How much should you spend on overheads?

 

Many professionals who start their own practice do everything themselves. Several years ago, before the prevalence of email, I visited an accountant who put stamps on all the envelopes for the mail that was sent to clients. He did not want to employ somebody to handle these kinds of administration tasks because he was concerned he would not have enough work for them.

After our conversation, he realised that instead of putting stamps on envelopes, his time would be better spent networking to grow his business or with his family.

How much should we spend on practice overheads? What percentage of revenue should go towards them? The answer depends on several factors:

  • What resources do we absolutely need now to function effectively and provide the quality of service our clients expect?
  • What resources will make us feel comfortable and secure?
  • Do we have revenue-generating staff in our practice?
  • Do we need to meet certain regulatory or professional body requirements?

Thought Leaders Global founder Matt Church and his business partner Peter Cook spar with each other on the topic of overheads in their individual practices. Church says his overheads might seem “obese” whereas Cook’s could be considered “anorexic”. We need to decide where our overheads are going to find a balance between anorexic and obese.

In a shared services environment, e.g. a medical practice, we should avoid a percentage-to-revenue overhead contribution. On the one hand, the people who do more work in these environments require more services. But on the other hand, people who provide fewer services still require support staff and accommodation. If the revenue you generate is above the practice’s average, you subsidise those who are below average. A percentage rate of about 40% may seem low when you’re starting out but when you reach your optimum level of fees, it can be significant. The general practitioner who generates $400,000 of gross fees could be paying $160,000 in overhead contributions. This is at the obesity end of the line.

If you are not renting a premises, practice overheads should not exceed 20% of your revenue after the second year of operation. If you are renting a premises, your overheads should not be more than 33% of revenue.

Percentages are important as a metric, however, it’s the dollars we spend that really matter.

Professionals commence their practices for many reasons but, ultimately, the amount of profit they generate matters. They need to:

  • Meet their living expenses.
  • Pay their overheads.
  • Honour their financial commitments of loans, etc.
  • Invest enough money outside their practice to generate sufficient passive income so they can enjoy the lifestyle they deserve when they cease to work.

If you need help trimming your overheads or investing in more so you can grow your practice, email me at bryan@bryanworn.com.

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