The Common Cash Flow Mistakes Dentists Make

Kerry Straine, CPBA, is the CEO and President of Straine Consulting. In this video clip, he reviews the common cash flow mistakes he sees dentists making today. They include not having a formal budget in place for the year ahead, and not having a clear understanding of how much dentists will take from the practice in terms of profit. Straine provides effective approaches to resolve these issues.

Interview Transcript (slightly modified for readability)

“The most common cash flow mistake I see dentists making, and there’s many: Number one is not having a formal budget for the year ahead so that they can see that their business is going to perform according to the economic needs of the practice and the owner. Number two, not having a clear understanding of how much money they’re going to take from the practice in the form of profits, distributing to themselves for lifestyle, retirement, disability, long-term care, debt reduction, working-capital reserves, and don’t forget the taxes.

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We really don’t have an understanding, and too often people don’t think that the amount of excess cash flow they have that month is all there is to spend. And when we’re helping a sole practitioner, who, let’s just say has a revenue budget and collection budget of a million five, profitability is going to be around 600-700 thousand dollars before debt service, and taxes, and lifestyle. I encourage that owner to make sure they don’t take more than 20 percent of that amount for them to spend personally, because in many states, half of it is going to go to taxes — federal and state level. And the balance is going to go to working-capital reserves, paying off debt, don’t forget retirement, with the rates of return we’re earning personally on investment accounts, when we do retire, we’re not just going to get a return on investment. That will be a little amount. We’re going to be taking a return of our investment to fund our lifestyle in retirement.

So the first mistake is, number one, not having an accurate plan. Number two is not having adequate working-capital reserves. I read a book once called Business at the Speed of Thought by Bill Gates, one of the richest men on the planet, you never know based on valuations, but, he said when he took Microsoft public he put two years’ worth of employee wages in a bank account and he figured if they could just start making money and be profitable in two years he knew he had a satisfactory economic equation that he could build from. I thought about that, and having prepared a lot of financial statements and tax returns in my life early on before my dental consulting role, I thought, what does a small-business owner need to have in terms of working capital set aside in savings?

My opinion is that they need to take whatever their monthly payroll is for all the team members and themselves. For a sole practitioner producing a hundred-thousand a month, that could be 45, 50 thousand, times two, and that’s how much money they need to have in savings and they should never touch it. That’s your working-capital reserve — your rainy-day fund, my dad used to call it. And on top of that, whatever your normal distributions are per month out of your checking and payroll account, you need to have half of that in there as a minimum at all times. Otherwise, what’s going to keep that owner awake at night is going to be the cash flow constraints that they’re facing. And there’s just no ATM to fund this type of overhead.

Too often, what the big financial mistake that business owners make is that they’re under capitalized, and nobody helps them understand that. As consultants, how can we come up with a strategy for that doctor to consider if we don’t know the economic consequences. As Steve Covey said, in his Seven Habits of Highly Effective people book, one of them is, you better begin with the end in mind. We need to know what our balance sheet needs to look like — all of those assets we need to buy, and how are we financing them, with the bank’s money, or with our money? Because that’s how assets are acquired. And within that pool, in our current assets, what do we have in terms of liquid reserves available to help us through those down times instead of borrowing against our future with a line of credit credit cards. If we can overcome those two big mistakes, the future is safer in the months and years ahead.”

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