Brook Hoover, CPA
Dentistry is a lot like automobile racing. Bear with me here. To be successful at practicing dentistry, you need a finish line (a defined financial goal), a support team (office staff), and a vehicle to get you there (your own practice). Just as automobile races differ by type, size, and location, there are no right or wrong variables in this equation.
When I meet with a dentist for his or her first financial planning meeting, we spend the day defining long-term goals and designing a plan to achieve them. It’s common for clients to arrive at this meeting with the idea that the bigger the practice the faster they will reach their goals, or similarly, that owning multiple locations and new equipment will get them to their finish line more quickly.
However, once we get their financial goals in focus, it’s just as common that we find just as much opportunity in effectively managing what they already have. Not only that, but the undefined goal of a bigger, better practice actually adds unnecessary stress to their lives. Serious racing fans know that the car with the biggest engine doesn’t always win the race.
It’s important to separate our emotional impulses from technical facts in the pursuit of our financial goals. On the emotional side, you may feel you need to grow, grow, grow, but the technical details may tell you something different. Lifting the hood and examining your own “numbers” can offer the clarity needed to achieve your goals.
So, back to the races.
Automobile racing is a team sport at every level. Teams have a goal, they want to win, and they must work together to achieve it. But the definition of winning can be very different depending on the type of racing you enjoy. When you achieve the best lap time in your group, the euphoria of winning is just as powerful whether it’s on a course designated by orange cones in the parking lot of your local high school or on the streets of Monte Carlo. In the context of a career in dentistry leading to a well-planned retirement, the point is that everything is relative, and I promise you that the winners of those respective races are equally excited by their achievements.
Achieving your goals requires you to first set them. Do you want to have the best time trial in the local parking lot and a very comfortable retirement in a familiar setting? Or do you want to win the Monaco Grand Prix and retire to the French Riviera? Only you can answer questions like these, but the following advice can help you keep things in perspective.
In 2014, a new client came in for her first financial planning meeting with the common expectation of needing to have a “million-dollar practice” in order to achieve her ultimate retirement goals. Let’s tap the brakes a bit before we hit that turn. It’s important to understand that a million-dollar practice is not a goal but simply one type of vehicle. This client’s actual goal was to live comfortably now while also saving and preparing to live the same way upon retiring. She was concerned because cash flow felt tight, both in the practice and at home. This was an issue I could help her with. The good news is that she had her vehicle—it just needed a tune-up.
- The client was in her late 30s.
- She had $57,000 saved for retirement.
- The practice collected $600,000 per year.
- Debt consisted of $290,000 in practice loans, $116,000 on a personal mortgage, $25,000 in student loans, and $8,000 on an auto loan (which should have been a practice loan, but that is a different tax topic for a different day).
- Cash feels tight at home and in the practice, and things feel like they are out of control.
- Anxiety about being nearly 40 years of age and having only $57,000 saved for retirement.
- Fear that she could not reach her goals with the practice collecting only $600,000.
The Green Flag
The focus needed to be on the goal of winning the client’s own race and ensuring 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 stressors. This involved a heavy scrub of the practice overhead and personal living expenses at home. We compared the practice’s expenses to the averages for similar practices and found a few outliers that we were able to address quickly. For example, lab costs were higher than average, leading the doctor to determine that she was likely being too lenient with fees for complex cases. We made plans to immediately adjust them.
We then examined the expenses at home. This entailed taking a hard look at absolute costs as well as “fluff” costs. There was some opportunity for 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 led to occasional splurges that would make things feel tight. A new strategy could allow the client and her spouse to maintain their lifestyle spending at its current level while still lowering the stress related to cash.
We determined that maintaining a certain level of cash on hand in the practice and at home would provide security, allow the doctor to focus on driving, and eliminate her stress over paying the monthly bills. For the practice, we recommended that setting aside an amount to cover 1–2 months of expenses and debt payments (when combined with accounts receivable) would provide enough cushion to absorb the ebbs and flows of cash requirements. For the personal account, we recommended 3 months’ cash savings to cover emergencies. (Three months is the average length of time before disability insurance takes effect.)
Once the bank accounts were in good order and there were no immediate needs for new equipment or staff, we could focus on the ultimate goal of preparing for retirement. We determined that maximizing a 401(k) and Roth IRA for the doctor and her spouse would get them to the retirement they desired. We maximized these accounts over the course of the ensuing 12 months and have continued to do so ever since. Both the doctor and her spouse were contributing $18,000 from payroll, and the doctor was able to contribute an additional $35,000 in profit sharing. Leveraging these tax-deferred retirement savings reduced income taxes to help free up cash and essentially fund themselves. Once the monthly bills, debt, and taxes were paid and the 401(k) plans were funded, there was enough cash remaining to enjoy life.
Four years later, the client and her spouse remain on pace to win their race. Their cash balances have grown steadily, they have upgraded their home, and their retirement savings has grown exponentially. More significantly, stress levels are low and spirits are high. This client’s financial plan is on cruise control, and the practice has grown at its own pace. With this strategy, she has the checkered flags in sight while effectively managing her single practice. The pressure to open another practice has lifted, and the client can relax and focus on her passion.
The Checkered Flag
Remember, this is a long race. Like a race team, dental practices need to be able to modify the strategy and direction depending on the conditions of the course. No race will be predictable, and no financial plan should be stagnant. Changes are part of the game, and doctors, race teams, and financial advisors need to be ready for what comes next.
Disclosure: Cain Watters & Associates LLC is an investment advisor registered with the Securities & Exchange Commission. Information provided does not take into account individual financial circumstances and should not be considered investment advice to the reader. Request form ADV Part 2A for a complete description of CWA’s financial planning and investment advisory services. There is no assurance that other client actual results will be similar to information presented. Estimated future results may not be obtained due to economic, business and personal circumstances.