Cash Flow Engineering - A Case Study
How A Chiropractor in Montana
Increased His Profit by $356,000 a year in 90 minutes
…while working 4.5 hours a week less.
Below is a breakdown of how Stacy added $356,000 a year in profit using Cash Flow Engineering’s basic and advanced recapture strategies. The basic strategies are available to any business owner, the advanced strategies depend on the business, the type of business, the state the business operates in, and other individual factors.
Stacy Livingston, CCA graduate and owner of Pinnacle Chiropractic increased his profit by $356,000 a year while reducing his amount of time in the office by 4.5 hours a week.
Pinnacle Chiropractic in Kalispell, MT, run by Stacy and his wife Kali, was already a successful chiropractic practice. They were already on track to hit their “core capital” number, the number they would need to not have to work, in ten years. Stacy and Kali enrolled in Certainty U to collapse that time down strategically.
Pinnacle Chiropractic
Topline Revenue: $1,200,000
Margins: 50% net
Stacy flew out to Seattle for an office day, where he was able to find an extra $356,000 a year in profit, the equivalent of $713,760 in new sales, and recapture 4.5 hours a week.
One of the philosophies we have at Certainty U is that Money Saved is equivalent to Money Earned multiplied by Profit Margin. So if you save $1 when you have 50% profit margins, you would need to make $2 to have an equivalent profit. (Because $1 = $2*50%)
You can calculate your own “Saved To Earned” equation by putting your own margins into this formula: $1 / {your profit margin as a decimal} = X, then solve for X.
Examples:
25% Profit Margin [$1 / .25 = X], so X would be $4. You’d need to make $4 in revenue to equal $1 saved.
70% Profit Margin [$1 / .7 = X], so X would be $1.43. You’d need to make $1.43 in revenue to equal $1 saved.
**This calculation does not take into account the extra expenses of getting new business, so the actual profit equivalent is higher.
It’s important to do this calculation so that we can appropriately value a dollar saved.
Since Stacey and Kali’s goal was to not have to work, they would need a certain amount in savings & investments - their “Core Capital” - and the gap between where they are and that “Core Capital” number becomes their Solvable Problem™
With Certainty U, Stacey and Kali were able to collapse the time to get their Solvable problem from about 10 years to about 5 years, while working less each week and making more income.
The profit and time savings are easy to calculate, and the Solvable Problem™ help us see what they really got in return: five years of their life.
Stacy accomplished this in two phases:
Phase 1:
Cash Flow Engineering
Recapture
The first step in Cash Flow Engineering is Recapture and Reallocate.
Most businesses that are growing tend to collect extra, unnecessary expenses, along with operational inefficiencies. When this happens, Overhead increases with Revenue, so profit never really goes up…only the stress and the workload.
Cashflow Engineering starts by looking at our “Two Oreo” problem: where are the little expenses that we barely notice that add up to tons of waste?
The “Two Oreo” problem came from Dan’s personal experience. Suddenly, with no warning whatsoever, Dan realized that he’d gained 10 lbs over the last year. Surprised by this development, Dan investigated. He hadn’t changed his exercise routine, he wasn’t sick…and then he realized the culprit.
During the move to their new house, Dan discovered where his wife hid the snacks. Over the course of the year, Dan had eaten the equivalent of 2 Oreos per day (often in the form of an entire sleeve of Oreos every 3 weeks)
Interestingly, the calories from 2 Oreos per day are almost exactly equal to 10 lbs of body fat. Once he removed the “input”, Dan lost the 10 extra pounds over the next year. No changes are needed to his current routine.
Recapturing small expenses is just the first step. There are often monthly, quarterly, and yearly recurring expenses that business owners don’t notice, that aren’t essential to the business.
There are also habitual expenditures that are triggered by recurring events, bloated expenses that can be trimmed, and “Opt-Out” costs that can be turned into “Opt-In” costs…all of which are explained in Cash Flow Engineering.
Stacey and Kali were able to find $8500/mo of these “Two Oreo” expenses that, when cut, resulted in $102,000/yr in savings with no impact on operations or revenue. At their profit margin, that is the equivalent of selling $210,000 in new business (Which would be a 17.5% YoY Growth Rate)
But that’s not the end…that’s only the beginning.
If you just removed the $8500/mo in expenses, often you’d just find new ways to spend the cash. “Free cash” tends to be utilized somehow. So the best next step after you’ve Recaptured is to Reallocate that exact same amount of cash to profit-generating activities.
For more info on the Two Oreo Principle and Dan’s entire methodology to “Rig The Game” in your favor, check out these resources:
Reallocate
Taking the $8500/mo saved, Stacey and Kali decided to make several profit-generating investments.
The first was a Hyperbaric Oxygen Chamber. Over the course of the year, it produced ~$1,362/day, 5 days a week. (more on that in the next Phase…they made even more using smart Tax strategies)
The second was investing in new Research and Development that contributes to Pinnacle’s unique Intellectual Property. (This is also tax-advantaged)
Because Stacey & Kali wanted to work less while collapsing time to their Solvable Problem™, they could also consider using the extra cash flow to hire a new staff member.
By immediately earmarking the Recaptured cash, they avoided the mistake of piling up the money in a bank account, waiting to be spent on something random. They consciously and proactively Reallocated the capital to investments that Collapsed Time to their Solvable Problem™
But that’s just where the fun starts…there’s a Phase 2:
Phase 2:
Basic Tax Planning
The Augusta Loophole:
The Augusta Loophole: There is a perfectly legal but hidden tax benefit to renting out your primary residence as an “Event Space” for up to 14 days per year. The best part is, though, that you can rent it to yourself through an entity. For example, if you have an LLC, the LLC will “rent” the office from you and the LLC can deduct the cost. For Stacey & Kali, this allowed them to deduct an extra $14,000 that year. (again, an equivalent of $28,000 if the money came from new sales).
Please talk to your CPA or tax specialist before deploying any of these strategies to get clear on the nuance. Stacy and Kali use Nth Degree CPAs.
Equipment Depreciation:
Pinnacle Chiropractic was planning on purchasing new equipment in 2023. To take advantage of tax depreciation changes, they purchased it in 2022, instead. This allowed them to depreciate the full purchase price quicker.
The new equipment cost was $170,000. They paid $70k cash and took out a $100,000 loan for the rest of the purchase. By doing so in 2022, they locked in an extra $34,000 of bonus depreciation. Of course, they still have a $100,000 loan to pay off.
The new equipment, a hyperbaric chamber, generates $1,362 a day on average, five days a week. Over the course of the year, it generates $362,880 in new revenue. $362,880 in new revenue at 50% profit margins is an additional $181,440 in profit.
$181,440 in profit from new sales
$20,000 saved from purchasing in 2022 ($120,000 saved - $100,000 loan)
$201,440 in new profit
If you have or plan on purchasing assets, ask your CPA about strategically acquiring and/or depreciating them. Most CPAs will tell you what to do after the fact - Dan calls them Archaeologist - but the benefits are knowing how to behave or what actions to take beforehand.
R&D Credits:
Many business activities can be considered R&D. Just by understanding this concept, Stacy and Kali were able to get tax benefits for work they were already doing.
Paying Children.
Stacy and Kali have four kids and were able to pay each $12,000, 100% tax-free. Side-benefit: The kids are learning to earn.
The Final Outcome
Purpose-Driven and Closer > More; a different way to look at money.
We only work with purpose-driven entrepreneurs who are clear on what they are trying to accomplish. This allows us to shift from thinking about “more” to strategizing to find the most efficient path to getting them closer to what matters most to them. This means money is the means, not the end goal.
Our mission has three steps:
Profit Priorities: Help you get clarity on what really matters to you
Certainty: Craft a plan that locks in the things that matter most
*Coallpsing Time: Work with you to collapse the time to get there faster without increasing risk or decreasing the probability of you getting the things that matter most.
An extra $356,000 is great. What is more important/powerful is that they have certainty they will get the things that matter most and they have shaved 5 years off their time to target. We don’t see it as an extra $356,000 dollars but as increased Certainty that they will reach their goals - and a bonus of five years of freedom.
One step further:
The process positioned Stacy for future benefits they may or may not take advantage of, like real estate.
They could choose to collapse time further by putting the additional cash into the investment vehicle of their choice.
Pinnacle is a rare case of profit margins at or above 50%, especially for a brick-and-mortar service business.
The lower the profit margins, the larger the impact of recapturing profits. For example, with margins of 20%, $356,000 in found profit would be the equivalent of $1,780,000 in new sales.
If you are a chiro or medical professional in Montana, you can ask your CPA about the strategies above. If you need a CPA who is forward-thinking, Nth Degree has spots that open up occasionally for purpose-driven business owners and entrepreneurs.1
Remember: all Certainty U and Nth Degree strategies are unique to the business, the location, and the preferences and goals of the business owner. You can start with the Two Oreo principle as a basic “recapture” exercise.
Link in the footnotes to talk to someone at Nth Degree CPAs about tax planning.
Hope you find this helpful.
Certainty Tools
PS. Every now and again Certainty Tools does a live Cash Flow Engineering workshop. Below is one of the recapture reports with the name removed. You can see how recapturing profits can have a much bigger impact than you might think:
