by Jason Smith
President, Founder, Four Quadrants Advisory

From the outside, it looks like your practice is doing really well. You’re making money, likely $300,000 a year or maybe even more. You’ve reinvested in the practice and grown it well, with new patients joining you regularly. To keep it going, you’ve spent on marketing, and maybe even on a practice management firm to help get the little things right, like improving patient care and internal training.

But you know better. There’s trouble behind the scenes. You’ve experienced a lot of pain. Your cash flow is tight, both for your practice and at home, and it’s keeping you up at night. Not to mention the worry that tax surprises could hurt your cash flow even more. Add in the pains of growth, like adding new staff, and it all might be getting to be too much.

Feeling these pains is a signal that you need a dental CFO for your practice. A good outsourced CFO can take your practice’s overall financial state from “a mild disaster” to “everything you could ever dream of.” Once you understand what a CFO can do for you, it’d be a mistake not to have one.

Read our guide: Dental Accounting 101

A CFO gives you flexibility and security. You’ll know your cash flow for two months ahead of time, and have the ability to deal with things like changes in payroll and emergencies. You won’t have to check your bank account daily and be surprised at what you see – or terrified that you won’t have the cash to deal with what’s coming. Your cash flow at home will finally be consistent so you can begin to build your personal accounts.

You’ll be free of the fear of tax surprises. No more $60,000 bills from the IRS that you weren’t expecting – meaning you can concentrate on growth rather than fixing holes in your budget. And with the intelligent planning a CFO gives you, you don’t have to be paralyzed by every financial decision that comes across your desk. You’ll have a team backing you, to figure out if that new procedure or equipment is really right for your practice’s specific situation today.

All of that revolutionizes your financial situation. You’ll save more for retirement – double or triple what you were before – and all of this comes without substantial changes in your lifestyle, either at work or at home. You won’t have to change the way you work, you won’t have to bring in loads of new patients. Simply fixing what’s wrong with your current finances – and trust me, there are problems in there – will totally change your situation, and your practice will start to give you what you’d always imagined.

If you’re making money but your financial situation is still awful, it’s confusing, frightening, and paralyzing. A dental CFO fixes all of that. If your practice is in a place where it’s ready for this kind of help, you can’t afford not to take it. There’s no other sustainable way to get to the next level. It’s more important than marketing, it’s more important than new equipment, it’s more important than hiring a dental practice management firm. It’s simply the best investment that you can make in your practice, your career, and your family.

Dentists aren’t usually business or financial gurus, and because of that they can run into a lot of problems when it comes to their finances. One of the main sources of these troubles is poor management of cash flow.

Read the Guide: Financial Planning for Dentists

But if you don’t know what to look for, how can you know what to fix? Here are five common hurdles dentists have to clear to get their cash flow situations in order.

Corporate and income structure

Choosing the right corporate structure and income schedule for yourself and your practice is crucial, and can help solve a lot of other cash problems. Operating as an S-corporation is most ideal, because it allows a dentist to take some income in a W-2, with taxes withheld every paycheck while remaining the business’s owner.

But an accountant might recommend a sole proprietorship to minimize tax responsibilities. This can slow your retirement savings – you can’t match as frequently on income from distributions, which is 100% of your income in a sole proprietorship. You’ll lose a lot of money from failing to look at the big picture.

Debt structuring

Dentists are naturally debt-averse, which sounds a lot better than it is. They’re likely to cut a check for a large purchase rather than financing, and when a piece of equipment costs upwards of $30,000, that could completely deplete your checking account.

It’s absolutely critical to make sure you have a baseline level of cash on hand in your accounts at all times to deal with surprise expenses, and that’s impossible if you pay for equipment and other planned expenses all at once. It may seem stressful to have debt to deal with, but it’s a lot less stressful than having a tax bill you can’t pay because of that shiny new x-ray machine.

Tax payments

The way you pay your taxes is intertwined with how your business is structured. Taxes are automatically pulled from your W-2 earnings in every paycheck, but not from money a dentist takes as a distribution. Practices that are run as sole proprietorships and as S-corps both need to make extra tax payments to cover the amount owed from distribution payments. But if 100% of your income in a sole proprietorship is coming from distributions, then 100% of your taxes need to be paid this way. And those bills can get big.

Since an S-corp allows you to be paid in W-2 income as well, that means that only a fraction of your income tax is your complete responsibility via quarterly tax payments. To an accountant, that may seem more complicated – after all, it’s two tax returns that need to be filed. But for the dentist, it ensures cash flow stability.

Quarterly tax payments fluctuate as your practice does. If you’re growing and the accountant doesn’t take that into consideration, it could mean that at year end, you haven’t paid enough taxes on your distribution income, and you could be hit with a surprise $80-100k payment. With the S-corp, with less of your taxes paid this way, even if there’s a surprise payment it won’t hurt nearly as much.

Overhead issues

An established dentist, one who’s been in charge of a practice for 8-10 years, should be running at around 55-60% overhead. In my time at Four Quadrants I’ve seen practices where the overhead level is closer to 90% or even 95%. That’s just preposterous. If your overhead is that high, something is horribly wrong with the way your practice is being run.

In a million-dollar practice, for every 1% drop in your overhead, that’s around $10,000 in savings that you can take home. Paying less improves your cash flow and puts more of your money where it should be – your bank account.

Decision-making

Think about the decisions you make in your practice. How many involve spending $30,000? Probably around one or two a year. How many involve spending $5,000? That’s probably more like one or two a month. Each one doesn’t seem big, but they add up fast – especially if you make the wrong choice.

When you make decisions about things like smaller equipment purchases, raises to employees, or fee increases, it helps to have someone on the outside to advise you. At Four Quadrants we have a “5K Rule” for our clients – if something’s going to cost you $5,000 or more, whether in your practice or in your personal life, ask us about it. We’ll look at the big picture and help you decide if it’s worth it, if now is the right time, and if there’s a strategy to help pay for it easier.

by 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

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.

by Jason Smith
President, Founder, Four Quadrants Advisory

Sometimes I feel like dentists take the same approach as a hamster on a wheel, running their hearts out but never getting all that far. They’re working harder all the time, but not seeing any progress with saving for retirement each year. A while back I got a call from a dentist that heard about Four Quadrants Advisory. After some pleasantries, his worry came out laced with urgency. “I need to produce more.”

I slumped in my chair just a bit. Here we go again, I thought. That comment is like the thin outer skin of an onion. You peel that away – and maybe a few more layers – before you get to the good stuff, the real problem. “I need to produce more” means “I need more income” which means “my cash flow is not good, I have a bunch of poorly structured loans, I spend more than I should, I take too much cash out of the practice, my overhead is high and I’m in the mouth all day so I don’t have time to figure this out.”

The ADA surveyed dentists in 2008 and found out that they are not much different than the average American in terms of financial planning. They found that 96% of dentists are not saving enough money to maintain their current lifestyle in retirement. Americans overall don’t save enough, but it’s more alarming for the dentist for two reasons: a cash-based business won’t sell for enough to sustain lasting income, and their lifestyle requires more income at retirement than average. We could all learn a lesson from our grandfathers who emerged from a depressive era with the sense to save and not spend what they don’t have. There is a movement back to this kind of pragmatism today, and it’s just what we need.

It was quiet on the phone. “That’s not your real problem, and you don’t have to produce your way out of this,” I said. He thought he was doing all he could. He has a rudimentary 401k loaded with commission, internal fees, and a lack of management – orphaned while his broker looks for new clients. His CPA means well, but doesn’t have the skills to analyze overhead properly or suggest a cash-flow model that lends itself to saving a lot for retirement. The IRA got some attention as long as taxes were in check, and he intended to save for the kids’ college someday.

Imagine if you could press pause and take a hard look at how everything financial in your life and business is inter-related and then make changes to dramatically increase savings. Pure savings. Not returns in the market, not real estate gains, and not promises from hedge funds, options, shorts, swaps, IPO’s, or complicated insurance products.

It is my belief that a dentist can save more than they think they can and their lifestyle doesn’t have to be compromised. If you’re saving early for retirement, you can save 10% of what you collect. It’s not easy, but it is definitely possible. Do it with a pragmatic methodology that combines great cash flow, acceptable profit, and a custom financial plan. Are you going to produce your way out of it or are you ready to get serious about saving?

Many dental practices have poor overhead, but that's not all on the dentists themselves. Practices cost a lot to start, and with dentistry becoming more and more expensive, once you get off to a bad start it can be hard to rein overhead back in.

Don't just let it happen. Watch the next in our Top 1% Club video series, and yearn more about breaking the overhead cycle.

TRANSCRIPT:

Hi, I’m Jason Smith, founder and CEO of Four Quadrants Advisory. We turn dentists like you into multimillionaires.

One of the worst habitual offenders in dentistry today is poor overhead. But it isn’t just the dentist’s fault. Inc. Magazine said dentistry as a whole is one of the five most expensive startup companies in the United States. So controlling overhead has gotten harder and harder, plus additional writeoffs with PPOs and insurance companies as they are today. We find, though, if overhead isn’t corrected at an early age in the dentist’s career, that they will carry that overhead for the rest of their career. So in other words, I’m saying if we find a dentist that is 37 years old that has 75% overhead, more than likely they’re going to be running 70 to 75% overhead when they’re 55, and that will lead to a non-stop problem in becoming financially free.

A great overhead percentage in general dentistry should be under 60%. 6-8 years into practicing we have to buy more equipment, we have to reinvest, and we’re running out of space. So if we’re still running high overhead, and then we need to expand our space and take on more debt, then it becomes a perpetual problem that you’re never going to get out of. And if you’re not debt free 8-10 years from retirement, you’re going to have very hard times with saving, and you’re going to have very hard times doing the proper practice transition, because any practice that is debt-laden is a practice that nobody else wants to buy.

This is just a glimpse into the multimillion dollar secret for dentists.

It’s hard to be proactive when you’re surrounded by the problems of the present. When cash is tight now, and production isn’t giving you the results you expect, that’s what you focus on. You try to fix now before you think about tomorrow. But if that’s your approach, by the time you’re ready to think about tomorrow it will be here. And it’ll be too late.

You have to save for retirement now, and if you want to retire comfortably and happily, you should be saving a lot. According to the ADA, only four percent of dentists will be able to retire by age 65 – mostly due to poor savings and tax planning. In fact, dentists are only saving, on average, $23,000 a year. But if you’re producing $1 million a year or more, you’re anything but average. You’re the best of the best, even if your results aren’t showing it.

You can do better than that. You deserve better than that.

Only a select few are able to reach the $100,000-a-year barrier. In fact, only the top 1% of dentists nationwide are doing it. We’ve never seen anyone crack $65,000 a year in savings, aside from our own clients. It’s an elite club, made up of dentists who have the ambition and discipline to master their finances and build a bright future for themselves. And you can join them.

If you’re producing at a high level already, you can get to that $100,000-a-year level. You can get control of your cash flow, reduce overhead, fix your tax structure, and free up the money you need to build your tomorrow while still living the life you want to live today. We guarantee that in just a year you’ll have 50% more annual savings for retirement – or you won’t pay us. You can do it all, with our help.

Anytime you have that type of a vision going into something, you can be much more effective at what you do. It’s nothing short of amazing.

When you graduated dental school and opened your own practice, you didn’t think it would be easy – obviously starting from scratch would be tough. But you weren’t prepared for just how tough it would be. You’re running a business, but you don’t have the tools you need to do it. You’re a dentist, not an accountant. And you didn’t get the business training that you need in your undergraduate or dental school curriculum. But you’re expected to have the skills of an entrepreneur and of a scientist. You’re lost.

What you need is a thorough and solid financial plan, which can guide you through the troubles of the present into the prosperity of the future. And that’s exactly what you’ll get from The 3 Pieces to Your Perfect Financial Plan. It’s Four Quadrants Advisory’s guide to getting the foundations of your finances in order, so you can concentrate on your patients rather than your balance sheets. Download it for free today and get started.

Growth can be good or bad for a dental practice, just like for any other business. Growing simply for the sake of it is not smart. Growing at a rate that’s well-thought-out, strategized, and steady is far better.

Many dentists grow their practice just because they want more production. But why? Because you want to make more money? Here’s a little-known fact – many times increasing production can actually cause you to make less money. That’s because in a rush to grow fast and make money, overhead skyrocketed, and now you’re stuck with a little more income and a lot more money going out the door.

There are three ways to increase your revenue.

1. Increase your production and maintain your overhead
2. Maintain production and reduce your overhead
3. Increase your production and reduce overhead

To grow your income, you have to have a good financial team on your side. You need quickly reported numbers, you need to have your pulse on your finances, you need fast interpretation of your situation. If a negative trend begins, you need to know so you can act fast to counteract it. Is overhead popping up five months in a row? Know fast, so you can nip it in the bud.

This applies both to your production and to your overhead. You need solid numbers on both no later than two weeks into the next month, and the numbers need to be reconciled and analyzed by your accountant. To identify trends compare them to the same month last year, and also to the past few months of this year. That way you can see in real time what’s happening in your practice’s financials, and whether it’s a seasonal effect or something new.

Even if you grow intelligently, you can still run into issues. For example, you might get a good news/bad news call from your accountant. “Good news! You made a lot more money this year than we were expecting. Bad news is that means your tax bill is well into the five figures.” Without timely and frequent tax estimates, you can end up with a nasty tax surprise at the end of the year. And that will certainly put a damper on your booming business.

When managed poorly, growth will actually hurt your dental practice. But when you do it right, growing your practice will do nothing short of changing your life.

Last time we discussed the best ways to build a framework that allows you to invest in ways that will help you build wealth from your dental practice. But once you’ve done that, what should you actually do with the money that you invest?

The short answer is, “invest conservatively.” Chasing big returns can be a hard temptation to resist, though. There’s a direct correlation between increased risk and increased potential rate of return, and many dentists feel the pressure to make large sums quickly to try to build a floundering retirement plan. According to the ADA, the average dentist only saves about 10% of their income – around $21,000 – and at that rate, they won’t be able to hit their retirement goals. To try to make up for it, they get forced into investing aggressively to get the big returns, and many get bitten by risky investments that eventually turn south. Anyone remember 2008?

At Four Quadrants Advisory, we recommend a more conservative investment strategy that concentrates on savings first. You don’t need to chase that high rate of return when your practice finances are structured so that you can save $100,000 a year rather than $20,000. To get that kind of money from investing alone, you need a 500% rate of return.

Focus on what you can control – your savings, not stocks – and avoid extreme risk. In 2008’s financial crisis, those who were heavily invested in risky stocks lost between 30 and 40% of their value. Those who were more conservative in their investments lost much less.

Finally, as a dentist you really shouldn’t be investing your own money. You are trying to run a million-dollar dental practice, you’re seeing patients, you’re running a staff, you’re raising a family. You don’t have the time to give your accounts the attention they need to grow the way you need them to. Get a team of qualified advisors to help you, and your money will be in much better hands.