The Private Practice Success Podcast

30. Master the Margins that Matter

• Gerda Muller • Episode 30

Share episode

Join Gerda for Episode 30 of the Private Practice Success Podcast, as she breaks down 3 critical financial margins that every practice owner needs to know if they want to build a long-term sustainable and profitable business. 

With her practical and empowering approach, Gerda clearly explains why these margins matter, allowing you to identify critical gaps in your business model.

In this Episode, you will learn (among others):

  • The 3 margins that you absolutely must pay attention to in order to create a sellable business.
  • The consequences of ignoring these margins within your business.
  • The goal margin target that you should be aiming for with each of these.

Who This Episode Is For:

  • Practice owners who want to gain control of their business finances.
  • Business owners seeking to improve profitability and long-term sustainability.
  • Anyone curious about how to build a financially stable and scalable private practice.

Gerda’s insights will empower you to take charge of your numbers, avoid common financial pitfalls, and create a practice that supports your team, your clients, and you as the business owner. Tune in to learn how to master the margins that matter!

Special Links:

To dive deeper into this topic, be sure to check-out the following...

  1. Contracting in Private Practice Training: Learn more about it here bit.ly/PPContracting Use Coupon Code 25OFF to access your Podcast Only Discount Code. 
  2. Contracting VS Services/Facilities Agreements: Access this FREE explanatory video training HERE.

Want Gerda's Help with your Business?

Gerda helps allied health group practice owners go from overwhelmed, overworked, and underpaid to fully empowered and financially thriving. If this is you, then make today the day you reach out. Complete this super short Triage Form here bit.ly/triageformpps and Gerda will personally reach out to you. 

Here to help you build a practice you can't stop smiling about :)

Connect with Private Practice Success & Gerda here:

 Well hello there, spectacular private practice owner. My name is Gerda Muller and you are listening to the Private Practice Success podcast, and this is episode number 30. 

Today we are going to talk about margins that matter, and my goal is for you to know at the end of this episode exactly which these three margins are, and what you need to do in order to not just know about it, but to actually master it.  

We're going to look at three specific margins, and I selected these three because these are three that I see people getting wrong all of the time. The first margin we are going to look at is the percentage wage to sales. This is particularly important for you if you have an employee model within your business. 

The second margin we are going to be looking at is the cost of goods. Now, when you are in a service business like we are as allied health professionals, this refers to your contractors. So if you've got any independent contractors on your books, then this is going to be a really important margin to look at. 

And finally the third margin we are going to be looking at is your net profit margin. All three of these are of equal importance, and if you don't get the first two right, you ain't going to get the third one right.

Margin 1: Percentage Wage to Sales

Now, what does this even mean? As I said earlier, this is for you when you have an employee model. When I say employee, I'm now talking specifically about clinicians. So these are your employees that are doing the billable work within your business.

They're the ones generating the revenue that you're going to use to pay them and pay all of the other operating expenses. So here we are looking at two numbers. We are looking at - let's say if you pay your clinicians on a fortnightly basis, for example - so in that fortnight this employee is going to be billing X amount of work. 

Let's say -  and I'm just making these numbers up - let's say they billed $5,000 over the course of the two weeks in billable revenue. So that is money that clients are paying your business. But in that same two week period, you've also paid them X amount of money. So let's say if their wages for those two weeks were $2,500, that means that you've paid them half of the money they generated. Which means that their percentage wage, which you paid them to sales, which is the revenue they generated, is sitting at 50%.

Now I use those numbers because it makes the maths easy, because I'm doing all of this in my head. So that is this first margin - percentage wage to sales. So what percentage of the billables are you paying your employee that's doing the clinical billable work? So that is the margin that we are looking at.

Why does the Percentage Wage to Sales Margin Matter?

 Why does this margin matter for you as the business owner? Well, wages are typically one of the largest expenses in your business. When this percentage spirals out of control, it can and will very quickly eat into your ability to pay your operating expenses, which is all your bills to keep the doors open, as well as into your profitability.

I want to remind you, if you have a PTY limited company in Australia, you are legally required to be making a profit. Yes, businesses make losses all of the time. But as a general rule, over time, you need to be making profit. Because if you don't, you are trading whilst insolvent, and that comes with big problems in terms of fines from ASIC.  You are not allowed to trade whilst insolvent, that has a range of negative consequences for everybody involved in your business, which is not the topic of discussion today. But I want to remind you that it's a legal requirement to make sure that there's profit in this business.

If you don't align with that, then you need to close down your PTY limited company, and you need to start a non-for-profit. No judgment there. If that's what you want to do, then you need to do that. But if you're going to try and run a PTY limited as a non-for-profit, you're going to cause yourself a huge amount of stress and you're just going to land yourself in trouble. I don't want that for you. So I'm talking to you if you've got a company. 

It is your responsibility as the owner of a for profit company to keep a close eye on this margin, because you need to ensure that your team's compensation aligns with the revenue that they are helping to generate. This is all about creating a sustainable model.  It's only when your model is sustainable that your business can thrive without being weighed down by disproportionate payroll expenses.

A healthy wage to sales ratio, then at the end of the day, gives you the flexibility to hire strategically, invest in professional development for your team, and reward your high performers - because you want to do that. Without the right margin, you can't do any of these things. So long term you are shooting yourself in the foot by not having the correct percentage wage to sales, so this is why that matters.

Consequences of Ignoring the Percentage Wage to Sales Margin

Now, if you ignore all of this, you know what's going to happen. You're going to find yourself under constant financial pressure. You're going to be unable to reinvest in the business, and you're probably not even going to be able to pay yourself. And I see this happen so often.

The number of practice owners that come and reach out to me, talk to me, and they've got group private practices - if you didn't know this information you would think they're very successful - you are probably guessing that they're paying themselves at least $100K annually - easily. And then they come and talk to me and they say, “You know what, Gerda, I can't even pay myself and not only that, I need to consistently be taking on more clinical work in order to pay the bills. I don’t know what I'm doing wrong - we are turning over a lot of them in excess of a million dollars and they can't pay themselves.” 

Or they come to me and they say, “You know, Gerda, it's really hard for me not to get resentful because I'm the one that has all this risk on my shoulders. I'm the one that's having all these sleepless nights, and my clinical team members are earning three times the amount of money that I'm earning.” You know why? Because you haven't looked at your margins. It is so important. If you don't do this right, right from the start, it's really hard to correct and it takes time.

It's not impossible, but it takes time and effort.  It can be turned around, but it's not easy. So really you want to get this right, right from the start. So what happens at the end of the day if you don't do this is, you will, I can guarantee you this -  end up being stuck in a cycle of just working harder and harder to cover your payroll and your bills.

As I said, this often leads to resentment and this leads to practice owner burnout. And then it becomes really difficult to get off that hamster wheel, because if you do, everything falls apart. And then you let your entire team down, you let all the clients down and practice owners can't allow themselves to do that, so they just keep going.

They just keep being resentful, burning themselves out, taking out additional loans, lines of credits, extra mortgage - all in silence - nobody knows about this other than them and their significant other, and they carry all that stress with them. Because they haven't mastered this very, very important margin.

And let's be honest, I am pretty sure that this is the opposite of why you started this business. Nine out of ten people I talk to and I ask them, “Why did you start your private practice?” And you know, for now, the majority of business owners in Allied Health are female business owners and they all tell me that they started it for flexibility and to have more time with their kids, to have more independence and when their business is successful, they go, “Oh my goodness, I can expand. This is so fulfilling this work that I'm doing.”

Then they expand into a group private practice. They’re taking one little step at a time and they're going -  I can't afford business coaching,  I can't afford to pay an expensive business consultant to help me. So I'm going to ask all these questions in Facebook groups, and do some research and they make decisions that they think are the right decisions at the time.

They make decisions based on their own experiences. Maybe they've worked at a group private practice where they felt taken advantage of as a clinician, and they go, “I'm never going to do that, so I'm going to do the complete opposite and I'm going to totally overpay and overgive because I want to make right the experience that I had.”

And then five years in, they are talking to me and it's like, “I don't know how I got here. It's just crazy.  I don’t know how to get out of it. I'm just stuck and I don’t know what to do.” This is why I'm doing this topic today because I want to warn you, if you are new to group private practice, this happens way more than you think.

If you are listening and this has happened to you, please know that you haven't failed. You are not the only one this has happened to this nothing to be ashamed of, okay? And this can be fixed, and I would encourage you to fix this. So what do we want instead? We want a clinical team - and admin team for that matter -  that is fairly compensated, but at the same time, you want to make sure that your business can pay its bills.

In other words, that you are operating whilst solvent and you are making that profit. It doesn't have to be either or. It can be both alright. This balance then allows you to focus on growing the practice. On building a positive workplace culture where people love coming to work. It's about creating financial stability, not only for your team, but also for the business. Because if you've got a financially stable team, but the business isn't financially stable, it's not going to last. It just isn’t going to last. The day's going to come where you're going to have no choice but to close your doors, because it's just impossible to keep going if these margins aren't working out. 

And you know what happens then for a lot of practice owners, they just close the doors. It's like, “I can't do this anymore.” They can't sell that business because it wasn't profitable. And there's a lot of people that lose out, I'm talking to clinicians and clients, the general community when practices close their doors and then the business owner is sitting with a lot of shame, a lot of unspoken shame.

I don't want that for you. I want you to feel in control of your finances, instead of you being controlled by them - and it starts by taking off those rose colored glasses and going, ‘What is my percentage wages to sales within my practice, for each individual clinician that does billable work?’ Do you want to know what the answer is to that? Because I'm going to share it with you. 

The Goal Percentrage Wage to Sales Margin

It's not 50%. And this answer is not a number that Gerda has just pulled out of thin air. This is a general business principle, and I know what you're thinking. You are going to tell me - ‘Oh, but we are different to general business Gerda. We are allied health professionals and we've got marketing restrictions, we are regulated, we've got a code of ethics. We need to be ethically and morally different from other businesses.’

I disagree. I think every business should be ethical. I think every business should be operating in a morally sound way. I think every business, doesn't matter who you are and what you do, needs to do business with integrity. Other businesses don't get a free pass, and neither do we.

In fact, I would say given the work that we do, working with really vulnerable people that need our help, we've got an even greater responsibility to keep our freaking doors open to make sure that we can continue helping people, and you can only keep your doors open if you stick to these margins.

So if you were to go to an accountant, and I would encourage you to go and ask your accountant this question, if you know other business owners go and ask them. I'm not saying what they have is going to be necessarily right unless they've had business consulting, coaching, or mentoring. Because there's a lot of people out there running all types of businesses and they don't know what the hell they are doing, and there's no judgment on that.

That was me for the first five years of my business. I didn't know what the hell I was doing. I thought I knew, I thought I was doing all the right things - until I knew what I didn't know. Right? So you need to be careful who you talk to. Ask people who should know the answers to this. Do a Google search and ask - what is the recommended percentage wage to sales.  Any good legitimate source will tell you it should be 30%. 

If you want to sell your business one day, this is going to be a margin that a potential purchaser is going to look at, especially a purchaser that might be a bigger organisation, maybe a corporation, you know those buyers that're going to pay you good money. Those potential buyers are going to look at your percentage wage to sales, and they're going to want this to sit at 30%. That's the ideal number. Now, that being said, when you have a ‘talent business’ such as we do, remember I just said we aren’t different. Okay? That still stands. 

However, there are these slight variations where if you have a talent driven business, so you've got professionals like Allied Health Professionals - this is lawyers, architects, doctors, that type of industry - the research tells us that this percentage can go as high as 40%. Can go as high as 40% if you can show cause for why that should be. Now, you don't want all your people sitting at 40%. Okay, maybe this is a more senior person, maybe somebody that's more got a leadership role, that type of thing. But as a general rule, it should be sitting at 30% and when you work with me in business consulting, we want to get this at 30%. Alright, that is the gold standard. 

Again, I'm happy for there to be this range between 30 and 40. So I want to encourage you today to actually go and work out for each individual clinician, you want to know what this is. But you also want to know what this is for the entire business. So if we had to go and look at your profit and loss statement, and I look at this total amount of money that you're paying towards salaries and wages, and I work that out as a percentage of your total revenue, what is that number?

If it's above 40%, then you've got a problem. A solvable problem, but it's a problem and it's something that can be corrected. If you need help correcting it, you know where to find me. This is what I do. I help practice owners work on this every day but we do it with integrity. We do it in a way that doesn't make your clinicians run in the opposite direction. It's about taking corrective action - and know you cannot fix this overnight, is just what it is. But the sooner you start, the sooner you will get there.

Margin 2: Cost of Goods (Cost of Contractors)

Now, as I mentioned earlier, in a service business, this is the cost of your contractors. So just for clarity, if this is a new term for you, costs of goods when you have a product based business, will be the cost of your inventory.

So if you've got a stationary shop, for example, your cost of goods is the money that you are paying for your inventory, for all the stuff that's on the shelves, because you need to pay all of that before you can pay your bills and before you can calculate any profit within your business. So costs of goods, when you have a service based business, which is what we do most of us, 99% in Allied Health, that is our contractors. Because contractors, of course, are different from employees. It's a whole different way of operationalising what we do, we manage them entirely differently. 

So a contractor is somebody who you are paying money to in order to look after the clients. Now, I want to make sure that you also understand that there's a difference between independent contractors and the other word like ‘contractors’. I don't like it when people refer to this model as contracting because it's not what it is, and it's extremely confusing to everybody involved. But the other way that people engage ‘contractors’ is through a services or facilities agreement. 

The costs of goods that I'm referring to are independent contractors. In other words, this contractor has quoted you to look after your clients. They invoice you and you pay them. If it's the other way round, they aren't independent contractors, alrighty. If you are invoicing them for the provision of a room of marketing services, of admin services, of electricity, of stationery - so they pay you, that's not independent contracting.  That is a business associate, let's use that word. 

Those are business associates, because in that relationship, you are actually the service provider because you're the one sending the invoice and you're the one getting paid. Totally different to independent contracting.

So when I talk about this margin, I'm talking about costs of goods for your independent contractor.  This is where you as the business are setting the fees for the clients, and when you are getting a contract on board, you are going, “Hey, I would love for you to help me manage the overflow of clients coming into my practice. Let me know how much you want me to pay you per billable client hour.”

They quote you and you then negotiate with them and it's really irrelevant how much the business charges the clients. That is true independent contracting.

If I've just confused you and you're going, ‘Hang on back up, Gerda, I don't get it.’ What I'm going to do is I'm going to put a link in the show notes to a 10 minute video where I actually talk through the difference between independent contracting and services facilities agreements. I would highly recommend you watch it. 

I think there's too many people out there in our industry that don't understand the differences. There's also a lot of people that don't run businesses that think they want to do contracting, but they don't understand the differences. So please make sure that you go and watch it if this didn't make sense to you.

To recap the cost of goods for independent contractors.

Why does the Cost of Goods Margin Matter?

Now, why does this margin even matter? Well, if you've got contractors, they are probably a vital part of your business, but the cost of their service provision to your business can spiral out of control extremely quickly if you don't manage this carefully. So you most certainly need to keep your eye on this number.

Knowing your cost of goods margin will help you determine whether the service being provided by your contractors are not only covering their costs so that you can pay them, but also is there sufficient money left in the kitty after you've paid them for their client session, so that you can actually have money to pay your bills - so you actually have some money to contribute towards profit, because we've just spoken about the importance of running a solvent business, also known as a financially profitable company.

You need to make sure, and it's your job, to make sure that you can pay your contractors well and pay your bills and contribute to profit. Which of course means that you need to ensure that your pricing structure, IE what you are charging the clients, reflects the value that is being delivered. The fees you charge to clients needs to make sure that this margin works. So there's a lot of moving parts here that you need to keep in mind.

It also helps you to confidently scale your services when you know this margin, because you want to make sure that when you are paying your contractor - and we are talking large amounts of money, per billable hour - that you feel good about that money, that you don't look at it and go, ‘Oh. Far out. I'm paying this person so much money and I can't even pay myself’. Again I've mentioned this already, this happens with contractor models as well. I hear this even more with people that have contractors than people that have employees where they go, ‘My contractors are earning three times what I am. I can't even pay myself because all the money is going there.’

And given the recent changes to the contracting landscape, if you've got contractors that are doing mostly therapeutic work, you most probably need to pay them super. So there's a lot of additional considerations here. The way that we manage our contractors has significantly shifted over the last 18 months. There's been a lot of legislative changes, there's new ATO rulings.  You need to make sure, because this is your responsibility as a business owner if you've got even just one contractor on your team, to make sure that you know what those changes are. 

And if you're going, “Far out, I've got no idea Gerda.” That's perfectly fine. I know firsthand what it's like to be so stuck in trying to keep all the bills in the air at your practice that you often aren't aware of stuff like this that is happening out there, but that's why I'm here to remind you.

So last year, July, geez, it's almost the end of April's almost 12 months. I did a webinar on the changes to contracting from an allied health perspective within our industry - looked at what those changes are, what those rulings are, and how we have adjusted what we do at my group private practice to accommodate that.

So if you are interested in watching that training, I am happy to make that available to you at a 25% discount. And yes, I'm charging you for this because this went for almost three hours, and I always want to be mindful of other people that have paid to see that and be respectful of that. 

But if you've read this far into this episode, thank you so very much. And because you have, go check out the show notes and I will leave a link to that page. It's not expensive anyway, the full price, but I'm going to give you an additional 25% off. I will put the discount code in there for you because I haven't set it up yet, so I don't know what it is. So, I've just decided to do that now as I'm recording, because I want you to be aware of it.

I want you to know these things because not changing the way you contract is going to land you into big trouble. And don't go just because Gerda has now said you need to pay super that's what you need to do. There is, like I said, it went for three hours. There's a lot of intricacies here. Before I ran that webinar, I actually spent nine months and thousands of dollars consulting with my lawyer around these changes. We had a robust discussion in terms of going - what applies, what doesn't? How do you do it? How do we do this in the right way? There's so much stuff that goes into it. 

Again, there's three hours of conversation and this is not just chatting. Anybody that's watched it will tell you it is very much actionable content. We actually take you through very specific examples of the thing, the task, let's say, or the job that somebody needs to do. How is this different for a contractor versus an employee? How would you do this differently for a contractor versus an employee? It's very, very specific examples, and I actually presented that webinar with my practice principal because she's on the ground working with the contractors and working with the employees.

I've got a hybrid model in my group private practice. We've got both employees and contractors. So we were really able to talk you through how we operationalise it differently for the different clinicians. How do we make decisions differently? Definitely worth the watch if you've got employees and or contractors.

Consequences of Ignoring the Cost of Good (Contractor) Margin

The thing is this, if you don't keep your eye on this margin, you know what's going to happen? You're going to be overpaying your contractors and you are not going to be in a position to pay your operating expenses, not even talking about getting paid yourself a wage for being the one running the freaking business. 

What happens for a lot of practice owners is that even though they've got a lot of client demand, there's no shortage of clients, the phone keeps ringing, referrals keep on coming in, they're booking in all these clients, but they're not making any money. They're struggling to pay their bills and there's no profit - which means that next year, when the contract is up for renewal, and as any normal reasonable person would, they're going to go, ‘Hey, I'm going to increase my fees to you as the business. So instead of paying me X per billable client hour, I now want Y per billable client hour.’ And obviously if they've been doing great work and they tick all your boxes from a contracting perspective, you are going to want to keep them on, and you therefore will need to pay them more money probably, right. That's just reasonable. 

But if you've not been able to even pay your operating expenses, if you've not been able to have some profit that you can put in as some business reserves, you are not going to be able to say yes to them, and then they're probably going to leave. And then it's going to cost you more money in terms of  trying to recruit again or hire somebody else. And then you're going to lose all this revenue. It just comes back to freaking bite you in the arse. 

You need to make these decisions thinking longer term. You need to start at the right place. You need to have a process for -  if somebody quotes me, how do I make a decision around what I say yes to and what I say no to. What ends up happening is practice owners make these decisions from an emotional standpoint. It just is what it is. They just keep on procrastinating, thinking, brooding about it, and then ultimately they say yes because they've got lots of clients and they go, ‘I just need to get these clients seen, even if I just break even, it will be fine. I will make a plan later down the track.’  Later down the track things just get more messy, things just get more dire. 

I find that that's when a lot of people come to me as a business consultant, I think I do have a bit of a reputation as a fixer in the industry, which I actually love. You know, these psychologists in me love to help people. Yes I love working with practice owners that are really doing amazingly and they go, ‘Hey, Gerda, things are great. I want to expand, I want to take over the state.’  It’s like, ‘Hell yes, let's do it!’ I love that.

But I also love to help practice owners that are struggling because I know the pathway out of the struggle. I know the pathway out of getting stuck. And what I would say is where a lot of people go wrong is they never accept that help or when they do accept it, they expect it to be fixed in three months, and I can tell you this now, if you get stuck in a financial situation where you have not looked at these margins and you've not done it right, right from the start, it's going to take at least 12 months to get out of it.

It just is what it is. Unless you are happy to have a clean slate and just fire everybody, which is not really doable, and I wouldn't recommend it. You can do it in a way where you can start to see slight changes increase, but you're going to need to have patience. And what I can tell you now is that 12 months in business is nothing. It is nothing. It might feel like a long period when you're in the thick of it, but it's nothing in the larger scheme of things. So a lot of people just don't have the patience to turn things around. But I want to tell you that you most certainly can do it.

So what do we want instead? We want a really well optimised cost structure -  so that yes, you can pay your contractors fairly. You want your contractors to feel well remunerated, but not at the expense of paying your bills, and most certainly not at the expense of your business profitability.

Just like with employees, it doesn't have to be one or the other. You can achieve both, and you have a responsibility as a business owner to make sure that your business achieves both. You want to know that every dollar that you are spending on a contractor is contributing to your practice's growth and to your business sustainability.

Because if you don't have that knowing, you are not going to be able to deliver exceptional client care. Because all you're going to be doing every day and every night is worrying about whether you're breaking even. And that is not the life I want for you. So what is the answer then when it comes to the cost of goods?

The Goal Cost of Goods (Contractor) Margin

This is where one of my general rules of thumb is going to come in that I'm going to share with you and if you work with me in business consulting, you would know that I've got lots of these, because I do like to make numbers and finances as easy as possible. So I'm going to give you one rule of thumb here when it comes to contractors.

This one is particularly for you, if you have contractors that do in-person work on location. And there can be slight differences between if you've got a fully telehealth team versus an in-person contracting team, because obviously one of the other biggest expenses that we have as a business is rent/

Yes some of us got really great and cheap rent, but a lot of us don't have cheap rent. And rent will be very much based on where you are located as well. But as a general rule, the majority of allied health business owners' rent will be one of those big expenses, together with your wages. I'm going to share with you the margin that you need to look at if you have rent that you need to pay. I'm basing this on the way that we do it at my practice where we don't pay a percentage, but you can always work this back to actual dollar amounts.

Let's say the client pays the practice $250 for their appointment with the contractor. So this is a fee set by the practice -  the practice charges the client, the client pays the practice. However, as a business, we have negotiated with a contractor what their fee is.

If a contractor comes to me and says, “Hey Gerda, I'm happy to come on board at your practice. I want to be paid X amount of dollars per client that I see for your business.” So I will go and check and I will go - okay, based on this person's skills and experience, how much do I think I charge them out for? And then I would go - okay, so based on that, the client fee, can I pay this contractor what it is that they would like me to pay them?

So the margin that I look at is the following, and this is an actual dollar figure. I know that in order for me to pay my operating expenses and put money towards profit, I need to retain $110 in the kitty after I've paid the contractor. So coming back to our example, if the client pays the business $250, I need to retain $110 right now at the time of recording, remember, this can go up in time, so if you are listening to this podcast episode in two years time, that's not going to be the number, because costs are always going up - but right now it needs to be $110. Which means the difference is $140. 

So now when I go back to this contractor, I can now negotiate. So I know that's the maximum I can pay them. And if I need to pay them super, depending on how I assess their situation - I've got a decision tool that I use, like a contractor checklist that helps me make a decision as to whether this person needs to be paid super, yes or no? I would go, okay, let's say for argument's sake, I determine that this person needs to be paid super. Then I know that $140 needs to be inclusive of super, so I can go back to them and say, “Hey, this is what I can pay you” and it's a take it or leave it scenario. I don't say that obviously, but in my mind, I know that I cannot pay this person more than $140 because I won't be meeting my margin. And this is where your discipline comes in.

If you are going to consistently go, ‘Oh, just for this one person, I'll be happy to accept $100, or ‘Oh, just for this one person I'm going to take $95 or for this one, or I'm just going to be happy with $105 because I'm feeling desperate. Nope. That is all shooting yourself in the foot. Once you've done the numbers, and you're going to revisit these numbers at least annually, possibly even every six months, maybe even quarterly. 

The less buffer you have, the more frequently you need to revisit these margins. I revisited, even though I've got a longstanding business, I like to look at it quarterly with my practice leadership team, because I always wanna stay on the front foot with this.  And going, okay, because we might be hiring another contractor. Is this margin still where it should be? Yes. No. Okay. How does it need to shift? How does it need to be updated? And I can tell you it never goes down because the cost of running a business is always going up. The cost of paying your admin team super is going up, wages are going up. It never goes down. 

So if you are right now retaining less than $110, it might be explaining some of your financial difficulties. So you want to know what this margin is, and then you want to have the discipline to let people go if they aren't willing to come on board with what it is that you have to offer.

Which also means that you need to know how to have those conversations, how to sell your business, why they should come and contract with you rather than somebody down the street. There's a lot of additional stuff that needs to come in here, but for now, I just wanted to share that margin for you, so that you at the very least know what is that goal that I need to get to.  And again, if you aren't close to that and you need help in getting there, you know where to find me.

Margin 3: Net Profit Margin

Concerningly when I speak to people about their net profit margin, they often give me a dollar amount, and then I need to go, no. When I'm talking about your net profit margin, this is not that you made X amount of dollars in profit in the last financial year. This is a margin expressed as a percentage.

So how do you calculate your net profit margin? First, you need to know what your turnover was in the last financial year. Then you want to know what your net income is. So net income is your sales, AKA , your revenue, AKA, your turnover, minus your expenses - that's your net income. And then you do net income divided by your sales revenue, and that gives you your net profit margin.

If you don't know what it is, calculate it, and then I would also ask your accountant to do it and make sure that you got it right. Now where people often go wrong when they're working out their net profit margin, is they don't put in the owners pay. When I look at net profit margin as a percentage - I always make sure that we can compare apples with apples when I work with practice owners -  it has to include the cost of your wage as the business owner, irrespective of how you pay yourself.

Why does Net Profit Margin Matter?

So why does profit margin matter? Well, it is ultimately an indicator of how well your business is doing. It indicates is this a great business, yes or no? What is the financial health of your business? Because this is what is left after all expenses are paid, and this number will be key to the long-term sustainability and viability of your business.

A strong profit margin tells you that you are not only surviving in business, but you are actually thriving, and it's only when you have a thriving business that you will be able to reinvest back into that business. Whether that is expanding into a new location, doing outreach, maybe adding a new arm to your service offering.

This is the money that allows you to do even more good in the world, but it's your job to make sure that it's there so that you can reinvest back into the business. It is also important for you to have profit so that you can reward yourself as the business owner, and that's where dividends come into play, 

If you are still working in the business on an ongoing basis, you need a wage, but as the person that accepts and takes all the risk as being the business owner, IE, the main and potentially only shareholder in your business -  most shareholders expect to get something like I'm a shareholder in Queensland Rail. I get a dividend paid out to me every quarter, needless to say, it's not a lot, but you know, it's like shareholders expect to get something - and if you are the only shareholder in your business, then you would expect to get something, even if it's a hundred dollars a quarter. You need to expect to get something out of it, and the profit margin helps you to get a dividend.

This margin, very importantly, therefore gives you the freedom to make really important strategic decisions. As I said earlier, such as expanding your business, maybe hiring more staff, taking some time off from your business without the constant stress of financial uncertainty. Also if we think about what happened to the whole entire world at the end of 2019/2020, businesses that went through Covid successfully were businesses that had financial reserves. There are businesses right now, practice owners that I speak to that are now in 2025, still struggling to recover from the consequences of Covid, because they didn't have financial reserves - they had to take out second mortgages, they had to take out a line of credits, they had to take out personal loans in order to keep paying their team because they're such heart centered fantastic humans that they did not want all of those shutdowns, and I'm talking particularly a lot of Melbourne based, Victoria based practices didn't want it to impact their team members.

As a result, they are still today in 2025 in a deep, dark financial hole.  I'm not making this shit up. You don't know about it because there's a lot of shame attached to it, and I get to speak to people in confidence when they reach out to me. And this is why I will never stop doing the work that I do, because I get to help practice owners like that, practice owners that really want to do the right thing. And a lot of the time that is where they end up. And it's my job to go, ‘Okay, let's fix this. Let's get you through this. Let's get you out of this deep, dark hole, and let's learn how to run a business where you can look after your team, and -  not or, and look after you, instead of you being stuck in this place where you're stuck right now.’ 

So profit margin allows us to build up those reserves so that when crises like that hit, and they always hit unexpectedly, that you will be okay. You have a responsibility not only for yourself, but your entire team to do that.  So what happens if we ignore this?

Consequences of Ignoring Net Profit Margin

If you ignore your profit margin, you will constantly feel like you're running on empty. These are those businesses that bring in a lot of revenue, they don't have profit, and it feels like it doesn't matter what you're doing, it's just a tireless spiral of zero reward for a shit ton of effort.

This leads to burnout within business owners, dissatisfaction and ultimately questioning - is this even worth it? The amount of practice owners I speak to says, “Gerda, it would be so much easier if I just go back to solo private practice because this is just too hard. It's not worth it.” And these again, are businesses that other people looking in would go, oh goodness, I wish I could do that. I wish I was there already. 

But in the meantime, back at the ranch, it is not a profitable business, which means that the practice owner is struggling, it's like -  why am I doing this right? When all I'm feeling is resentment and burnout? Why? And I get that. So we need to readjust things. Again, like the other two margins, this can be fixed. Again, like the other two margins - we can't fix this in a day or in a week, or even in a month. It takes time when it comes to financial margins, but it is doable, but you need to have a clear pathway out of it. 

So what do we want then? We want a thriving profit margin, not an unreasonable profit margin. This is not me saying be greedy and put yourself first at all costs. No. Remember, it's not one or the other. It is - we can have both. Okay. That now makes me think of that Bloody taco advert. Why can't you have both right? Soft tacos and hard tacos. I am a soft taco girl. I'll just put that out there.

But you can have both and that is what you want. You want freedom, to yes - pay your team well, pay your contractors well, but also have the ability to build up your cash reserves and reinvest back into your practice, and reward yourself for the hard work that you are doing as the business owner. This is about creating a business that not only supports the clients and the team, but also you as the business owner, and getting that done both financially, emotionally, and professionally. 

So what is that margin then that we want to work towards.

The Goal Net Profit Margin 

Within my Private Practice Success Academy we do a Practice Pitstop with all our members every eight weeks. And as part of our Pitstop, we do an assessment of all the growth drivers and one of the growth drivers we look at is profit, and we have ways of assessing those and I'm going to share what the margins are that we like to work towards. 

So if we look at profit and we go - what was our profit over the last month, two months, whatever period we are looking at - we ask ourselves, is profit margin a problem? A weakness? A strength? Or a superpower?

So your profit margin -  this is a percentage, remember - it is a problem if it's 0% or less, because that means you're not making any freaking profit and you are running a loss. So that is a clear red flag okay. It would be a weakness if it's under 10%. Now you might think, oh, 10% is not too bad Gerda. Yeah, it's not too bad, right? It's good. You might be doing better than a lot of other people, but it's still considered in my books a weakness because it's a very slight margin. It's like something can go wrong easily and you can be in the red okay, so we want a bigger buffer. So it's still great you are making a profit, but we still call it a weakness.

Your profit margin is a strength if it's above that 10% number. So anything from 10 to 30%, and I know that's a big range - is still considered in my books a strength. Obviously you are always just competing with your own business, so if your profit margin right now is a 10,  maybe your goal for the next quarter is to get it to 11 or to 12%, or maybe over the next year you want to get it to 15%. You are only competing with yourself here, so 10 to 30 is still a strength. 

Then if your profit margin is sitting at 30% or above, that would be considered a superpower. And a superpower is what profit is what's going to allow you to build a sellable business. Because at the end of the day, if you want to sell your business at a good price, because remember anybody can sell a business, you can pay me a hundred dollars tomorrow to buy my business, and if I decide to sell it, I can walk around town saying, oh, I just sold my business, aren't I cool? Well you’re only cool if you actually sold it at a good rate. And the asking price is going to be determined by your profit margin, not only over one year, but over the last three years.

And of course, there's other formulas that come into play in terms of generally is it times two, times 2.5, times three in terms of what that dollar amount for value is going to be. But if you want the option and the choice to one day sell your business at a good rate with this becomes part of your retirement planning, you want it to be sitting at 30%. 

Then when it sits at 30%, then you know, then it's hunky dory. I'm not saying get greedy and go, I want it to sit at 40, 50, 60. That's not what I'm saying okay. This is not about greed. This is about having a responsible business. A business that serves its purpose, not only legally as required under an ASIC here in Australia, but also for the purpose for why people start a business to create a sellable asset so that one day I can retire and look after myself.

Alright geez, that was actually a lot of content. When I initially thought about this, I thought, oh, it's three margins. It's probably going to take me 15 minutes to get through all of these, and I think it's taken way more than 15 minutes. And if you've read all the way to the end, thank you so much.

Remember to go and check out that Contracting in Private Practice training in the show notes. I'll be sure to add a discount code in there for you.

Be sure to check out the show notes for that 10 minute video where I talk you through the differences between contracting and services, facilities, agreements that will be totally free for you to have a look at.

Thank you so much for tuning in and always remember that I am here to help you build a practice you can't stop smiling about it.  🙂

People on this episode

Head Shot

Gerda Muller

Host