“Can I afford this expense?”
Every practice owner will likely ask themselves this question at some point. No business is immune to financial pain and sometimes tightening the belt is very wise. But how do you know where to spend and not spend? As a practice owner, this is where it becomes VITAL to understand the difference between investments and expenses.
A growth-minded practice owner avoids the temptation to view everything as an expense.
“This mind-set is one of the biggest downfalls of businesses in general. If everything is viewed as an expense, then decisions are based not on a growth model but rather a survival model. Those who start a business wanting only to survive are sabotaging their ability to make decisions that will grow and sustain their businesses.”
What is your goal as a practice owner? Do you want your practice to run more efficiently so you can work fewer hours? Do you want to create enough value to eventually sell at a high profit? The right investment both creates freedom now and raises your worth, stability, and profit margins down the road.
A few of the biggest items in the investment category are People, Training, Physical Location, and Marketing. That said, each one of those can be expenses if not done correctly.
When it’s time to make a decision, consider these key differences between investments and expenses:
Investments Provide A Return,
Expenses Drain Resources.
This one sounds straight-forward. After all, we talk about investments in terms of ROI, but ask about expenses “can I afford this?” But understandably, it can be easier said than done when it’s time to make the investment. This is where planning comes into place. Planning takes away a lot worry and gives you time to make carefully researched decisions.
The U.S. Small Business Administration recommends your marketing budget be a piece of your overall marketing plan – with every goal having a cost and timeline associated with it. Which leads me to my next point…
Investments Can Be Measured Statistically,
Expenses Are Often Measured by Opinion.
One major difference between spending money and investing in your business is knowing the results of the spend. Make a plan, set a goal, allocate an investment, but remember that keeping track of the results helps you plan even better next year.
Investments ALWAYS have a statistic. Whether it’s new patients, total income, cancellation percentage, or anything else you can measure.
The result of an expense is either harder to find or is strictly a matter of opinion. An example would be repainting the outside of your practice. One staff member could say “Oh this will attract more people because it looks so nice!” while another doesn’t like the color at all. Without a way to measure potential patients’ opinion of the building and if that lead to more consults, this categorizes as an expense.
Investments Improve A Business,
Expenses Just Keep It Going.
Some expenses are necessary to keep your practice running. The electric bill, cleaning, equipment repairs, these are necessary but don’t improve your income.
Investments do improve your income – but there’s one catch. Underspending on something that should be an investment can turn that thing into an expense that just keeps the business going without improvement. What do I mean? FrogDog says it this way:
“As a general rule of thumb, companies should spend around 5 percent of their total revenue on marketing to maintain their current position. Companies looking to grow should budget a higher percentage—usually around 10 percent.”
If you want to grow you need to INVEST in marketing – spending enough to improve your patient flow and income. Investing too little turns marketing into an expense – costing you money instead of making it back. (The U.S. Small Business Administration recommends a similar tactic: 7-8% of the budget for companies with less than $5Million revenue.)
Investments Are Typically Consistent,
Expenses Are Usually One-Time Spends.
“This is where companies went awry in the last economy. When times were good, they stopped marketing in spite of the fact that marketing got them busy in the first place.” –Entrepeneur.com
Just like a 401K, good investments are often made up of smaller, consistent investments with a big, long-term goal. To use the marketing example, practices that rely on an event here and there, or an “occasional” mailer rarely see a return from those efforts. Because of that, they qualify more as an expense than an investment.
Now, don’t get me wrong. Events and one-time campaigns can work well as a supplement to a monthly or annual marketing plan, but if you want a consistent return, you have to start with a consistent set of systems and processes.
I’ve been around Neil Trickett (PT & our Founder/CEO) long enough to hear this metaphor several times. An effective marketing system is like a faucet for new patients. Turn it on and the flow continues without too much effort, but turn it down and the flow stops. Consistent marketing outflow = Consistent patient inflow.
The One Shared Quality:
Before I close, there is one great thing shared by both investments and expenses: Tax deductions. Maybe it’s the cause of some of the confusion between the two, but I encourage you to take advantage of them either way!
So, Which Is It?
To close, here are the conclusions of Entrepeneur.com’s research:
“Areas that are considered an investment by companies that understand a growth model vs. a survival model are: image and marketing, training and development, technology, physical location, and hiring.”
In English, the difference between an investment and expense is the difference between the freedom of a sustainable business and the struggle to make ends meet.
You didn’t start a practice to struggle. You did it because you’re a growth-minded PT with a passion! Physical therapy is an industry built to help people live better – and that should include you. And if a marketing investment could radically improve your practice and your life, let’s get started right now.