Four Quadrants Advisory

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Don’t Let Tax Surprises Ruin Your Cash Flow

Posted by Four Quadrants Advisory on Wed, Aug 10, 2016

cakeby Jason Smith
President, Founder, Four Quadrants Advisory

My family knows better than to ever throw a surprise birthday party for me. I don’t like surprises and I don’t like the unexpected. I tend to arrive early to appointments, I over-prepare for most things, and I want to know what I’m getting into with everything I take on. Imagine you walked into your kitchen on a cool, winter evening after work and surprise! – your friends and family are there to greet you. Instead of a cake with candles on it, though, there’s a slightly different surprise waiting for you. A great big surprise tax bill.

You can’t put candles to this one, as much as you might like to. “Good news! Your dental practice revenues are up and overhead is steady or down. Bad news, though. We didn’t make tax adjustments along the way. Surprise!”

I’m sure most dentists don’t like surprises any more than I do, so we thought we’d share a simple technique that our clients and our CPA partners appreciate. A lot of CPAs specializing in dentistry stay on top of this, but frankly most don’t. Each fiscal quarter, we analyze a combination of revenue growth and overhead to determine which clients are likely to need tax withholding adjustments. For example, for those clients with revenue up and overhead down for the quarter by a combination of 10% on the upside, we’ll notify their CPA to make adjustments as necessary.

This has actually been an interesting barometer for the health of our clients’ practices across the board. In the third quarter of 2009, for example, we only had 15 clients that required withholding adjustments. The next year we had 28. We took this to be an indicator that we might be coming out of the deepest of the economic doldrums of 2010, particularly after looking at December numbers for most.

Read our guide: Dental Accounting 101

Our CPA partners like the added eyeballs on the P&L and appreciate having a second line of defense. This technique is one of many that make it a lot easier to save what is necessary to satisfy a well-crafted financial plan. A combination of really good analytics and communication between your advisors can keep your planning smooth. If all your advisors aren’t working together to champion great cash flow and savings, it’s tough to stay on goal.

Does this technique reduce your overall tax burden? No. Does it add anything to your retirement nest egg? Not really. Will it prevent you from clutching your chest from shock when you stumble into your “end-of-the-year Tax Surprise Party”? No doubt about it.

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Topics: dental tax, dental accounting, Tax Advisory

How Much Should Dentists Pay Themselves?

Posted by Four Quadrants Advisory on Thu, May 19, 2016

atmby Jason Smith
President, Founder, Four Quadrants Advisory

Do you wonder if you are taking too much salary, or not enough? Have you ever had to delay your paycheck a couple of weeks because cash was tight at your dental practice and you thought a large insurance deposit might drop in a few days? Are you hoarding cash because you fear an autumn tax surprise?

Rather than throw a number at a dartboard or guess at what your income should be, take a balanced approach to maintaining practice cash while still bringing a fair amount of money home for personal use. First, figure out how much overhead is necessary to fund 45 to 60 days of payables in the practice. That range will vary for each practice a little bit, based on the business model and certain trends.

Let’s say we have determined that your overhead for 45 days is approximately $100,000. That’s how much cash you want in the practice at all times – your minimum practice cash reserve. This balance will float up and down against the ideal. Remember, overhead fluctuates – so pay attention to the monthly averages on your bank statement and how they relate to your monthly overhead. Now, you can identify trends in this reserve balance, allowing you and your advisors to take action on the spot, taking distribution withdrawals in a predictable manner, putting taxes and savings in the right buckets, or adjusting salary.

Sample: Monthly Practice Cash Management

Practice Profit & Loss

Actual    September –  2011   

Actual      October –     2011   

Actual    November –  2011   

 Total Income 




 Officer Salary




 Total Expenses




 Net Income




 Overhead %




 +/- 2010 overhead  72.35%




 +/- target overhead    66.00%

 - 0.31%



 Practice Biz Checking – balance goal ($100k)  




 % +/- bank over prior

 - 7.7%



If your cash balance is significantly lower than what your unique practice reserve should be, here are a few options: 1) decrease your salary, 2) start strategically cutting overhead within the practice, or 3) a combination of both. Overhead changes will not happen quickly and typically, you can’t “produce your way out of it.” If your CPA utilizes a custom, dental Chart of Accounts in your bookkeeping software, you can begin a forensic examination of expenses and develop strategies to chip away at unnecessary spending.

Moreover, if you take it one step further and utilize cloud technology – allowing both you and your CPA to access bookkeeping software simultaneously in a secure environment – you can work on the overhead together, in real time. This is great because it lets you discuss all the sub-categories of your expenses and determine where to start making precision cuts – half percentage point here, another half point there.

If you know how much cash you need on hand at all times, and how much you’re paying on a regular basis, it’s simple to figure out how much money you should be taking home. And you might even be able to give yourself a raise.

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Topics: dental financial planning, Financial Planning

Five Mistakes in Dental Hygiene That Could Be Costing You Thousands

Posted by Four Quadrants Advisory on Fri, Dec 20, 2013

rachelThis guest blog post is written by Rachel Wall, an expert in maximizing the earning potential of dental practices through better use of hygienists.

#1 Assuming Perio is Taken Care Of

Having a sharp hygiene team is a beautiful thing. But assuming everything is being taken care of is a big mistake. Be sure you know that a complete perio exam is taking place at every hygiene visit AND the data is being recorded. This is a huge area of liability for you and it’s your hygienists responsibility to collect and analyze this information. One way to find out where you stand is to do an audit of your charts. Randomly pull 20 charts of adults seen in the last 6-12 months. How many have a complete perio exam recorded in the last year? Chances are very good that if the percentage is low, so is the amount of perio treatment.

#2 Starting Perio Treatment Too Late

My interpretation of the AAP’s Perio Classification system is that Beginning (slight) periodontal disease is 4mm pockets with bleeding and slight bone loss and 1-2mm CAL. This is a huge distinction for many dental teams. Often, these are the “difficult prophies” or the patients that have 3 month prophy intervals. I see it time and time again- teams waiting until pockets are 5-6mm deep before beginning treatment while valuable the patient loses valuable bone that could have been saved.

#3 Too Little Time for Hygiene Visits

I’ve mentioned this before and I’ll say it again. Every time I have ever coached a team to increase their hygiene time, their production has increased as a result. Now that wasn’t they only thing they did. They put in place systems to deliver a higher level of service and enroll more treatment. Critical steps that drive production are left out of the hygiene exam when time is short. When you choose to allow 60 minutes for adult recare and perio maintenance, it’s important to outline exactly what will take place during that time. If you are going from 40min hygiene visits to 60min, what are you going to add?

#4- Not expecting enrollment of restorative in hygiene.

If you are carrying all the load for keeping your book full of comprehensive, productive treatment…STOP! Empower your team to help you! Set up the expectation and then clearly communicate your treatment philosophy. Your team needs to know when you recommend a crown versus an onlay, for instance. Schedule time to sit down with your team and outline your specific treatment recommendations. Have them create a mock treatment plan and then work through what they got right and what you would do differently. This one step will automatically increase the amount of treatment scheduled out of hygiene.

My article in Dentistry Today, “Dynamite Diagnosis...Empowered Performance“ gives you a step-by- step guide to conducting a Case Review meeting. Click here to find the article link on our website.

Get Dental Continuing Education Resources Here

#5- Not offering patients the option of at-home or in-office fluoride therapy.

I see thousands of dollars walk out the door of dental offices every month when I hear that they are not offering adult fluoride. The truth is, there are very few patients in your practice who WOULDN’T benefit from the application of fluoride varnish and/or a fluoride appliance for home use. Think about it. What percent of your patients have crowns, bridges, onlays, abfraction, recession, interproximal fillings, sensitivity? Educating patients about the value of fluoride therapy and it’s protective benefits will get them on board and guess what? They’ll pay for it!

For a practice that has 1500 active re-care patients, not doing adult fluoride therapy is costing them at least $100K per year in lost revenue!!

Action Steps:

  • Print and read my Dentistry Today article
  • Do a Case Review meeting-get it on the schedule today!
  • Set a goal for how much restorative you’d like to see enrolled in hygiene
  • Meet with your team to discuss adding a fluoride therapy protocol
  • Put the protocol into action

Do you have specific questions about how to put these action steps into play? That’s exactly how we work with our Mastermind members. We help them create specific strategies to boost hygiene productivity! To learn more about the Hygiene Mastermind, click here.

Wait! Here are a few action steps to help you get started NOW:

  • Do a chart audit-look for current periodontal charts
  • Communicate to your hygiene team that you’d like them to do a complete periodontal exam on every adult patient
  • Give your hygiene team the time they need to complete a comprehensive hygiene exam
  • Be proactive and get the information you need to really believe that starting periodontal therapy early is the right thing to do

Owner of Inspired Hygiene, Rachel Wall helps dentists tap into hygiene’s profit potential. Rachel’s articles have been published in numerous industry journals including The Profitable Dentist, Dental Practice Report, Dentistry Today, RDH, and Modern Hygiene. Inspired Hygiene’s programs include in-office coaching, a free weekly e-zine, the High Performance Hygiene Mastermind group and the new High Performance Perio webinar series. To contact Rachel, email her at or call 877-237-7230.

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Topics: Financial Planning

The Top 10 Tips for a Successful Dental Practice Start-Up

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

diggerThis guest blog post was written by John Fiore, dental finance expert and Senior Vice President at Bank of America Practice Solutions.

With every chapter, every experience, and every challenge you will encounter in your dental career, there is opportunity. Take the opportunity to grow, the opportunity to learn, and the opportunity to avoid costly mistakes so frequently made by new practice owners before they even open their doors for business. Here are my top 10 tips to making your practice start-up experience a successful one.

1. Do a little homework and prepare yourself

During this recession and as the economy slowly rebuilds, it is my opinion that dental practices have resurfaced in good shape and overall failure rates for practices remain very low. However, practices occasionally do fail and when this occurs, it can be a life-defining disaster, both professionally and personally. There was a time not too long ago when you could build a practice from scratch and have the luxury of a consistently booked schedule of patients soon after your grand opening. I will tell you that this is rarely the case today. So, as soon as your mind is made up to become your own boss, start getting an idea of the unknowns that lie ahead. Speak with current practice owners to find out what particular challenges they faced, what they did to prevail, and what they would do differently today. Gather a useful amount of information and become comfortable with the upcoming challenges that you are likely to face.

2. Build a network of trusted advisors

From the day you decide to start a practice, you will be meeting many people. As you filter through all the advice and various relationships you will be establishing (or have already established), it is important that you position yourself with industry-specific advisors who will help you with the many crucial decisions you will be making for your start-up venture.

There are several trusted advisors that are vital to your project and in no particular order they are as follows:

Dental-specific Contractors: This is very important. Trying to save money by cutting corners with a general contractor who is not experienced in building out dental practices can lead to unnecessary overruns and possible frustration with your equipment specialist and architect. Dental specific contractors exist in every market in the U.S. and are easy to find. Your equipment specialist should know reputable contractors they have worked with in the past on other projects, and your state annual session usually includes dentalspecific advisors. Also, check with colleagues who have already opened their offices and may have valuable feedback about contractor performance.

Dental specific CPAs: As we know, a general dentist can do root canals, but an endodontist is highly recommended for more difficult procedures. Similar to a dental specialist in this situation is a dental-specific CPA for your practice. As with general contractors, there are thousands of general CPAs who would like to earn your business. In fact, you may already have a relationship with some of them. Though I’m not recommending you make a change from your current CPA, I would encourage a conversation with a dental-specific CPA who works with a minimum of 25 dental clients and can lend another perspective on the value of using specialized CPA services.

Dental Equipment Specialists: Quite often this group is looked upon as a source whose primary interest is selling you as much equipment as the lender will approve you for. In most cases, I have found that this is not true for the better equipment specialists. A good equipment specialist is truly looking out for your best interest and can be one of your most insightful advisors. Typically, equipment specialists are very tenured and plan on staying in the dental field for their entire careers. It is very important to these specialists that you are well-positioned as a start up to succeed because they plan to provide you with updated equipment and the latest technology for many years to come. As with your CPA, it is not uncommon to see dental practice owners maintain career-long relationships with trusted equipment specialists.

Dental-specific Lenders: Currently there is a large amount of interest in dental practice financing from a plethora of lenders including local, regional and national banks, money loan brokers and SBA lenders. You will find some lenders are very experienced with financing dental practice start-ups and others are simply general small business lenders. General small business lenders are typically looking to lend against the collateral in the transaction and not really interested in the “soft cost,” which includes your build out or tenant improvement and working capital. Dental-specific lenders who provide start-up financing are very familiar with the cost of your new project, which may run upward of $450,000 (and of which only a third is equipment costs). Working with a lender who understands the project breakdown is very important.

As your business grows, other dental-specific advisors might cross your path, which can play a major role with key business decisions. You may have a need for dentalfocused attorneys and practice management consultants who will help bring your practice to the next level. Practice management consultants can be an excellent source early in your practice plans and can assist with establishing internal control systems and personnel decisions. They are truly focused on helping you become and stay efficient while growing your practice.

3. Secure financing

Although over the past few years there has been a significant amount of press about how banks have pulled back with lending to small businesses, I have not seen this to be the case with dental-practice financing. There is no shortage of banks wanting to lend to dentists. However, you might find that your local bank and others are unfamiliar with the cost and funding allocation requirements for a start-up practice. Fortunately, there are many major lenders who are very familiar with your needs and are willing to provide you with the required funds. Also, make sure your loan decision isn’t based solely on interest rate. Although the rate is important in keeping your payments lower, it should only be one factor when deciding on a lender. Here are some other loan features to consider:

Loan Term: Similar to your home mortgage, you should consider the longest term available (i.e., 10-15 years). This will provide you with lower payments as your begin to grow your revenue stream. If your business does better than expected, you can always pay down your loan similar to your mortgage. Loans can typically be prepaid if you elect to do so after three to five years without a penalty.

Pre-payment: Loan pre-payment options will vary from lender to lender. As you build and open your dental practice, your loan pre-payment terms are less important in the earlier years and pre-paying your loan may become an option after your practice is no longer considered a start-up and is looked upon by lenders as an established practice. This occurs when you have demonstrated proven practice collections, your business revenue less your business expenses and personal expenses provides adequate cash flow, and the new loan you are considering is in your best interest or more attractive than your existing loan.

Loan Structure: The payment structure is crucial and by having a loan with graduated payments in the first two to four years provides breathing room and flexibility as your practice grows. Graduated payments can range from interest-only payments for six to 12 months to a tiered payment structure for up to three years.

Interest Rate: Rates can be fixed for the term or adjust with prime or other rate indexes. Although payments might be less with an adjustable rate, rates will eventually begin to rise, so locking in with a competitive fixed rate for the next seven to 15 years is your best solution.

Lender Service Levels: As a start-up, you will have immediate banking needs such as merchant (credit card) processing, direct deposit accounts, business credit cards, etc. During construction of a new practice, better dental-specific lenders have internal processes in place to pay the building contractor, equipment companies and other vendors that may require deposits and incremental payments. They will also make sure all disbursements are made as planned so you can stay on schedule.

4. Have a business plan

You will learn, if you haven’t already, how to present a treatment plan to a new or existing patient. You’ll want to be very specific with a comprehensive exam, diagnosis and a course of action involving quality care. Similarly, developing a plan for how you are going to run your business from A to Z is instrumental in the success of your practice. You can find business plan templates for your start-up dental practice from the ADA resource center, dental specific lenders, and possibly your state dental association.

5. Develop your business acumen

The one opportunity that comes to mind when I reflect on the worst economic downturn since the great depression is the need for new dental practice owners to develop business skills and acumen. We all know the lack of business curriculum that is taught in dental school. With this in mind, from the moment you graduate and become licensed, it is wise to make a personal commitment to allocate a certain amount of time to learning the business of dentistry. Ask your school professors for suggestions of other dentists you can speak with who are already running successful practices. Begin to explore what type of business model and practice philosophy you would like to incorporate in your practice. You might be surprised how a colleague or school alum who once had the same anxiety you have about starting a practice is willing to lend a hand and share successes. Remember, these contacts are already living the dream of practice ownership and can help you save time and money as you begin your journey. Other suggestions include attending practice management seminars in your area and downloading articles on the business of dentistry.

6. Maintain a high level of credit worthiness

This is really not a secret; I hope you already know how important your credit score is, both personally and professionally. A negative or low credit score can have a significant impact on qualifying for a practice loan, the amount of money you may qualify for and the interest rate you receive. If you are not sure what is currently reflected in your credit file and would like to obtain your credit score, you can go to; or to obtain a free copy of your credit report, go to To inquire about a reported creditor on your credit bureau you can contact one of the major three reporting credit bureaus: (800-685-1111), (800-888-4213) or (888-397-3742).

7. Keep your debt load at a manageable level and don’t over-extend yourself

Visit the next dental trade show or speak with your colleagues and you will hear the current buzz in the industry about the amazing technology that exists today in the dental profession. I guarantee you will hear from the companies that sell such equipment about the value the latest technology will have on generating revenue in your practice and why you can’t live without it. While this may be true, you need to be very careful that you do not acquire equipment before you can justify the cost of such an acquisition. New technology can be very expensive and can be a burden on your cash-flow if you are not ready to optimize the use and see immediate revenue or expense savings. This is also true with equipping all your operatories right from the start. Typically a 1,500-square-foot office has room for four operatories with many dentists equipping two as a start-up, as there will be always be time later to equip your third or fourth room when your practice is at a level to support it.

8. Stay on budget

We have seen new dental start-up total cost range from $250,000 to $500,000 with an average cost of just less than $400,000. The total amount includes your landlord allowance (some landlords provide an allowance toward the build out), your construction costs (for a leased space), your equipment needs (dental and office hardware/software), dental supplies, office supplies and working capital (typically $75,000 to support your expenses while you see new patients and see insurance reimbursements). Once you are approved by a lender and your project begins, it is crucial that you and your team remain on track to finish your project within budget. It may be helpful to apply for a little more than you may be forecasting to allow for any unforeseen overruns that may occur while your office is being built. Lenders may accept a slight overage than original plans but an overrun of 10 percent or higher of your original amount may create concern from the lender, so try and stay on track.

9. Establish professional/practice goals

A goal is nothing more than a target that needs to be believable, achievable and measurable. Once a goal is established, the measureable component will help you stay focused and will force you to adjust and reinvent ways to achieve your goal along the way. Professional goals can include the number of new patients per week or month, number of hygiene appointments, amount of monthly production, collections, etc. Try and be disciplined, as only you are responsible for the overall performance of your business. A simple tool of having specific goals for you and your team might make the difference between success or challenges.

10. Maintain your associate position as you are growing your business

No one is more familiar with your debt load than you are as you begin your pursuit of practice ownership. Between your student loan debt, your car loan, your mortgage payment if you purchased a home (if not, rent can be as much as a mortgage), and now your practice debt, the numbers will seem enormous and it will be very important to maintain guaranteed (predictable) income after you open your practice and while you are building your practice revenue. Once your practice is built and opened for business, we have found that maintaining an outside associate position for two to three days per week helps you better predict cash flow and pay your bills while you are adding patients to your new practice. You may consider associating for up to three days per week and reduce your associating days as you add days to your own practice. This associate position will typically be in another town or city to avoid taking patients from the dentist you currently work for.

John Fiore is Senior Vice President at Bank of America Practice Solutions and has been entrenched primarily with dental practice financing since 1992. John has seen, first-hand, the key disciplines successful practice owners live by, why certain practices struggle and how crucial it is to be surrounded by the right set of resources to ensure a successful outcome.

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Topics: dental advisor, Practice Transition, business of dentistry

Create a Patient Referral Program

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

larryThis guest blog post was written by Larry M. Guzzardo, author and expert in practice management solutions.

Consider the type of patient you would like in your practice. Stop spending time putting out fires that consume valuable time and energy, with problem patients. Spend more time with your preferred patients and their friends. Birds of a feather really do flock together.

Patient surveys show that the majority of patients find out about dental practices from other friends who are already patients. This has consistently been the method of choice for patients to identify and locate a new dentist.

Traditionally, all professional relationships have been developed through personal contact. Your practice will not be any different. Just ask other health professionals such as your CPA or attorney. They know, all too well, the power of a well-placed referral.

Yes, it is true, advertising works. It’s just that it works with the wrong group of individuals. Anyone can create large volume if you give away dentistry at a discount or accept every patient who calls. It is far more rewarding to build a practice of patients who seek you out because they are looking for the unique dentistry you are trained to provide. Far, far more rewarding to have them curious about the problems you can solve for them, because their friend raved about you and your staff.

If you would like to build a practice upon the referrals of your most preferred-type patients, well then, just ask them to refer their friends. Take these action steps to get started:

  • Get comfortable with the idea yourself.
  • Discuss the idea with the staff at your next staff meeting.
  • Make a list of the characteristics of your most preferred-type patient. Get agreement on what you are looking for.
  • Practice with the staff ways you can ask for a referral that will be comfortable for them. Help them to create an outline of what they would like to say without making them remember a script.
  • Review the schedule each day and decide what patient you would like to ask for a referral.
  • Ask every staff member to select a patient.
  • Track how many patients are asked.
  • Document the date and who asked.
  • Track what patient referred the most new patients.
  • Set a good example. Do not be surprised when the staff follows suit after watching the doctor take the lead asking for referrals.

Look for opportunities to ask for a referral, such as after the patient has complimented the practice. Be proactive. Create opportunities that lead to compliments. During a post-treatment evaluation of the patient’s progress, ask them if you have been able to meet with their expectations.

“Ms. Jones, I have to admit, we really enjoy having you here in our practice as a patient. Have we lived up to your expectations?”

“Gosh Doctor, you and your staff have been fantastic. I couldn’t be more pleased!”

“Ms. Jones, we’re glad you feel that way. We work hard to create a rewarding experience for all our patients. Matter of fact, if you have any friends who are looking to have any dentistry done, and want to tell them about us, we would be happy to take just as good care of them as we have of you.”

Let patients know they are special in your practice and a referral from them would be considered a compliment. Patients like to be acknowledged and given permission to refer. For all they know, you have all the patients you can handle. Patients rarely make a referral based on a logical point of view, more often than not; their decision to refer will be based purely on emotion.

What evokes or influences emotion:

  • The first impression of your office – Your personal appearance and the appearance of the office.
  • The history your client brings; IE: stereotypes, expectations, past experiences.
  • Snap judgments or biases by patients about certain procedures/ services w/ consideration of all the evidence.
  • Reliance on irrelevant information.

Patients will feel positive about you when they experience gratitude, acceptance, happiness, relief or excitement. Emotions such as anger, disappointment, sadness, disgust, hurt, frustration, fear, and confusion have the patient feel negative about you.

When patients feel good about themselves because of the experience they had with you or with your office, they tell others. The ensuing reputation that develops keeps your name where it should be. Social pressure has a stronger influence on people than mass media.

Positive emotions are around when:

• We help the patient “fit in,” belong, satisfy long burning desires.
• We tap onto core values held by the patient.
• We present a solution to a problem.
• We surprise them with something extra.
• The procedure makes the patient feel important.
• The patient feels competent.
• We show genuine concern for them.
• They decide on what makes them feel better. (Not you or us.)
• Accepting treatment has some excitement built into it.
• We are sincere in our dealings with them.

Your objective should be to create an experience that so overwhelms your patients with its positive side that small problems are insignificant. You cannot expect a patient to say anything about your practice if you simply meet their basic expectations to be greeted by name, seen on time, treated with courtesy, compliant with OSHA regulations, provide a pain-free experience, office to be clean and, up-to-date equipment and furniture.

Are all relationships with the patient and each staff member healthy? Friendliness alone is not excellent service. All staff must be:

  • well-trained in their jobs
  • confident
  • communicative
  • reliable
  • courteous
  • credible
  • energetic
  • knowledgeable
  • attentive and caring
  • an attitude of “I can do it for you now”

What systems are in place to provide responsiveness (availability)? What’s your ability to solve a patient’s problem – help them get what they desire? Can you create value for the fee paid? Can you help the patient understand what they are paying for and what makes the procedure so expensive? Can patients get answers to questions?

Develop a referral base.

1. Create a list of patients, specialists, and other professionals who currently refer to the practice now.

2. Create a list of specialists and other professionals who do not currently refer to the practice but know you or about you and can talk to others. Identify what these individuals should know about you. Create a strategy to keep them up-to-date.

3. Consider what information should be available for patients to help build your reputation.

4. Identify patients who are always into new things, the innovators, ask about what they are trying or would like to try. Then have samples available for them to use and give to others.

5. Focus on those who have referred before.

6. When you take up a suggestion from someone, tell everyone else, for example mail an announcement letter.

7. Ask vendors if there are ways you can get their information to patients. Also, get them to help you with names or contacts.

8. Provide service to someone influential – even one of your best referral sources, specialist or member of their staff. Make the offer even if they never take you up on it. Let well-known people like your pastor, rabbi, or preacher know, that as a favor to them, you would donate your services to someone in need if they asked
you. To pay back this favor, this “well-known” person will quietly promote you on their own.

9. Find out what group (professional or social) your best patients belong to – offer to make a presentation at their next meeting or help them with a donation.

10. Always follow-up quickly with good referrals sources after their last interaction or appointment with you. Send something about what was discussed, like an article or brochure, or even a short thank-you note.

11. Be prepared to discuss what is going on in dentistry. Provide a comparison of procedures or products.

12. Be seen as a leader among your peers.

13. Network with companies or organizations through current patients. Offer to help those new to the area, speak to the Human Resource Manager, provide emergency services to select groups (become the doctor of record).

14. Every patient should be given a Post Treatment Evaluation.

15. Select patients every day to be given a “TLC Call” after difficult treatment.

16. Make an attempt to learn why a patient has left the practice.

17. Talk with personal trainers, spa owners, dieticians, and healthcare educators.

They always want to know how their ideas work. Find out what they promote and see how it relates to what you do. You can also provide them with information they can give to others. Become a resource for them, a person to learn from.

It is not enough for you to be good at what you do. You must also be good at promoting what you do. There is no amount of money to be spent that can influence a potential patient, in the same way, as a testimonial from a satisfied patient with first hand experience of what you really can do.

Larry M. Guzzardo who has co-authored two books, “Powerful Practice” and “Getting Things Done” conducts in-office practice management consultations exclusively for dentists to enhance trust, create organization, increase profits, and the development of patient relationships that last. Larry has presented numerous workshops including, “Winning Patient Acceptance,” “Business Communication Systems,” and “The Leadership Challenge.” For information call 800-782-5770 or

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Topics: Financial Planning, business of dentistry

Analyzing the Investment in Dental Software

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

icebergThis guest blog post was written by Andy Jensen, an expert in dental software who's been in the field two decades.

“How much does it cost?” That’s the first question most dentists ask when investigating a new or replacement software system to manage their practice. If only the price tag told the whole story! Unfortunately, most of the cost is below the water line. When the great ship Titanic made its maiden voyage, the “unsinkable” boat found out very quickly that what is beneath the water may be substantially more dangerous than what is visible above the water. The consequences were tragic.

What We Can Learn from Icebergs

Icebergs are large frozen masses of water. When they freeze, the volume increases and they are slightly less dense than the surrounding water. From Wikipedia, “Any object, wholly or partly immersed in a fluid, is buoyed up by a force equal to the weight of the fluid displaced by the object.” That’s why they float. It also means that, given the density of water vs. ice, most of the mass of the iceberg is found below the water, out of site, but just as real. Dental offices that don’t consider the costs found “below the water line” can also face unforeseen and undesirable outcomes. A holistic perspective and analysis is required to ensure positive ROI on any technology implementation.

What Lies Beyond the Sticker Price?

Gartner Group, a widely respected national re-search group conducted a study and found that across all industries, for most client/server installations, the software price represented just under 10% of the total cost of a system. Of course, these are not dental industry specific numbers, but anything remotely close to these numbers warrants significant consideration when you have so much on the line.

The sticker price never tells the whole story. There are always additional considerations with any purchase. This is especially true of technical purchases like dental software. Software license fees usually don’t include most of the cost items associated with implementation, use and maintenance of the system. For example, there are typically additional charges for things like:

  • Implementation fees.
  • Data conversions.
  • Initial system training and upgrade training.
  • New staff training and re-training costs.
  • New hardware.
  • Hardware upgrades required to run the software.
  • Hardware upgrades required to support an upgrade (like new video cards, additional memory or faster processors).
  • IT staff expenses for installation, configuration, and upgrading.
  • IT services costs for system maintenance, database repair, and overall database health.
  • Data backup equipment/software/tapes, and staff time to manage it as well as IT support time to setup and maintain appropriate scripts and processes, then update those processes with each software upgrade.

With a little time and thought, the list can become quite long. These undocumented fees can easily in-crease the cost of a typical dental software system by double or more. One IT Professional that specializes in client/server dental installations indicated that his clients will spend between $500 and $700 per month on his services (that is in addition to the cost of equipment and vendor fees). You can find out what you spend quite easily. Just ask your accountant what the average IT spend is over the last year. My guess is that you will be quite surprised. It all adds up really quickly.

How to Spot Lost Production

Even given the long list presented above, there is one cost item that is intentionally passed over by many vendors—because they don’t like to talk about it. It’s a very easy item for software reps to just ignore and forget about. For some offices it can become the most expensive cost item on the list. It’s the cost of office downtime and lost production required by most vendors for things like computer installation, configuration, upgrade installation, staff training, etc.

Any time the office has to be shut down when it would ordinarily be open, there is massive cost to the practice (and the practice owner).

Most firms suggest “on-site” training. Sure, it’s more convenient for a trainer to come to your office and spend 3 to 5 days in a row, but how much does that cost? They will quote something like $1000 or $1500 for the training but that’s just the check you write. What about the check that isn’t being written by your patients during that week of training? That’s where the real cost is. And think about how productive your staff is being when you have an IT guy running from workstation to workstation installing the latest bug fix. It isn’t hard to see that much of the cost for a traditional dental software system is really hidden beneath the water line and is not taken into account in the typical client/server software sticker price.

Analyzing Web-based Solutions

Web-based solutions inherently include more of the costs in their published price. Most of the items that require office downtime are not required. For example, in a Web-based solution, the installation is done on the web-hosted server located in a hardened network operating center. Nothing is installed in the dental office. There are no CD’s to plug in, no server to configure, nothing to load on workstations, etc. With a web-based solution, once the system is provisioned, the dental office receives a URL, a username and a password. All that is needed is a web browser. The result is no hidden costs for installation, configuration etc. Same thing goes for updates. Nobody has to come to your office and take precious and expensive office time to do an upgrade. You just log in the next morning and the upgrade is installed.

Training is much the same way. When using a web-based system the training is most effectively done on-line. It will be presented in short, one-hour sessions that can be handled during normal office breaks and down time. They don’t require you to close the office for several days. The result is no lost production time for training and implementation.

Finally, there is the general maintenance cost for a client/server system that requires hundreds of dollars a month for an IT guy’s time. We’re not saying that you won’t need the IT guy anymore, but you will only need him about half as much. So, whatever you paid last year for IT services, you can pretty much cut it in half for a web-based solution. When you buy a car, you know that some models require more maintenance and use more gas. Some are really reliable and just sip fuel. Obviously, the sticker price is just part of the equation.

Avoiding the Apples-Oranges Comparison

One common mistake that many offices make is to assume that the product and services received from a client/server system are equivalent to the product and services received from a web-based system. This assumption will result in a gross error that can cost the dental office thousands of dollars. The monthly subscription fees paid to a web-based vendor typically include many services that are not included in most traditional software vendor quotes. Many offices find that the additional services required with a client/server based system end up costing as much or more than the total monthly subscription fee of a web-based product.

Thus, it is vital that a total and honest comparison is performed before simply accepting the sticker price as the whole price. Any return on investment (ROI) analysis must include not only the simple software fees, but also the system related fees that are not included in, but are required to run the software. Additionally, the analysis must include the costs associated with office downtime and disruption. Failure to include these hidden costs is simply ignoring the truth.


When a dentist is considering a new practice management system, all costs should be included in the analysis. It’s very easy to ignore some of the most expensive parts of a system. Expenses not paid to the vendor, such as server configuration, software installation, backup systems and process scripting need to be considered. Additionally, the very significant costs of lost production associated with on-site training and computer software installation must be factored in. It is widely recognized that a typical client/server software price includes just a fraction of the total cost. Web-based systems improve the ROI from several perspectives. First, they totally eliminate some of the most routine expenses; secondly, they incorporate in the price many products and services that must be added to a client/server based system; and finally, they represent a hassle free implementation eliminating the hidden costs of lost production.

Andy Jensen has been in the dental software business for nearly 20 years, directing the marketing activities for DENTRIX, Easy Dental, DentalVision, and now Curve Dental. You can reach Andy at or by phone at 801-851-5175 x1002.

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Topics: dental advisor, dental technology, dental software, Financial Planning, dental computing

Renegotiating Dental Insurance Contracts

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

terriThis guest blog post is written by Terri Bradley, an expert in dental practice management consulting.

Imagine that you were happy with your insurance contracts. Imagine that your office had the perfect fee schedule, that when patients presented you with their insurance cards you were happy to see who they were contracted with. Imagine! The reality is, of course, that is rarely the case. What many practices do not realize, however is that it is never too late to renegotiate your office’s fee schedule, or re-evaluate your insurance contracts.

In fact, renegotiating can be both beneficial andprofitable to your practice, and is not as difficult – even impossible – as you might think. In this article, I’ll give you some tips and advice on:

  • what questions to ask before a renegotiation
  • what to look for to obtain a more favorable fee schedule
  • navigating the confusing aspects of insurance contracts/negotiation

Begin by answering some important questions about the insurance carriers your office is contracted with. For instance, when was the fee schedule last negotiated? I recommend asking for a new fee schedule annually, as it gives your office a chance to receive higher reimbursement on some of your most common procedures. However, keep in mind, you can ask at any time, and should if you feel your current reimbursement is inadequate or out-of-date.

You should also be looking at the billing guidelines for your carriers and the volume of patients per carrier, to see which are the most profitable to your practice. By answering these questions up front, you are well on your way to beginning a successful renegotiation of your contracts.

When the time comes for you to renegotiate, there are a few things to keep in mind that will ensure you receive a more favorable fee schedule. For example, if you are a specialist, or if there is not a lot of competition in your area and a carrier is looking to become contracted with your specialty, carriers may be more willing to give you a higher fee schedule.

Another factor that can help in renegotiation is your relationship to the carrier. If it’s good, carrier representatives will be more willing to participate in the give-and-take of negotiation, and ultimately agree to higher fees. When renegotiating, it also helps to focus on the most common procedures done in your office. This way, you get what you really want for your practice: a better fee schedule on the procedures that make up the bulk of your office’s income.

Understanding “rental” insurance carriers, and how to negotiate with them

It’s important, too, to examine not only which insurance companies you are contracted with but which ones you are billing. Many carriers rent out their contracts to other carriers, thus allowing people contracted with those others to use provider networks, i.e. your office.

For example, if your office is contracted with ABC Insurance, but they have rented out their contracts to XYZ Insurance, you may be billing XYZ Insurance while being contracted with ABC Insurance. There are carriers who rent their contracts out to dozens of other carriers. While the contracts are rented out, your office must accept the rental carriers and their fee schedules. Who the carriers rent out to can change frequently, sometimes monthly, thereby changing which carriers your office is contracted with and whose insurance you must accept.

The renting of contracts can be complicated, so be sure to keep track of which companies you are billing and which you are actually contracted with. If you find yourself billing one company more than the one you are contracted with, it may be beneficial to remove the “middle man” and contract directly with the other insurance carrier (in this example XYZ Insurance). Rental contracts are a key issue when renegotiating your fee schedule, so be sure to carefully examine which carriers you are billing the most in order to get the best fee schedule for your practice.

Remember, renegotiating your fee schedule is never impossible, and in fact conducting annual re-negotiations is beneficial and profitable to your practice. Understanding how your insurance contracts work, and knowing what you want out of them, gives you a solid footing to begin re-negotiation. Though it can seem complicated, renegotiating fee schedules is something every office should do and can benefit from.

Terri Bradley brings 22 years of experience – ranging from Practice Administrator of a multi-doctor specialist office to Practice Management Consultant. She is a ‘go to’ resource for comprehensive consulting, dental and medical billing and cross coding, and insurance billing and renegotiation. She specializes in consulting for Oral and Maxillofacial Surgery practices, and presents OMS coding and billing workshops and courses for private practices around the country.

Terri is a member of the prestigious Academy of Dental Management Consultants, is certified with Human Resources Specialists Bent Ericksen & Associates in both Employee Law Compliance and Integrated Performance Management (IPM), and presents to PracticeWorks User Groups regularly.

Learn more about Terri’s speaking engagements and webinar series at Terri Bradley Consulting.

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Topics: Financial Planning, business of dentistry

Can Dental Lab Fees Lower Overhead and Increase Profits?

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

toothThis guest blog post was written by Larry M. Guzzardo, author and expert in practice management solutions.

Are you frustrated by the balancing act between achieving your best restorative result and making a fair profit on procedures? Do you feel you have to compromise on esthetics because you can’t afford the lab that knows how to provide the very best quality? Tired of “eating” the cost when you go ahead and do it anyway or when the lab fee turns out to be higher than you expected? Every dentist I know is exhausted by the strain this creates between them and their lab technician.

Create options and flexibility

If you are doing prosthetic dentistry and participate with insurance plans that force you to discount your fee, the options are few beyond looking for a lower priced lab. But then you’re caught in the “you get what you pay for” syndrome. However there is still a way to decrease overhead expenses and increase profits all while utilizing your choice of the best technicians. Consider billing patients a separate fee for their laboratory expense. Now get up off the floor! This is not as unusual as it may seem. There is no other area of medicine that pays the lab service for their patients or includes this amount in their fee. Explore the possibility that your hands will no longer be tied. Options are now available to you and your patient that could not be presented in the past.

” . . . You now have the flexibility to do what you want without risking a clinical compromise or financial loss.”

Immediately increase operating profits and lower overhead expenses 10%-14%

This concept may be new to all of us in dentistry; however we have to recognize this is a standard practice in almost every other industry, particularly medicine, for years. To mention a few, lawyers have always done it. Mechanics, banks, contractors, and hotels do it. Now even the airlines do it too. Not to mention delivery services who add on a surcharge when fuel prices go up. All of them have discovered the increased flexibility and profitability achieved from charging one fee for their initial service and a separate fee for anything extra. They never have to lower their quality of service or put their reputation at risk. I say it’s time we catch up. How much longer can you continue absorbing additional costs without it affecting your bottom line?

Every dentist I know understands how important it is to maintain a healthy working relationship with their laboratory technician. They realize the vital role the technician plays in the final result so they also expect to pay a premium for the very best.

An excellent technician makes you look like an artist and an average one makes you look just like everybody else. Let me show you how this can be done and still show a profit.

Because this is so widely done in other industries we need to learn how to feel good about it too so we can eliminate this significant overhead expense. And give ourselves the flexibility to choose a laboratory technician that can provide the best result for your patient at the same time.

Why not just select a fee that includes every expense and allows for a fair profit margin? First of all, your fees would be constantly changing depending on the lab you selected or procedure you needed and second, psychologically, it is easier (as all retailers have found) for the patient to comprehend when the total is divided in two. Charging separately for the lab will make your fee for the procedure sound competitive with other dentists in town.

Presenting this fee to the patient is easy:

“Ms. Patient, to complete your treatment as I have described, the fee will be (x) and the approximate laboratory fee to achieve the result we are looking for is (x).”

Get familiar with the fees charged by your laboratory so you can estimate the fee slightly higher than you expect, so when the case is completed, the final fee will likely be lower for the patient.

Bookkeeping and accounting is even easier. Lab charges are posted to your accounts payable system as you do right now and, instead of billing the patient for their lab fee through your practice management software, their lab invoice is generated through your accounting software as well. When patient lab payments are collected, this amount is credited against the amount posted. When this occurs (+$250.00 posted and -$250.00 collected) the result equals zero. Eliminating this expense completely from your practice and immediately increasing your operating profit!

I realize this may be a difficult concept for some because not only does the doctor have to embrace the idea, so does the rest of the staff. Take your time by starting with a small case so the excitement for the idea can build and before you know it, you’ve created a routine. Clients I’ve worked with who have implemented this concept have not only become better at managing the business side of their practice, they’ll tell you that having the freedom to work with the lab of their choice, they enjoy dentistry more than ever.

Larry M. Guzzardo who has co-authored two books, “Powerful Practice” and “Getting Things Done” conducts in-office practice management consultations exclusively for dentists to enhance trust, create organization, increase profits, and to develop patient relationships that last. Larry has presented numerous workshops including, “Winning Patient Acceptance,” “Business Communication Systems,” and “The Leadership Challenge.” Larry can be reached at 800-782-5770, and by email at

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Topics: dental advisor, dental technology, dental financial planning, Financial Planning

Embezzlement Strikes 3 out of 5 Dentists - & It Can Happen To Any Dentist

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

cashThis guest blog post was written by David Harris of Prosperident, an expert in fighting embezzlement and fraud in dentistry.

Published statistics suggest that three out of five dentists will be victims of embezzlement in their careers. Embezzlement knows no boundaries – it strikes general dentists and specialists, solo practitioners, group practices, dentists in small towns and those practicing in urban areas. It is carried out by long-time, trusted employees and carries high financial and emotional costs. I’d like to share some of the things I have learned in the course of investigating many dental embezzlement files.

How is embezzlement normally uncovered?

The answer to this question might surprise you. The American Dental Association recently published the results of an extensive study on embezzlement. Among other things, the study considered how victims uncovered the embezzlement taking place in their offices.

Here’s where it gets interesting — only 19% of discovery was prompted by the planned operation of the dentist’s system of controls (day-end balancing, review of software audit logs, fraud found by the dentist’s accountant etc.). The remaining 81% was discovered by some accidental occurrence (examples include another employee reporting the theft, patients identifying billing discrepancies or an employee working unexplained extra hours).

So what can be learned from this?

There has been a lot written by advisors who suggest that the way to prevent embezzlement is to implement more (and more) controls. I’m sure you have seen articles that give frustratingly long lists of things a dentist should check weekly and monthly. In addition to the large time commitment that accompanies this internal audit process, I have always questioned its effectiveness.

Embezzlers are driven by some powerful forces, and to expect them to be discouraged by some visible and easily circumvented controls seems like a delusional exercise.

Read our guide: Dental Accounting 101

With the ADA’s survey results reinforcing my view, I hope that dentists and their advisors begin to see the futility of attempting to manage fraud through internal controls and self-directed audit.

Please don’t misunderstand me — there are lots of controls that serve purposes other than fraud detection. For example, even though day-end reviews uncover less than 8% of all embezzlements, these reviews serve other useful purposes like catching clerical errors.

There is good news. Since I’ve just turned your understanding of embezzlement upside down, at this point you are probably looking for a solution. Fortunately I have one, and it is a lot less painful than you might think.

This silver lining is that, regardless of the methodology used to steal, embezzlers behave in very predictable ways. We have developed and constantly refined a “Fraud Risk Assessment Questionnaire” that is designed to help you capture and assess these behaviors. Completion will take less than five minutes and could save you a bundle. You can request the questionnaire by sending an email to And what if you suspect fraud? This is where it gets a bit tricky. Many of the things that instinct tells you to do in this situation (call the police, confront the subject etc.) have the potential to make your situation far worse.

If you suspect fraud, the best advice I can give you is that stealth is paramount. If someone is stealing from you and senses that you are about to uncover their stealing, they will have a very strong desire to destroy the evidence. This might be as simple as wiping your computer’s hard drive and destroying all backup media, or it might take a more sinister form (there have even been cases of thieves burning down dental offices in an attempt to hide the evidence!)

Any steps taken by the thief in this direction will compound the damage they have already inflicted on you.

If you are in this situation, it is essential that you receive knowledgeable advice – and by this I mean someone with experience in dealing with dental embezzlement investigation.

While the list that follows is not a substitute for this kind of advice, it may prevent you from making some of the mistakes that others have made:

Stealth is paramount for several reasons – normally at this point, fraud is SUSPECTED but not CONFIRMED. It is not unheard of for a dentist to wrongly believe that he or she is a victim.

On the one hand, if there is no fraud, it is far better that staff members are unaware that the dentist had a “crisis in confidence” in them. However, if fraud is happening and the thief thinks that you are on to them; their normal inclination is to take steps to destroy evidence. For example, erasing data from your computer’s hard and destroying all backups. We were not involved but did observe a situation where an employee, sensing that the dentist was about to uncover her fraud, burned down the entire office to make reconstruction of her crimes almost impossible.

If a theft is taking place, the best outcome for the dentist will be achieved by preserving evidence, conducting a quiet (stealthy) investigation and confronting the thief only when fully prepared.

There are several things that must be done in order to preserve stealth:

  • The dentist must continue to act normally and avoid behaving unusually
  • Investigation must be done in a way that does not disclose the dentist’s suspicions. The easiest way to tip your hand is to have a couple of people who look like police officers or accountants) come into the practice and start poring over records or to start having a unusually large number of non-patient phone calls for the dentis
  • The dentist must be extremely guarded about discussing suspicions with colleagues, staff members etc. We were involved in a situation where a relative of the suspect worked at the vendor of the dental software used by the dentist, so great care had to be taken in communication with the software company.
  1. Obtain professional advice. Some dentists approach fraud investigation as a do-it-yourself project. Given that the dentist typically does not know what to look for (and often needs the assistance of staff to access computer information in any case), self-guided fraud investigation is likely to accomplish little other than tipping off the fraudster.
  2. Preserve evidence. Your computer’s hard drive contains a cornucopia of information that will be needed to confirm the fraud, quantify losses, prepare an insurance claim, proceed with prosecution etc. However this information is volatile and can be deliberately erased or overwritten
  3. Dental software vendors make continual improvements to their software. A common recommendation of vendors, if contacted with concerns about theft, is to upgrade your software to the latest version. This is probably not a good idea in most cases as doing this will undoubtedly be resisted by, and raise the suspicions of the thief.
  4. Do not place “bait” (e.g. put an extra $20 in the cash to see if it goes missing). This action is likely to provide a false sense of security. Employees who target their dentists often perpetrate sophisticated frauds involving tens or hundreds of thousands of dollars. If you were doing this and the dentist offered a (fairly transparent) chance to demonstrate your honesty by returning the $20, wouldn’t you give it back? This seems like a fantastic bargain.
  5. Do not change financial protocols. Looking to make changes without being able to explain the rationale will certainly be seen through by a thief.
  6. Do not report the incident to police (until you have sufficient evidence to confirm fraud). Making a police report before you have gathered all the evidence serves no purpose and may limit your options in dealing with a thief.
  7. Do not confront the suspect. There will be a time when this is appropriate – our success rate in obtaining confessions from thieves is 100%, but it requires careful preparations before the confrontation.
  8. Do not contact insurance companies. If a theft involves obtaining extra funds from insurance companies (e.g. upcoding of treatment), the insurance company may have recourse against the dentist for amounts misappropriated. Some insurance companies will provide agreement not to hold the dentist vicariously liable in situations where the dentist had no involvement in the theft, but this amnesty needs to be set up correctly, with an intermediary approaching the insurance company on behalf of an unnamed client.
  9. Whatever you do, don’t fire anyone until evidence has been gathered – the amount the employee may steal from you in the few weeks that it will take to complete an investigation pales in comparison to the cost of a wrongful termination lawsuit.

If you want to speak with me about a fraud matter, you can see my availability online and self-book an appointment using my online booking calendar at Or if you prefer, you can call and ask to speak with me or one of our experienced investigators at 888-398-2327.

We also have an email hotline that is checked daily (including evenings and weekends) by our on-call fraud investigator. This email address is

David Harris is the Chief Executive Officer of Prosperident, the world’s largest dental embezzlement investigation firm. His personal email is and he can be reached by phone at 888-398-2327.

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Topics: dental advisor, dental accounting, Financial Planning, dental CPA

3 Reasons Sole Prop Dentists Can't Save

Posted by Four Quadrants Advisory on Thu, Dec 19, 2013

chasingTimes have changed. There are dozens of reasons that dentists are fed up. They’re fed up with the last decade returning zero % in the market – highs and lows like a roller coaster – with the result being a retirement delayed once again. They’re fed up with being sold whole life insurance as a great investment vehicle despite the commission and expense that cling to it like sucker-fish. Good for some but not for most. They’re fed up with great practice management consulting growing practice revenue and seeing savings for retirement stay the same year over year.

My previous blogs speak of a Financial Revolution in Dentistry, a turning back to a pragmatic time where saving a lot of money was cooler than how you spent it. Living off half your current income in retirement should not be normal, as the ADA Survey on Retirement suggests, yet most dentists believe it is their destiny. The average dentist saves $28k per year, 17% of net income, and it’s not enough. The more you save, the less you chase high returns in the stock market. You want to save more money but don’t know how? Start with getting incorporated.

1. Structure, structure, structure. I know it sounds simple but saving is a lot tougher when there is no W-2 income. For those sole proprietors that missed this lecture in dental school, let’s re-visit the basic principals of corporate structure. Let me start by acknowledging a few advantages some might point out with sole props. Most small businesses default to the sole prop because it’s easy, cheap, and simple. There are some nice tax deductible fringe benefits of a sole prop related to medical premiums, dependent day care, and such but let’s focus on what I call the “big kahuna goal” – your ability to save a lot for retirement and retire when you want. Tell me what trumps that?

A dentist in an incorporated business technically has security from seizure of his personal assets. Only corporate assets may be attached to satisfy a lawsuit. I said “technically” because this security – called the “corporate veil”- is being “pierced” more and more often, so don’t opt for a corporate set-up just because you think it offers 100% protection for your personal assets. We’ll focus on the benefit of structure that incorporating brings rather than security. There are some sticky points when it comes to sole props allowing the owner, in this case a dentist, to easily save money for retirement. When you incorporate, you can take income two ways: one as W-2 salary income, since you are the President and also an employee. The second way is through ‘distribution income’ or also called ‘dividend income’ by some. Just like a big corporation might pay a dividend per share of a company, you can also pay yourself a dividend, or “distribution” as additional income from the corporation on top of your salary.

One of the big challenges many dentists have is where to set that salary income vs. the distributions. Often, distribution income is too heavily weighted in an attempt to save a 2.7% in Medicare tax – which is not deducted from distribution income. The problem with this, from a retirement planning perspective, is that weakened W-2 income often inhibits great retirement and tax savings that result from a well-crafted 401k. When a W-2 employee takes income, the corporation takes out taxes (fed, state, local, Medicare) and social security contributions. Because a sole prop is not taking w-2 income, they have a great big ball of cash that handed to them and they’re expected to place in all in the appropriate buckets – take home income, payables, taxes, etc. No tax withheld = big tax surprises. It never fails, autumn falls upon us and dentists get the call about “good news, bad news” from their CPA. The good news is your production is up. The bad news is you didn’t adjust your tax with-holdings and you owe an additional $30,000. Ouch. Pay the small expense to get incorporated and benefit from great structure AND the ability to super-charge your qualified plan and profit share – hopefully a non-commissioned 401k with a fee-only advisor that doesn’t charge commission.

2. Cash-Hoarding. Sole-proprietor dentists begin to “hoard cash” – like storing acorns for a foreboding winter. That might sound like a good thing but it’s not. Because of the tax surprises the dentist wants to avoid, they begin to hoard cash in their business accounts. They don’t know what to expect in the fall so they choose to over-compensate. The irony is that this is not good cash management since large reserves are trapped in the business checking account and can’t reap the value of being invested and managed properly. Not ideal cash management. Once you understand what a consistent amount to have on hand for payables over 45-60 days, keep no more and no less. A business line of credit really helps here but I find most dentists don’t have one or have too little credit on the line. A little technique we use is to communicate with the CPA when monthly monitoring suggests two things: overhead is the same or better AND productivity is up. That means more tax will be paid and an adjustment should be made NOW to withholdings and/or income.

For example, “Dr. S-Corporation” pays quarterly taxes and has a good idea of his tax situation and income structure because of the reliability of W-2 income versus random distributions. “Dr. Sole Prop” has her business account, personal account, and tax accounts blurred and often they are all fed from the same account. The tax situation is much more unclear because taxes are not actively withheld on an ongoing basis. As a result, she sits on a huge amount of cash just in case the tax situation turns sour. The end result is that there could have been significant cash-flow capitalized on throughout the year but fear of a tax surprise prevents that. The domino effect that results is a major frustration at home that occurs when a spouse sees money is in account but they cannot take income. Though there may be tax surprises with an s-corp., it is drastically limited by actively saving throughout the year and easily being able to decipher how much is yours versus what is going to the IRS.

3. No 401k in place. Not just any 401k but one that is NOT commissioned-based, one that has a generous matching contribution and profit share component, and one that is not expensive to administer. Sole props generally don’t have a 401k in place and opt for a Simple IRA. Simple IRA has lower limits to maximize contributions. A 401k in 2010 allowed for $16,500 for under 50 yrs old (50 and over is $22,000). Simple IRA limits are $11,500 and $14,000 respectively. Additionally, a Simple IRA can only match up to 3% max. With a proper 401k, we insert a 6% match to contribution – plus a profit share analyzed each year.

These limit differences can be seen on an example of Dr. Joe who makes the max income limit for retirement plans ($245,000). If Joe had a simple, he can only contribute $21,350 in max match and deferrals. With a 401k (excluding a profit share), the number jumps to $36,700. That is an additional $15,350/yr that is tax deductible—this would lower the taxes another $6,140 (assuming 40% tax bracket). A lot of folks are advised that a 401k is messier to run and requires a little more expense to manage, although that expense is deductible through the business. A Simple IRA can be done “in-house and is easier to pass the government-required test; however, with an affordable TPA (third party administrator), the plan is easily managed by them with little headache for the dentist.

So you made the changes and, oh so quietly, the income falls into the correct bucket each month, savings becomes automated and the staff loves a 6% match. Your commission-free 401k is maxed now, you save tax as a result, and you escalate contributions to a non-qualified brokerage account in addition to balance your tax burden in retirement. Then, you set up the monthly draft for the kid’s college UTMA (NOT 529 accounts, but that is another blog altogether). You’ll look back at the end of the year and just might be astonished at how much you saved – and it was easy. Won’t work for you? Take the Wealth Workup and find out for yourself.

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Topics: dental financial planning, Financial Planning