Home Care U - How to Run a Profitable Home Care Agency (Mark Johnson Pt. 2)

Episode Date: February 13, 2023

Take a not-strictly-tax-related-deep-dive with us as Mark Johnson, who's worked with dozens of home care agencies to help them not only minimize taxes but also build profitability, discusses the financial practices and strategies that work. Enjoying the show? Send me a text and let me know!Learn more about Careswitch at: careswitch.comConnect with the host on LinkedIn: Miriam Allred This episode was produced by parkerkane.co

Hey, welcome to Home Care U, a podcast made by the team at Care Switch. Nobody went to school to learn how to run a home care agency, so we're bringing the education to you. Join our live audience by going to careswitch.com slash homecareu or listen on your own time wherever you get your podcasts. Home Care U is hosted by myself, Miriam Allred, and Connor Koons of CareSwitch. Enjoy the session. Welcome to today's episode of Home Care U.

We're excited to bring back Mark Johnson, financial, tax, and just all things really home care financial expert. So Mark, thanks again for joining us. Hi, Connor. Great to be here. So yes, as you said, my name is Mark Johnson. I'm an enrolled agent and I'm an accountant and I run an accounting practice that specializes in working with just home care business owners. We do tax planning, we do tax preparation, we do CFO service

and we do general accounting. A little bit of background on myself, I've been doing accounting for over 20 years. I've been in home care for the last two to three years now, and I really love working with home care business owners. And I just like to see the businesses grow. And yeah, that's it. Okay, thanks for the intro. For those who didn't listen last week, Mark is extremely knowledgeable, extremely informative, and also has a pretty fun sense of humor. So this will be a good episode. A couple housekeeping items to get into here. So just as an agenda for today, this will be a deep dive into all things financial focused, especially on some of the most important topics for an agency, which are how can you forecast your future revenue and how can you make sure you're running profitably? We'll be talking about some of

the ways that you can do these and also address questions like how can you know if your expenses are right or if they're too much or not enough for what you could expect to be paying, what's a reasonable amount of profits to expect to make, and at what stage in your agency, how much do you spend on things like marketing, and all kinds of similar financial topics there. So should be really good. A couple, I guess, disclaimers before we get started. So first one, you know, the challenge with talking about financial topics is that everyone is at a different place in their understanding of these things. Some of what you'll hear today will seem super obvious and basic. Some of what you hear today will be new to you. There will be a balance of it for everybody.

So know that even if there are some things at the beginning, especially that seem a little bit elementary to you, it is all too easy to get to a stage of your business where you realize that you have gaps in your financial knowledge that should have already been filled. And the point of this is to help you not have that problem. Second thing before we get started, you may have noticed slightly before, or if you've listened to our podcast in the past. I do have a stutter. Sometimes it shows up, sometimes it doesn't. If you hear a random unexplained pause during this podcast, it is not Zoom buffering. It is not Spotify buffering. It is me buffering. So just be ready for that. Okay. Last thing, just a brief intro to CareSwitch, who we are, what we do. We are HomeCare's first freemium agency management software. What freemium means

is that there's a base version that you can use for free for as long as you want. And then there are optional things to add on that you pay for if you want them. So we offer essentially everything you need to run your business from one place for free. That includes scheduling, care documentation, chat, all the things like that. And then there are things like full service payroll that you can choose to pay for if you want us to do that for you too. So it's especially highly valuable for an agency that is running on a budget, has a few people trying to do a lot of things, and you need a super user-friendly system that's

cost-effective and helps you all run it really simply. All that being said, we'll go ahead and get started here. Let's talk forecasting, profitability, and how you can make more money in your agency. So Mark, take it away. Thank you, Connor. So yes yes today we'll be talking about the juiciest subject of forecasting profits you know and um when running a home care business i always tell uh my clients that the main reason for running the business is for making profits you know and um ever too often i find out that when i speak to a new home care owner and i ask them the gross revenue they're very glad to tell me what the gross revenue is they're very glad to tell me what the gross revenue is. They're very glad to tell me what their gross profit margin is. But when we get down to what is the net profit, they just fall off and don't know. That's not a good thing

because at the end of the day, you need to know how much money you're making. And if you're going to pay taxes, you need to know that in order to know how much taxes to pay. So we're going to be taxing, you need to know that in order to know how much taxes to pay. So we're going to jump into what our forecasting. Basically, a profit and loss forecast is basically when you do, you make a projection of what your profit is supposed to be by the end of whether it is a month, a week or a year or even five years. That's what the forecast is about no there are two separate ways that we can actually do the forecasting of profit and loss we can basically do it by looking at the revenue saying for example you as the home care business owner say you know what i want to make a million dollars at the end of this year so you have a million dollars that you want to make and what you do is forecast how much uh billable hours you're going

to get you're going to deal based on your billable rates and all of those stuff and you're right down to from from your revenue you turn down to your cost of sales which is all your caregiver expenses then you're going to that's after the caregiver expenses then there's the gross profit and um after the gross profit there there are operational expenses. And these are all of the other expenses outside of caregiver expenses, where you're talking about your rent, your utilities, things like paying admin staff and stuff like those. And then after you're paying for all of those expenses, then we get down to net profit and um we always want to have a positive net profit that's what we're shooting for yeah or so that's when you use your total

revenue then you might say you know what on a weekly basis i want to do a thousand billable hours so you can run work from that thousand billable hours on a weekly basis to how much revenue you're going to get. And you can forecast your revenue based on the billable hours. So you can either use a total revenue amount as in a dollar amount, or you can start with a billable hour. You work based on that. Now, one of the things with forecasting is sometimes you want to know, you know, or you'd have to ask, you know, what expenses are running through the business? What expenses are too much? What are too little? Now, what I would normally do with all of my clients is we start out with benchmarking because the benchmarking basically tells, and when we talk about benchmarking,

these are industry standards that once you work towards those industry standards, you're basically should be in the right place because industry standards are based on what is the best practice within the industry. So say, for example, the benchmark says at a particular revenue would tag it say between say 600,000 and a million dollars, your say salaries,

admin salary should be 12%. And when we say 12, when normally when they tell you what it's supposed to be a percentage of something, it is normally a percentage of your total revenue everything whenever they say you know this should be a percentage of this or this should be a percentage of that normally they call it margin they are talking about it being as a percentage of your total revenue so for example they say you know whenever you're you're you're reading through something and it says uh any expense should be this margin or that percentage we're normally talking about the

percentage uh as a percentage of the total revenue so what we try to do is go with the benchmarks and if the benchmarks say your admin salary should be 12 percent it should be 12% of your gross revenue. So for example, your gross revenue is a million dollars and the salary should be 12%. That means it should be $12,000 maximum. If you're over $12,000, more than likely you're spending too much on admin salaries. And basically that's how we go down the line with all the other expenses

because they are benchmark for all the expenses. And depending on what net profit you want, you would basically switch up how you're going to spend on each expense. If you want 10% net profit, you'd have to align all of your expenses within your profit, your profit forecast, your expense forecast in order to get that 10% net profit. I know this might seem a little bit, I don't want to say confusing or such, but it would be best for if once you understand the concept, you can sit with a financial advisor or

accountant that would be able to go through it in detail more with you. But the most important part of it is to understand that this is something that is done before. So like, no, we're in the month of February. We should be doing a full forecast for the rest of the year. And that forecast should tell us exactly how much money we will be making at the end of the year. Because what we normally want to do in the forecast is this sit down with that with a person and you would basically say you know what this is the amount that we want to make at the end of the year in gross revenue because most of the time they don't know what profits they want so this is the amount we want to make at the end of the year and we

divide it out in months to see how much money you want, what you're going to get per month. And then you as the business owner would sit down and tell, these are my expenses. Because everyone knows what expenses they have on a monthly basis. So you would write down all your expenses, just like doing a budget. You write down all your expenses. And based on that, most of the time you will directly see whether you're losing or you're gaining. Because once you minus all the expenses from your revenue, it is either going to be negative or positive. Now, if it is positive, then you would have to go back and cut at different strategic places. And that is where the actual benchmark comes in. So you look at a benchmark and 99%

of the time, if you're over on something, you're going to be over in the benchmark. So you need to bring it down. Yeah. So I have a whole list of questions here for you. So first off, you talk about using benchmarks to figure out where you should be and if you're off track on something. If I'm an agency who is looking to start doing that, where should I look to see those benchmarks? What benchmarks do you recommend using? How do I find them? So yeah, and this is not to work with Home Care Pulse. It's not a plug for Home Care Pulse, but I find that the best benchmark tools you can get from Home Care Pulse. So you can just go on the website and you can buy

it from them. Okay. And for those who may not be familiar with that, that's the Home Care Benchmarking Study now called the HCP Benchmark Report by Home Care Pulse. You can get it at benchmarking.homecarepulse.com. I think I used to work for them and I actually worked on it. So that's kind of how I'm familiar there. But that's what I expected. You know, wasn't sure if you had something else that you look at, but I would agree that that's a very good source. One caveat before you go on, kind of one caveat that I can give is that if you as a home care business owner buy, purchase the benchmark, to be honest, it can be a bit intimidating. And even for me, as an accountant, I had to rearrange a lot of the figures for it to work for me. So I would advise you, when you get it, if you don't understand it or anything like that, speak to a reputable

accountant. And my information is also inside of the chat and it will be shared. You can call and set up a time to speak with me as to how to navigate the benchmarks and forecasting. Go ahead, Connor. Yeah. So next question here, when you talk about forecasting, you mentioned there's the two kind of main ways to do it, either by revenue or by hours.

I think it's pretty easy to understand what the value of forecasting it is by revenue. I'm curious to hear what's the value, in your opinion, what is the value of using the method of forecasting by hours? At the end of the day, every home care business owner knows about billable hours and they know what billable hours they're doing and they know where they should be. And they know what they can't do at this time based on the capacity. So if you go by billable hours, it gives you a more, as a home care owner, it gives you a more more homely fee you actually know what you're talking about right there because i can tell someone that you know all right so they want to make two million dollars and i said but if you want to make two million dollars at your billable rate we're looking at at least three thousand hours per week they would like okay all right i'm not going there then because they know that they can't make based on where they are no they're just not going to do that amount of available hours

on a weekly basis so it is more familiar when you do it uh by uh per billable hour so it sounds like if i can kind of restate what i think you're saying here um it sounds like one reason for it is that the hour is basically like the unit of production within a home care agency. And so that's the standard or currency that everything is kind of measured off operationally and financially and stuff. Is that accurate to say? Yes, yes, it is. Yes, it is. How far in advance do you recommend that agencies should be forecasting? My clients, we do at least three years, depending on where they want to go.

But minimum, 12 months. Minimum. Yeah, at least should do a 12-month forecast just to give you an idea. And the beauty about the forecast, and I see it all the time, I would sit with a home care business owner, and normally most of the time when we do the initial call, you know, how much was your net profit last year? Yeah, I'm not sure, but I think I did a loss. I came out at a loss.

And when we start doing the actual forecast, I will put everything down on paper and show where the loss is coming from. Because until you have everything on paper, you just don't know what is going on in the business. And once we put everything down, you would know exactly where you need to cut and sometimes it's just a matter of collecting or being more efficient in managing caregivers or other expenses. Okay. I know that for me, in my experience running businesses, like the hardest part of forecasting for me has been this part of like trying to predict it, you know, especially when you talk about forecasting two to three years out,

I can just hear the agency owners listening to this saying, how do I know what I'll be making in two years? What would you say to them? What tips do you have for that predicting part of forecasting? So basically, it's pretty simple. And in life, we all have goals where we want to go in life. So it's just like, you know, when you were younger, you know, some people say, you know, I want to get my degree by the age of X. I don't want this by the age of... It's the same thing with business. You know, you say, well, in the first year, you know, we're just starting.

Maybe we want to do $ 200,000 or next year, 500,000. So those can just be arbitrary figures that a person can think up and work towards those. But to be a bit more specific, what I do is bring the same benchmarks. Again, there are benchmarks to tell how much revenue a company should be doing based on the amount of years they are in business. So what we try to do is have our clients shoot towards getting to there, because Home Care Post does have basically a revenue chart as to based on the amount of years you are in business, it gives you an idea of what the top businesses are doing as far as revenues are concerned. So if you don't know exactly where you want to go or where you should go, we can show you what is the best practice for the industry, what are the best businesses in the industry are doing, and we try to get you right there.

That makes sense. So what I'm hearing, if I can try and restate that again, is that it's not so much trying to predict or guess what you're going to be making in, let's say two years, but it's saying, here's my goal for what I want to be making in two years. And then the point of forecasting is that it then helps you work backward and say, here's exactly what needs to happen to reach that and provides you with milestones along the way to tell if you are on track or not to reach those goals. Definitely, definitely. And I would also suggest to all of the newer home care businesses, when you take on a financial person with an accountant, CPA, or whatever, always ensure that the person actually asks about your personal goals. Because at the end of the day, the whole idea of being in business is to improve your personal life. So the person should

be interested in your personal goals. So when you're setting goals, you set both company goals and also personal goals, and they should try to help you to use the company's resources to achieve those goals. Are there frequently made mistakes in forecasting that those listening to this should watch out for? The most mistakes I see me in forecasting is basically doing a forecast and not following it. Because if the forecast is there, it's basically a blueprint as to what you are supposed to do. Yep. So if anything goes wrong is basically we did not follow what we were supposed to do or and I tell uh business owners all the time sometimes I would say you know what we have to list the expenses you go and put your expenses in and then give them to me no if the underestimate expenses that can be wrong because

you don't want to underestimate expenses it It's better to put the expenses more so that we know that more than likely, if this really happened, we're going to lose. So then we need to do this, this and that, as opposed to you underestimate expenses. And then when the real thing comes in, we're losing and it hits us by surprise. So that could be a problem, underestimating expenses. Yeah. That makes sense. My experience is that it's generally easier and simpler, or I guess like more intuitive, to forecast revenue than to forecast your expenses. To what degree of detail should agency owners be trying to forecast their expenses? So maybe it's easier for you to forecast revenue, Connor, but for most people, I know

expenses are expenses. And some of the expenses, for example, even in the care business, caregiver costs, that's something that can easily be, because it's based on the billable hours. So if you're going to take in 100 billable hours, you have to pay a caregiver 100 billable hours at least. Yeah? No. So that's right there. And that's very easy to forecast that part of it.

Where the trick comes in is when you start doing overtime. And that has to do with managing the caregivers. Because, you know, normally we're not budgeting for overtime, but we're paying time on a half. So we're paying extra for that. And so we can end up lose money doing that. So to me, both ways are pretty much easy if you know what you're doing, but it's not that hard to forecast your expenses because rent, unless we're going to be moving from office to office to office to office, it's the same rent right across the board. Utilities, more than likely, same thing, right across the board.

If they pay for consultancy fees, more than likely the same thing, right across the board. There are a few things things expenses that can come up but for the most part the expenses normally would remain the same throughout the year now revenues sometimes can be tricky because with home care you cannot have uh cure clients dying you can have all sorts of things happening to affect revenue. You know, if you deal with Medicaid, there are all sorts of things that can affect the revenue right there. But the most important thing is to be proactive

in planning and how to avert any kind of problems or issues. When it comes to what to expect with some of those things around either changes in revenue or changes in expenses. Do you find that there are like seasonal things that typically happen the agency owner should expect? So for example, should most agency owners expect to have a dip or a bump in revenue in the wintertime? It all depends on where the person is, is you know where where the actual agency is or

are or what type of clientele they have and um that kind of question it more has to do with the individual so it's kind of hard for me to give a blanket statement as to you know where people have dips are are stuff like those it. It mainly is tracking what is happening with your particular client or you yourself, because some people might have a dip in the Christmas because for whatever reason, and clients die all over the, throughout the year. And so I had one client that told me

that she had like five people dying one time. Wow. Sad. But yeah, she lose. So that's a lot of billable hours that you lose one time. No, you can't budget for that. Yeah. So, you know, when it comes to revenues, I would always, and I'm not, I don't know anything about marketing,

but I always tell them, always be marketing because you never know when something is going to happen where you're going to need more clients. That makes sense. And thanks for letting me hit you with that curveball there. You did well. Speaking of marketing, how much should agencies spend on it or how should they go about deciding how much to spend on marketing? The benchmark has typical amounts that you should be spending on marketing i think it's about three either four to five percent three to five percent of gross revenue and and then don't quote me exactly on it because the percentages change based on your total revenue. But the main thing what I do with my clients is this.

I have a system where I work out how much we're going to pay this person. And depending on how much billable hours that person is bringing in, we basically would be able to calculate based on the amount of pay that they're getting we can tell how much billable or this person should bring in for it per week for it to make sense so within the contract we normally would stipulate that if the person does not bring in x amount of billable hours for x amount of time then they're going to be fired so it said that that that would would fix that problem of having a marketing person just getting paid and not doing anything. I see it all the time. That makes sense. You mentioned that that range should be

somewhere between 3% to 5% generally. Do you find that that will go down as an agency gets larger? Yes, it does. Yes, it does. And as I said, it all depends. All of those things all depends on where the agency is, the need a professional that one understands accounting very well and also understands home care, because there are a lot of things that are within the benchmarking tool that it would not apply to everyone. So an accountant or anyone that is working with you would be able to understand that, oh, this doesn't apply to this person. So instead of having that as a person, we would add that we can spend more because this doesn't apply to this person, if you understand what I'm saying. Or if it is taken, and I'm going to give you an example, franchise fees,

5% for franchise fees. Now, everywhere on the benchmarking tool, they take out the 5%. So therefore, the net profit that they're saying that you should get is reduced by 5%. Now, if you don't pay franchise fees, that does not affect you. So you shouldn't be looking to, if they say with the franchise fees, you should be getting 10%. You should be getting 15 because you're not paying franchise fees. You follow? Yeah, yeah, that makes sense.

That's a good example. I was going to ask for an example that way. And I think that's a really good one of, you know, it'll look a little bit different if you're a franchise versus an independent. Yeah. So whoever you work with, you want to ensure that they understand what is going on and they would know how to navigate around to let it work for you. Yeah. Let's talk about the balance sheet a little bit. I think this is one of those things that like sounds really basic, but also is too easy to underestimate. Why is it important to pay attention to a balance sheet?

That's a very good question, Connor. What I see happening very, very often with not only new home care businesses, but home care businesses that have been there for years, they are more interested in what is happening in the profit and loss. And yes, you need to know what is happening in the profit and loss and yes you need to know what is happening in the profit and loss but as the song says you know it goes down in the dm everything goes down in the balance sheet and why everything was everything goes down in a balance sheet is this the balance sheet basically gives you an idea of everything that is happening and you can basically tie back everything because the profit and loss can be incorrect and you don't know but if the balance sheet is incorrect you know and if the

balance sheet is incorrect something is wrong and I'm going to give a quick explanation I hope I don't go too far with this accounting thing in explaining the balance sheet but basically the balance sheet as it says is is a sheet that balances what it does it literally what it does it shows your assets on one side and the liabilities on one side with your equity and there's an equation accounting equation that that actually sorry i don't i couldn't share a screen and show but there's an accounting equation that that that basically is the basis of the balance sheet and it says assets equals capital plus liability so all of your assets and normally assets are like money in the bank if you have motor vehicle if you have motor vehicle, if you have buildings, and if you have receivables,

and all of those things that you own. And for a home care business, the assets are normally bank accounts, you know, your business bank accounts, if you have a savings and check-in for the business, that's an asset. If you have accounts receivables, meaning for like Medicaid, if you have accounts receivable as assets, other assets could be some, could have motor vehicles as assets. And there's fixed assets and there are also current assets. Fixed assets are more like long-term stuff,

like machinery and cars and stuff. Current assets are the things that you can liquidate quickly, like a bank account. So you have the assets on one side, and this is what you own. Then liabilities on the other side are monies that you owe. So we're talking about loans, credit cards, any amount that you owe to other people. It's part of liabilities. And then there's equity, which is the capital that you put into the business so whenever you start the business whatever your money you put in from your personal uh account to start the business that is equity now how it works is this

and why we say everything goes down in the balance sheet is this the business could be running and um you could be seeing a lot of profits yeah meaning the business could be seeing a lot of profits. Yeah. Meaning the business could be making a lot of profits. But you don't know because you can't see the cash because every time you get that cash, you borrow. The owner would go in and take funds out of the business. Now, if that is happening, normally, if you don't watch the balance sheet, you'll be seeing a lot of profits in the business if it's just the profit and loss you're looking at. Because all the profit and loss work is every money that you collect, it's revenue, every

money that you pay is expense and the difference, profits. So if you collect 100,000 and you pay 50,000, 50,000 is profits. Now sometime a business owner asked me, so Mark, why I'm not seeing $50,000 in profits. Now, sometimes my business owner asks me, so Mark, why I'm not seeing $50,000 in the bank account? And that's what's supposed to be left. These are the reasons why you don't see it sometimes. Sometimes in the bank account, what would happen is that the business owner would have a debt that they should pay someone else

that has nothing to do with the business. And they would draw that money out of the business bank account, pay that debt and don't remember about it but because we're not doing a balance sheet we don't really know what is going on right there because that money that you draw and pay to someone else does not affect the profit or loss so you're still seeing profits so those are the kind of things that would happen and why it is very important to understand what is going on in the balance sheet and always have your account and give you a copy of the balance sheet and try to explain to you what is in the balance sheet so you can interpret

and you can know exactly even if the person is not doing the job, you can look at the bank statements and see if they were reconciled. I don't know if that's enough. Right before we got on this call, me and you were talking and you were talking about the dangers of confusing cashflow with net income, or even not necessarily confusing them, but just kind of failing to remember how different they can be and especially how loans come into that and that kind of thing. Do you want to just kind of share all the thoughts you were saying about the dangers of not keeping those things very separate in terms of how you think of them? Yes, that's so true. There's a distinct difference between cash flow and profits and um basically cash flow is the

amount of money that you have already amount of money that is going through the business and there are a lot of times it happens all the time especially with home care you get a lot of money coming in you know the business is going well you said you're doing a lot of billable hours so you have the money coming in say say for example you're you're doing a lot of billable hours. So you have the money coming in. Say, for example, you're a private pay business, the money's coming in. That's cash flow. That's cash flow. However, if you're not managing your expenses, that cash flow does not mean that you're making profits. You could be losing. If you're not watching your expenses, you could be getting a lot of cash, but at the same time, you're spending a lot of money and a lot of money is going out because now that you see all of this cash, you start employing everybody in the world because nothing is wrong with that.

Most home care, something is wrong, but nothing is wrong in being nice. Most home care owners that I speak to, they're very nice. They're very nice, genuine people, and they want to help everyone. So what happens is that they would over hire happens all the time so so that cash flow doesn't mean that you're making a profit until you look on your profit and loss and see the actual profit no what can can happen is that when we see the the coming in, it can happen that we start taking trips because we have the cash. So we go to Dubai or we go to wherever and we take the business funds or we do that. No, we didn't check to see if we are having profits. We just saw the cash coming in

or we start to spend or we start to lend to this person and someone come to us with a crypto idea that I can make a certain amount of money or put some money inside of that. I see it all the time. And then when the year end comes, you see that the business did not make profits and the cash has gone all over or the business made profit, but no, you don't have enough to pay your taxes because you took out all the money. So these are a lot of things that you can look at or try to understand before you get to that point. So I have a couple of questions about that, but first I have to ask, you mentioned two things, which is home care owners using their business funds to go to Dubai

and also to get involved in crypto investments are those things that you've seen I've seen it I've seen it I've seen it I've seen it all and and and and nothing is wrong with that nothing is wrong with with trying to do it honestly but you have to understand what you're doing and understand where the business is at. And if you can do it, no, you can't go to Dubai and say it's a business trip unless you have actual business purpose doing in Dubai, like a conference or something to do with that with home care. But that's another story. That's a whole other topic. But yes, I've seen it. Well, when CareSwitch launches our home care conference in Dubai, you can all write off that trip. But in the meantime, you heard Mark, no trips to Dubai on business time. If it's a personal trip, you don't have anything business doing there more than

you're reading some emails. I miss this trip. Yeah, that makes sense. So going back to the more practical questions about cashflow and net profits, sounds like one of the risks of maybe over-focusing on cashflow is that if you have a lot of loans involved in stuff, you can be running at a loss and not realize it because you'll appear to have cash, but there's not actually like a healthy new influx of cash that translates to profits. Is that accurate?

Yes. And yeah, you remind me, we were speaking about it before that. I saw a lot of that happening a year or two ago when there was the influx of PPP loans or EIDLs. Now, because the business got so much of these loans, the cash is there, but there wasn't much income coming in. So it didn't look like you were actually doing well. You weren't and I and I can give you example of business owners that I I saw basically the business was going at a loss they are shedding sea and um basically their sole proprietorship yeah so so and and I think I spoke about it last week that as an LLC you shouldn't be taking a salary you know and that one of of the reasons that I it is it is the IRS says it as an LLC, you are not a corporation. So the owner does not, is not required to

take a salary. But when to go further. So the person that got the PPP, no, it wasn't PVP was a ideal. They had the ideal loan and they were paying everyone with the EIDL loan, including themselves. Now, at the end of the year, when the profit and loss was calculated, the business lost a whole lot of money. Now, the fact of the matter is that salary that the person was taking, that salary was basically being borrowed from the business because the business didn't make enough money to pay the owner. So it was borrowing the money from the business. And on top of that, they shouldn't have been paying any employment taxes

because as an LLC owner, you should be taking draws and you don't pay employment taxes on draws as a matter of fact, because the business is a loss. You wouldn't have any taxes to pay. So imagine paying taxes on losses when you shouldn't even be paying taxes because you had a loss. So that's that's one of the other. So that's two things that was done wrong. You know, they assumed that they were making money using the loan and two, they were taking salary when they shouldn't be taking salary. That makes sense. Kind of tying in with that, we have a question from an anonymous listener here. So they said, for that example about withdrawing cash to pay for something that has nothing to do with the business, would you advise that such withdrawals be paid back, say, at the end of the month?

So this is the thing. It depends on what you want to do. Say, for example, as the owner, you can take out owner draws as long as you have profits. So if there are profits in the business and you can take out draws, because if you're running the business, more than likely if the business is the only source of income you have, you're going to have personal expenses. So to pay those personal expenses, I'm not saying that you shouldn't be taking the money from the business. If the business can afford to give you that money, instead of if you're an LLC, instead of writing, doing payroll for yourself, what you should do is take out an owner draw. And literally, it is basically just with a cutting a check, the company cutting a check for if your name is John Brown, business owner, the company cut a check for John Brown. You take that check and lodge it into your personal account or you sell the money to yourself from the company

would send a cell payment to you and it goes to your personal account totally okay and if you wanted to give someone that money or lend them or whatever you can take it from your personal account and give it to them no any other transaction would be like the company lend loaning I'm giving a loan to some because I see it all the time you know uh own care business owner would be running their own care agency and they would say you know what we're gonna start nurse practitioner uh company or uh a lab and um the lab would have startup costs and they would take the money from the own care business to do the lab. Nothing is wrong with that.

But what you have to do is have everything set up where the home care business is actually loaning the money to the other company. That makes sense. We also have a question here in the chat from another listener who says, when you are a new home care agency and you don't have that many clients, how do you do a projection? This is for a private pay agency,

they said. So I guess I'll kind of start by recapping what we'd mentioned about that rather than using it to try and predict how many hours you're going to have or how much revenue you'll make, you should make it a goal and then it kind of helps you work backward from that. But is there anything you would add to that, Mark? That's the best and easiest way. You have a goal. So if you're just starting out and you say, you know what, I just want to recoup my salary as I was working as a nurse and I made $150, 000 and i want to be able to recoup that 150 000

now i have a formula that i work out with clients the first thing that you'd have to do is do enough billable hours that one you can pay the caregivers first and then on top of that you have to do it enough billable hours so you can meet that $150,000 for yourself. So it's both billable hours to pay the caregivers and billable hours to pay you. You add those two billable hours and that's what you would have to do. So that's like the goal that you can work on. Love that. The breakdown there is really good.

We have another really good question here from Brian in the chat who says, I use my 401k to start my business. Technically, we are a C-corp owned by the company's 401k. It happens that I'm the only one with ownership in the 401k. Do I have similar options to pay myself like the LLCs? No, as a corporation, you should be paying yourself a salary. Okay. Yeah. Great questions from the listeners. Keep dropping them in here. This is excellent. And if you have follow-up questions, if you're one of the people who's already asked

a question that we've answered and you have follow-up questions, feel free to drop those in here too. We'll keep rolling. So one question that I have that we'd kind of briefly discussed before too, is you had mentioned this issue of it's important to understand how putting too much money into the business can affect you. Will you talk about that a little bit? I'm going to try. I don't remember saying that, but I kind of get what you're saying. I get what you're saying. So basically you're saying so basically the thing is this what we want to do is ensure that the business income as in middle of the hours are actually funding the business that's the whole idea you don't want to be fun

before doing the business through using your personal money for too long you want your operational income to be funding the business that's the if i said anything to sound like that that's what i meant because i yeah yeah that's what i meant you don't want to be funding the business using your personal uh money for for too long and um why i professed by saying that is that what would happen, I was talking about the difference between the profit and loss and the balance sheet in that if you're just looking at the profit and loss by itself, sometimes you're not going to catch the fact that, listen, we're putting too much money in this business, you know, because we're not going to notice that we're basically running out of cash because we're paying all our bills. Normally, you know that you're running out of cash when you can't pay bills here um if you are an llc electing to

be taxed as an um as an s corp you can take a salary as well as distributions on profit is that correct yes it is and you you should take the salary before the distribution the irs does not allow taking a distribution before paying the salary and and that's why last week when we spoke about it i i was saying you know electing s corp is a very serious thing and i find that a lot of home care business owners would get people like um them to become S-Corps without explaining all the responsibilities of being an S-Corp. And one of the responsibilities as the owner of the S-Corp, you should be taking a reasonable salary. But if the business does not make enough for you to take both a reasonable salary and get a distribution, you can't take a distribution.

Okay. In what circumstances would you want to do this where you elect to be taxed as an S-corp, even though you're actually an LLC? That is a personal answer that each business owner, when you speak to your tax professional, take your particular situation because some situations you're better off staying as an LLC. So it all depends on where you are at. Now, what I would normally say to my clients is, if you are making over net profit of over $70,000 to $100,000, it may be beneficial for you to become an S-corp or at least look into becoming an S-corp if you think you're paying too much in taxes. On that same vein here, I think this is a follow-up question to one of the previous ones. We have a question here from Chantal who says,

but as a corp, you can pay yourself a salary that changes based on what you're earning, correct? You should not. It's a reasonable salary. And Chantal, you said the person is? Let's put it this way, Chantal. Do you pay any of your admin staff based on how much the business is making? No, you pay them based on the amount of work that they're actually doing. So the IRS looks for things like those, and that's basically a red flag if your salary is a moving target. What you want to do is come up with a salary based on what your area is, what is being paid in your area, what type of work that you're actually doing as the owner. Because as the owner, I would assume you'll be doing some menial jobs, which are very much available. The hourly rate for those jobs, those actual jobs are very low.

So basically, say if you're the clerk, you're the salesperson, you're a little bit of admin, all of those, you'll add up all of the hours that you do for all of those and rate for all of those and it would come up with an amount in in a 40-hour week of what your salary should be and that should be your salary um she now has the same follow-up question that i was about to ask which is so she says i've kept it the same for the last year. Can I increase yearly without any issues? Yeah. So I think I just answered that question before.

Unless you work in that, you sign up a contract and basically saying in this contract, based on your performance, you'll be getting X increases for inflation or whatever. You'd have to be able to justify all of that because the IRS is going to ask why. So you wouldn't want to have justification for increasing the salary or why increase the salary. Always get it that the IRS says as an S-corp owner, you should be, any corporation owner, you should be paying yourself a reasonable salary.

And the word reasonable, it can be debated, but basically at the end of the day, they want it to be something you should be able to justify. If this person, if I was going to employ someone else, basically that's what we'll pay them or near to that. And we treat them the same way. How safe of a justification would it be to say, well, because the business grew, the scope of my responsibilities increased. And so it like thus it became a bigger job and I'm paying myself more. You believe that that's something that you can justify, then fine. But always remember on this particular call, I'm not giving tax advice because I personally don't know your personal situation. Your tax preparer, tax professional would understand your personal situation and

would be able to give you full advice. I'm just giving you general advice. Let's just say that. Yeah. But yeah, once you can justify it, that would be fine. Yeah. And that's probably a good reminder here of like, you know, this is great for educational purposes. This is good to help you have a foundational understanding of your business and how to run it. This is definitely not a substitute for talking with the tax professional specific to your business, asking them these questions and receiving insights that are specific to you and your circumstances so definitely not not meant to replace that in any way we've got one more question here which is

uh will you be paying taxes on your salary if you are an llc taxed as an s corp taxes on all salaries all sides unless if the person is is and you still pay when you hire your kids you don't pay taxes if you once you pay them below 12 the the actual standard deduction you don't have to pay taxes on those but every other tax is above the standard induction you will be above the 12 500 or 940 whatever the standard deduction is you'll be paying taxes on any salary that is in that level. Thanks for that. We have a couple of questions about your availability and your scope of services. We'll chat out your contact info again so that those people can contact you directly.

I think we're going to start to wrap up here. So first off, thank you, Mark. You've been a good sport as we've hit you with questions from all sides. Thank you for that. Just kind of a little preview for next week for those who are listening. We have a former sales rep turned agency owner who built their agency to 12 million plus in revenue, started a marketing company for home care agencies, basically, that we're going to bring on as our guest. She's extremely knowledgeable, all things marketing, especially B2B referral marketing. So super excited for that. Lots of great questions that

I know that she's going to answer. And she'll definitely be a good person to ask whatever questions you might have about marketing and sales specific to your business. So as always, that'll be next Wednesday, 3 p.m. Eastern. You can register at homecareu.careswitch.com. Thanks again, Mark. And we'll go ahead and wrap up there. Yes. Thanks, guys, for having me on the program.

Yeah. That's a wrap. This episode was made by the team at CareSwitch, the first free home care agency management software. If you're tired of running your agency on an outdated software that looks and works like Windows 98, and you want to save a little money for your bottom line, check us out at careswitch.com.

Thanks for listening. See you next time.