Dentists dream big. When we have our first meeting with a client and we try to define their goals, it’s common for their sights to be set on exponential growth for their practice.
Honestly, it’s just as common to see more opportunity in effectively managing what dental practices already have. Not only that, but the undefined goal of what a bigger, better practice means to them may be adding unnecessary stress to their lives.
There is an emotional side as well as a technical (or mathematical) side to realizing one’s financial potential. On the emotional side, you may feel you need to keep growing, but on the mathematical side, that may not necessarily be the case. Taking the time to stop and look deeper into your practice’s numbers can often offer the necessary clarity to better define and achieve your goals.
”The Million-Dollar Dental Practice”
In 2014, a new client had the expectation that running a “million-dollar practice” was a requirement to achieve her ultimate retirement goals.
It’s important to understand that a million-dollar dental practice is a type of milestone, not a goal. This client’s real goal was to live comfortably now, while saving and preparing to live the same way upon retirement. Cash flow felt tight, both in the practice and at home. This was an issue we could help her with. The good news is she had everything she needed to get where she wanted to go, it just needed fine-tuning.
- The client was in their late thirties
- They had $57,000 saved for retirement
- The practice collected $600,000 per year
- Debt consisted of $290,000 of practice loans, $116,000 of personal mortgage, $25,000 of student loans, and $8,000 for an auto loan (this should have been a practice loan, but that is a different tax topic for another day).
- Cash feels tight at home and in the practice, and things feel like they are out of control
- Concern with being nearly 40 years old and only $57,000 saved for retirement
- Worried that they could not reach their goals with the practice only collecting $600,000
The Real Goal
Rather than focus on what she wanted her practice to be, the client needed to set her eyes on how her dental practice could help her get to where she wanted to be in her life. Time and focus were needed to ensure the proper issues were being addressed both in the near term and for the future.
The first issue was to figure out the immediate cash flow stresses. This involved a heavy scrub of practice overhead and living expenses at home. We compared the practice’s expenses to the average spending of similar practices. There were a few outliers that were quickly addressed. For example, lab costs were higher than normal. The doctor determined that she was likely being too lenient with fees for complex cases. We made plans to immediately adjust.
We then examined the expenses at home. This entailed a hard look at absolute expenses and “fluff” costs. There was a chance to structure around the fluff to ensure it did not get out of control, but for the most part the expenses at home were well-controlled.
Routine living expenses were healthy at 40% of income, but lack of focus allowed for occasional splurges which would make things feel tight. Knowing this, a new strategy was developed allowing them to maintain their lifestyle spending at its current level, while still lowering the stress related to cash flow.
We determined that maintaining a certain amount of cash on hand both in the practice and at home would provide security. This would allow the doctor to relax rather instead of stressing over monthly bill payments.
For the practice, we recommended that one to two months of expenses and debt payments (when combined with accounts receivable) would provide enough cushion to absorb the ebbs and flows of cash.
For the personal account, we recommended three months of cash savings for emergencies. Three months is typically the recommended amount as it is the average length of time before disability insurance takes effect.
Once the bank accounts were sufficient, and there were no immediate needs for new equipment or staff, we focused on the ultimate goal of preparing for retirement. We determined that maximizing a 401(k) and Roth IRAs for the doctor and spouse would get them to the retirement they desired. We maximized these accounts over the course of the next 12 months and have continued to do so ever since. With both the doctor and spouse contributing $18,000 from payroll, and the doctor able to contribute an additional $35,000 in profit sharing, leveraging their tax-deferred retirement savings reduced their income taxes, helped free up cash, and essentially funded itself. Once the monthly bills, debt, and taxes were paid, and 401(k) funded, there was enough cash remaining to enjoy life.
Four years later, the client and spouse remain on pace to reach their goals. Their cash balances have steadily grown, they have upgraded their home, and their retirement savings have grown exponentially.
More importantly, the client’s stress levels are low and her spirits are high. This client’s financial plan is on cruise control, and the practice is growing at its own pace. This strategy allowed the clients to have their clearly defined end goal in sight while effectively managing one dental practice. They no longer feel the pressure to open another practice so the client can relax and focus on her passion.
Remember, your career is a lifelong journey. Just like anything else, dental practices need to be able to change strategies and direction depending on the conditions life serves us. No journey will be predictable, and no financial plan should be stagnant. Changes are part of the game, and doctors and financial advisors need to be united and ready for what comes next.
The team at LenDRgroup Consulting cares about the long-term success of your practice. No matter if you are in need of practice financing or business consulting, we are able to craft a customized plan to fit the unique needs of not only your practice, but also your career. We bring a lending platform of 300+ dental and healthcare-specific lenders, and we built this network with the purpose of helping dentists, veterinarians, and physicians. We want you to achieve your dreams of practice ownership while eliminating the obstacles associated with practice financing.
To date, we have helped hundreds of medical professionals expand and grow their practices. LenDRgroup Consulting recognizes and understands the needs of your business and can provide guidance to help avoid costly mistakes. So, let’s get started. Contact us today to schedule a one-on-one consultation.