The Private Practice Success Podcast

71. The Difference between 'Contributions to OPEX' and 'Profit' and Why This Matters

• Gerda Muller • Episode 71

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In Episode 71, Gerda breaks down two financial concepts that practice owners often confuse, and how that misunderstanding can quietly sabotage your pricing, team pay decisions, and long-term sustainability.

She unpacks the difference between “Contributions to OPEX” and “Profit” and why knowing the distinction can transform the way you run your business, especially in the current economic climate.

In this Episode, you will learn:

  • The difference between “Contributions to OPEX” and “Profit”
  • Common misconceptions around what actually happens to practice Revenue.
  • A simple framework for understanding the flow of money within your practice.

Who This Episode Is For:

  • Group practice owners who feel like there’s never enough money left, even when revenue looks “good.”
  • Anyone who wants to run an ethical and sustainable business, without just hoping that the bank balance will work out come next payday.

This is one of those foundational episodes that will make you think differently about every dollar coming into your practice, and help you build a business you can’t stop smiling about.

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

Connect with Private Practice Success & Gerda here:

Well, hello there brilliant private practice owner. My name is Gerda Muller, and you are listening to the Private Practice Success Podcast, and this is episode number 71.  

Today I want to talk to you about two really important financial concepts, and I want to talk about this because I find more and more when I speak to practice owners, that we aren't clear on the difference between these two. So what are these two financial concepts? The first one is what is called: Contributions to Opex. So what is Opex you might ask? Opex is just short for operating expenses, so contributions towards operating expenses as a financial concept within your business. And then the other financial concept that you might be more familiar with is profit. And it's really important to understand how these two are different, because I find that people confuse these two all the time. 

Now if you are listening to this and you go, ‘I don't Gerda.’ Sweet. I'm glad you get it. You might still learn something from this podcast, I'm hoping. However, you will be really surprised and I'm constantly surprised at how many people don't fully understand the differences between these two. And there's no judgment in that, right? I'm not saying that in a condescending manner or that you don’t know what you're doing. We did not study accounting at the university. Maybe some of you might have, but I know I didn't. And accounting sure as hell isn't an included subject as part of your psychology undergrad degree, honours degree, or master's. Well, at least last I checked. If it's changed, I would be really surprised. But you know, university curriculums take a very long time to be changed and adjusted, so I highly doubt it.  

So if you're sitting there thinking, oh shit, I don't know the difference between the two. That's okay. I'm glad you tuned in because this is an accounting concept, alright.I learned about this through having conversations with my accountant, and I once sat in a meeting hearing this term and going: What the hell are you talking about? And that is literally what I would say in the meeting. Because I know that there's things that I don't know, and I will be asking if I don't know. Alright, so let's talk about this.  But before we do, I really want to make this point. If you are sitting there thinking, yes, I don't know, or maybe I'm not a hundred percent sure as to the differences between these two things, I want you to think if you as the practice owner don't know the difference and don't understand both of these two concepts properly, then we can't expect our clinical team or our admin team for that manner, to understand the difference. And if they don't understand it, they're going to come to you with certain requests that you're going to want to pull your hair out as a result, and it's not their fault because they don't understand it. 

So if your admin team is constantly coming to you saying, ‘Oh, we should just waive that cancellation fee, we should just waive that no-show fee. Well, these clients have requested we bulk bill, I think we should really do it, they're really struggling.’ It tells me they don't understand the difference between those two concepts.  If your clinical team is coming to you asking for consistent raises so they're not waiting for their annual salary review, and they are just knocking on your door saying, ‘Hey, I want a $10,000 increase, or I'm gone.’ Or your contractors are coming to you and saying, ‘Hey, I want to earn a larger percentage, or, I want to up my fixed rates that I'm charging you’... and they know that you've not even increased client fees in the last 12 months. It also tells me that they don't understand the difference between those two. But this is really where if you, as the practice owner understand these concepts, when you are having those conversations, you can also have conversations with a team member that understands it too, that have already put their request, whatever that might be, through that filter of going: have we thought through all of these things? And if not, it's our job to sit with them and help them. I can tell you now a lot of the conflict that happens within group private practice is a result of practice owners expecting the team to understand business concepts, when it took us forever to understand it, and it can be very frustrating talking to somebody that doesn't understand those concepts, but it's not their fault. They also didn't study business. They also didn't study accounting. 

It's really our job to feel safe enough to also talk and communicate with our team about these concepts, so they can understand that when we say no to something, it's not because sometimes we want to say no, it's because we have to say no. You know, sometimes our hands are tied as a result of variables outside of our control. Sometimes our hands are tied as a result of what the numbers say, and we have to keep those numbers in mind, and ultimately, when we talk financial concepts, it is numbers at the end of the day. So even if you want to give somebody a $10,000 annual raise. Even if you want to bulk bill every client that calls up because you want to help them, you're so passionate about making a difference, you know that the numbers are telling you that if you do this, you're going to have to close your doors in 3, 6, 9, 12 months’ time. It just is what it is. So it's like what do you choose? Do you choose to stay open, and at least be able to help some people, or are you happy to not help anybody in 12 months’ time? Because that's what it comes down to. But that also means that as a practice owner, you've got a responsibility to ensure that you know what your contributions to Opex should be, and what your profit should be. This is not a, now I can just wash my hands of it because the numbers are the numbers. No. Once you know what it should be, once you know the differences, you know what it should be, now you need to make a plan for this all to work. 

I've gone down the rabbit hole already, and I want us to really talk about the actual concepts today. Because step one is understanding it. Step two is understanding and knowing why it matters. And then step three is optimising it, making it work - building a business, a model, and great foundations around these two concepts, so that it can support, not only the business that the doors can stay open, but your clinical team who is entitled to having a salary review. So that you can say yes to potentially offering a reduced rate to a client. Two, potentially waiving a no-show or a cancellation fee, because you've now set up the model in a way that this cushioning and that can support more yeses than nos. But it starts with understanding the difference between these two concepts. 

 Understanding Contributions to OPEX

Now, I'm going to use very general broad numbers in order for the maths to work here on a podcast. There's not a whiteboard here. There's no visuals. So in order for this to work, I'm going to use very arbitrary numbers. Don't challenge me on these numbers. I know it's silly, numbers, but I want to convey a point in the most effective way that I can over a podcast episode, which is you only listening to me.

Let's say you are a psychology practice and the client pays $200 to get the appointment. Let's, in this situation, say, just because it makes the numbers easy, that you've got contractors, the same thing applies to employees, let me put it out there. But let's say you've got contractors and you pay your contractors $100. The client pays the practice $200, and you pay the contractor $100. Yes, you need to also pay Super plus GST if they're GST registered. But we are just going to go round figure $100. Remember, I just want to make my point here. That means that after you've paid the contractor, there is $100 left in the practice's bank account. That my friends ain’t profit. And unfortunately a lot of people see that as profit. A lot of clinicians see that as profit. A lot of admin team, when they look at what the client pays versus what the contractor earns - or very often what the employee earns -  they look at that as profit. Clients look at that and they will see that as profit clients particularly, you just need to go into, you know, Facebook groups especially now with the current talk about NDIS and all that stuff happening in, in the industry at the moment that is often seen as profit. As a business owner, nine out of ten of you're pretty sure you are going to know that that's not profit. But do you know what that is then? And how do you differentiate that a hundred dollars that you retain? What is that? How much of that should be contributions to Opex? How much of that is actually profit? Real profit. 

So in essence, your contributions to Opex, or operating expenses, is basically the money that is now left after those direct clinical costs. So after, if you've got contractors, it would be referred to as Cost of goods. So the cost of goods, it's the cost of being able to deliver the service that is the fees or the percentage, if you are still paying percentage, (you shouldn't be, but anyway) that you are paying them. Now if you have an employee team some people might put their employees under cost of goods depending on how your individual accountant likes to do it.I know some put employee wages under cost of goods. I don't do that in our zero, it's down as wages, but it's still a direct cost to deliver the services. So that's the clinical wages, right? Whereas admin wages are not a direct cost. So it is basically the wages of people that are doing the billable work that is a cost of good to some extent.  The same with a contractor.  Now, again, I'm not an accountant. You need to chat to your accountant about this. I'm only sharing, as always with you guys, my understanding of it ,and how it makes sense in my head as a non-accounting person, and as a non-numbers person. Like I'm a psychologist. Right? Okay, so that is the direct cost. 

Now, after you've paid the direct costs, which could be your contractors or your clinical team members, , the people doing the billable work, now you've got a shit ton of other costs and bills that you still need to pay. Stuff such as your rent. Now, if you've got a telehealth business, it's not a problem for you, but most of you, including myself, I don't have a telehealth business. I've got an in-person practice, currently, we've got three locations looking at starting a fourth. We do have a telehealth team attached to each location, but predominantly we pay rent, and rent is pretty expensive. Take it from me. Then you've got your admin wages - people not doing billable work, which can be your reception, your practice manager. You might have an in-house bookkeeper, so all that administrative wages. Then you've got all your freaking subscriptions. You know how many freaking subscriptions we have. It's like, it feels like it's never ending, but you know you need them. 

Then of course, there's insurance that we need to pay. Then there are accounting fees. There are marketing costs. Superannuation a lot of you will be paying payroll tax. Then we've got professional development budgets. Then we've got a budget for tools and equipment. Maybe your computer at the front desk has just stopped working. Maybe the printer needs to be upgraded. Anything can go wrong at any time. Maybe the rooms are in need of a new paint job because you've been practicing there for the last five years. Maybe you need to replace a couch. Then utilities, internet, phone, air con, electricity The list goes on and on. And don't forget freaking stationary. Okay?  I must say since we've gone with electronic files, our stationary budget has significantly declined.  However, if you've got a child in a lesson practice like I have, you still need to buy a shit ton of stationery and resources for child clients, which we love to do. But everything needs to be considered. So all of that is operating expenses. 

So after you've paid your contractors, after you've paid your billing team that does the billable work, your clinicians. Whatever's left in the business bank account, then first and foremost goes towards paying your bills so you can keep the doors open. And you as a practice owner need to know what that is, because that's the contributions to operating expenses that you need to be able to have in your bank account so that you can cover those operating expenses. Do you know how much that is? A very important question. And then what is left after you've done all of that is profit. 

Understanding Profit 

Now, if you are a profit first advocate like I am, you will take out your profit fast, but I'm not going to go down that robot hole today. Because before you can even do that, you need to understand these two concepts, these things, it's like little dominoes. You need to put one domino up, then the next one, then the next one. And when you're done, then you can press the first one down and everything builds on the other one. It's all sequential. So you first need to understand these concepts. You need to know how much is your contribution to Opex that you need every month. You need to ask yourself, do I have that? Don't I? Because if you're going to take out profit first before you pay your bills, as per Mike Michalowicz Profit First Philosophy, you might find yourself getting into debt because you can't pay your bills, so we need to first start with looking at those contributions for operating expenses. And then whatever is left is your profit. That's the money that's extra after you've paid your expenses. 

So what happens if we go back to our numbers? The client pays the business $200 for an appointment. We pay $100 to a contractor. That $100 is not profit. A lot of times people will be using 50, 60, 70, 80, 90, even 95, even $100 towards paying their operating expenses. And what people often forget is that our clinicians don't work every hour that our doors are open. But guess what? Our rent is due for every hour and weekends and during the night our electricity is due, all those other expenses are due for every hour. So in essence that one billable hour needs to not only cover operating expenses for that hour, it all goes towards keeping the doors open during your complete operating hours. So for us, in my practice, we generally expect our clinicians, let's say if they are a full-time equivalent employee, they would be working 38 hours. Of those 38 hours, they have 14 hours for non-billable work. So they generally book 24 billable appointments, which means there is 14 hours that's non billable. Which means that the money generated from those initial 24 hours doesn't just cover 24 hours, it has to cover the entire 38 hours, if that makes sense. So it's really important for you to understand, do you know what the contributions to operating expenses are for each and every billable role within your business. 

You should have a general rule of thumb for what that should be, and it's your job to make sure that you track that. It's your job to make sure that every role contributes to it. Because it wouldn't be fair if one role does and the other doesn't. And a lot of times what happens is that within a team, a practice owner might have one or two really high performers, and those high performers then often carry other people that don't perform at that level. And when I say high performance, honestly, I wish I was lying here, I'm just talking about people meeting reasonable KPIs. And then what happens is because the majority of the team aren't meeting KPIs, then when it comes time for the wage review, the practice owner just says no, and they say no to everybody because they want to be fair. But I don't think that's very fair because why say no to everybody when there are people that's performing really well and it's almost like they're expecting the high performers to carry the rest of the team. And I don't think that's fair. Yes, of course there's always going to be times where somebody isn't going to be making KPIs, and we want to understand the circumstances and the variables around that, that happens at my own practice, but I'm talking about ongoing performance. 

A lot of practice owners accept ongoing performance issues because they don't want to rock the boat, because they don't want to lose somebody. Because they know how hard it's to recruit in our industry, so they just tolerate it. And then what happens is the high performers that are actually meeting KPIs and doing what they're meant to do, they're the ones that you lose. And I would hate for that to happen for you. But again, oh Gerda, you've gone now on a different tangent. But anyway, I like to just go with the flow and talk to you because the way that I, and now I'm going on another tangent - the way that I think about this podcast is I imagine sitting just with you, that the two of us are just sitting and having a chat, and I'm talking to you as if nobody else is listening. I'm talking to you honestly, transparently, and I know sometimes things that I say might be judged by other people, might ruffle feathers might come across as, I don't know various different things based on people, how people judge it. But I know at the end of the day, if I take myself back in time, I wish that I had a fellow group practice owner who I could meet with once a week, once a fortnight, and just have a chat with. An honest, truthful, vulnerable chat about all these things where I could say, you know what? I have no freaking idea what are contributions to Opex? Do you? Tell me about it? What do you do? How do you manage it? It is so important to have these conversations, because, and this is where the why it matters comes in because it does matter. And I know you're not here for the money. I know that. 

Why This Matters 

I think you also know that in order to do what you are here for, that is to help people, you need to be able to keep your doors open. And if you don't understand the difference between contributions to Opex and you manage those closely, and the importance of still making a profit, because you are a PTY limited business and it's expected legally from ASIC that you make a profit. 

You will Price Incorrectly 

If you don't understand this distinction, you will be pricing your services incorrectly. You'll be setting fees based on false assumptions around profitability, and that will be detrimental to your business. 

You will Pay Your Team Incorrectly 

If you don't understand this distinction, you will be paying your team incorrectly. You might overpay, you might think you've got more margin and more contributions to Opex than you actually have, so you need to know what that looks like. 

You will Grow, but not Profitably 

If you don't understand this, you might grow, but you won't be growing profitably, and I can tell you that's the worst freaking business to have, because it is incredibly stressful. More clients, more clinicians, more revenue, does not mean you've got a successful business. Because when there's no money left at the end of the day, it is incredibly stressful, and that is when practice owners burnout. That's when practice owners quietly close their doors, nobody knows about it, and then there's less and less providers in the industry. 

You will Feel Constant Financial Pressure 

Not understanding the difference between these two things will also make you feel under constant financial pressure. Knowing what's happening is clarity. Understanding these numbers and concepts is clarity. So if you're feeling and if you, knowing your gut is telling you that currently things aren't adding up in your business, it might have something to do with contributions to Opex, and therefore having no profit in your business. 

Where to from here 

So where do you go from here? It is really, really important for you to understand that every dollar that comes into your business needs to be allocated with intention. You shouldn't just assume that you're going to have money for A, B, and C. You shouldn't guess, ah, that's enough. You know? Yes, we can pay that. Yes, we'll be able to pay the bills. You can't just hope for the best that come Thursday next week when wages are due, that you're going to have enough cash in the bank. You need to start looking at your numbers. I said dominoes earlier on, but it's like layers. Maybe this is a different analogy, you know, like a layered cake. I like my cake analogy much better. I feel like I need some cake after this. 

So the first layer, number one, is the revenue that needs to come in. And a lot of people, when their business is struggling, they think, oh, we just need to make more money. Yeah, making more money is always helpful, but it doesn't fix fundamental financial misalignment within your concepts and your numbers. So that's the first layer is the revenue. The second layer is your contractors, so your cost of goods. Of course, then you've got those direct costs for your employees who are doing the billable work. So, I'll put it under that cost of goods umbrella. Like you have to pay that, if you don't have those people doing the billable work, you won't have a business anyway. So that's the second layer.  Then the third layer is your contributions to Opex. So that is the money that you then have left after you've paid your cost of goods and your billable clinicians. Then four, you pay your operating expenses And that is that list of example items that I've mentioned earlier on. And then five, that final layer, what is left in the kitty is your profit - and you need to look at all of these layers and really ask yourself, am I ticking all these boxes? Have I actually paid attention to what is happening at each of these layers of my business revenue cake?

Just like your layered cake, the bottom, the first layer is going to be the largest, and then the second layer might be a little bit smaller, and the third layer might be a little bit smaller, and then the next one goes a little bit smaller. So if you think about those layers getting smaller, because you're using the freaking money to pay your people to pay your bills to pay operating expenses, it does become less and less and less. So as a responsible business owner, you want to know what those numbers are? What does it look like right now? What should it look like? And that of course, is where business strategy comes in, this is where your business design comes in. This is where your business model comes in, and there's a lot of decisions around margins and all of that stuff that you make as a result of this information. 

So, if you take nothing else from today's episode, I want you to take this with you, that the gap or the difference between what you charge your clients and what you pay your contractors, what you pay your clinicians is not your freaking profit. It is first and foremost contributions to operating expenses. Because as a responsible business owner, you need to pay your expenses. That is running a business that is in integrity. You pay your freaking bills, and it's your job to make sure that there's money to pay those bills. And then what you have, once you've done all of that, what is left over is your profit. Again, there's this part of me because I follow the Profit First philosophy that says, ‘No Gerda, that is wrong. Profit needs to come first. You need to take it out first.’ And that is okay if you already have a profitable business. If you already have a profitable business and you are making anything from 5% profit margin or above, then you need to follow the profit first. Philosophy and you take our profit first. But today I'm talking to people that are struggling out there right now, because I know there's a lot of you. If you are struggling to get over that break even line, if you're struggling to get into the black, you need to start with paying your bills because I don't want that stress in your life. It just makes it worse. 

And what happens when people have got bill stress? That's when they take out credit cards. That's when they take out additional loans and lines of credits. I don't think there's anything wrong with that necessarily, but it doesn't fix the problem. I've got nothing against a credit card, a line of credit, or a business loan. But what worries me is when it is used to pay day-to-day operating expenses, and it just gets you deeper into debt and it doesn't push you to actually fix the problem that is in your business. It is like a stop gap solution, and I guess sometimes that's what you need to do, but I want you to actually recognize and see it for what it is. And if you're taking out credit cards that's a stop gap, it's only going to last so long. You are going to be in more debt, and that is where you need to reach out to your accountant, who will be able to help you to some extent. But when it comes to the business of allied health, that is where somebody like myself, that is an allied health specific business coach can really help you make the day-to-day decisions within the business. How do I have those accounting discussions with clinicians that aren't accountants? How do I determine remuneration and pay packages? How do I have difficult conversations around wage reviews, around performance, around KPIs, all of that type of stuff. An accountant can give you insight into the numbers, but they're not going to be able to help you to translate that back at the practice into conversations with your clinical team, and that is so freaking important to get right, because you don't want them to run. You want them to be on board. You want them to understand what it means to work in private practice and all the things that we need to consider. 

Alrighty, I think we're going to leave it at that for today. As always, I welcome any and all feedback from you. If you want to email me directly, just hop into the show notes. My email address is there. If you enjoy the podcast, please share it with at least one other practice owner and tell them that this exists. Because imagine if all of us within the allied health industry can be on the same page when it comes to running an ethical, but sustainable allied health private practice. Now more than ever, this is so important, we owe it to our clients, to our clinicians, to our communities, to ensure that our businesses are sustainable. That we are there, ready, willing, and able to support the community when they need us. It is our job to keep the doors open and to build a sustainable business. And hopefully today, understanding the difference between contributions to Opex and profit, is taking you one step closer to being able to achieve that. 

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

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Gerda Muller

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