How Much Should Dentists Pay Themselves?

Thu, May 19, 2016
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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 

 $112,447

 $105,024

 $109,574

 Officer Salary

 $22,000

 $22,000

 $22,000

 Total Expenses

 $98,814

 $92,683

 $95,320

 Net Income

 $13,633

 $12,341

 $14,254

 Overhead %

 68.31%

 67.30%

 66.91%

 +/- 2010 overhead  72.35%

 4.04%

 5.05%

 5.44%

 +/- target overhead    66.00%

 - 0.31%

 0.70%

 1.09%

 Practice Biz Checking – balance goal ($100k)  

 $85,570

 $88,419

 $104,197

 % +/- bank over prior

 - 7.7%

 3.3%

 17.8%

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

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