is that– ’cause sometimes, sometimes different business owners over the years have hit limits on, what they actually want to manage and build.

And, some of- sometimes that comes from just a, What am I saying? Like just a, a lack of confidence around their business and leadership, maybe abilities and what it takes to get to that higher level. But sometimes we’re not talking about a huge enterprise that needs to happen [00:39:00] to give yourself just that bit better quality of life. So we’re constantly revisiting that over the years and just making sure that, you’re not, those clients are not, just settling in or getting too comfortable with status quo,

Right

Make sure they’re not settling. yeah, I’d say that- that’s a big part of it. And then we s- you know, we keep running the system from there. The, the better you do, the more you have to split out between owner’s compensation to fund those personal goals and profit to be able to, self-fund future growth, whether it’s, you need to ex- you wanna expand to a new location, or you wanna acquire a whole another practice, or you just want to expand, get some,more lanes and more associates.

What- whatever that growth plan is that you’ve, decided on or that, we’ve helped pencil out, that’s where we go with it

What one financial habit should every practice owner change today?

Evon: If you could, i- if you can get every practice owner to change [00:40:00] one financial habit starting tomorrow, what would it be?

Eric: Oof. That’s a good question. Huh. There’s so

Evon: One I did not prepare you for, by the way, Eric. So let’s catch you here on the spot

Eric: All right. one habit, look, I’m so ingrained in the system by now that it would be take your profit first. know it sounds like I, I– can decide what that sounds like. But

Evon: This episode sponsored by Profit First. No.

Eric: But I think that, that is, that’s such a big thing,as far as financial habits.

being more, just, it just helps set yourself up for so much more success if you can start to do like that, that one little habit, more habits will build off of that, and you’ll start to, you’ll start to get into, a, a certain rhythm or system that, that works better for you than what you may currently have.

So that’s

Evon: And when…

Eric: that’s coming to mind.

Evon: I love that and I love the focus again on starting [00:41:00] with the lifestyle needs and goals of the family, building that into the business goals, because these things are all tied together. this is why I focus so much on my work of merging together the practice and the household finances. your work is so important, Eric, because all of these things are tied together, and your goals or what’s happening, whether you are aware of the financial aspects of the household or not, what’s happening in the household is gonna impact the business.

it’s going to impact the demands that your household is placing on the business financially. And what’s happening in the practice obviously is gonna impact the household, because the practice funds all of your goals, your savings rate, your ability to fund your future financial goals, your ability to spend the lifestyle that you want.

So i- these things are so connected, and I love how you blend that together in your work.

Wrap up – where to find, follow, and connect with Eric Levenhagen, CPA

Evon: And, we’ll wrap up here. Where can people find and follow and learn more about what you’re doing?

Eric: Yeah. I’m on LinkedIn. They can reach out there, look me up, Eric Levenhagen. Or, our website is the best place to learn more [00:42:00] about what we do in the firm. So it’s prowisefinancial.com. there’s a couple buttons on there. there’s a button that’ll take you into an assessment if you wanna start to look at, some qualitative, questions about where you would, you’d fall in that financial harmony framework we’ve been discussing and, what some, top things you might be able to do on your own to help, start improving. And, there’s also a button on there to schedule time on my calendar directly. we love to talk to people and meet new people. and our first call is always a very low-key, not a sales call. We don’t sell any– we don’t sell anything on a one-call basis. We wanna get to know people. If we can help you out, a little bit in that process, in that 30 minutes, I’m gonna do it. and then if it makes sense for both of us, we look at what the next step would be from there.

Evon: we will throw all of that information in our show notes, which you can find by just scrolling down on whatever app you’re using to listen to this podcast. Eric, really appreciate [00:43:00] you coming on. Hopefully we can have you on again in the future. For the listener, appreciate your time in listening today.

We will catch you on the next episode. In the meantime, take care.