A practice owner with a cash crunch recently pushed back on the advice I was giving – to defer some compensation for a quarterly distribution – with this statement: “I thought I was supposed to pay myself first!”
And “pay yourself first” – which means putting money away into long term savings before spending it on your immediate needs – is really good advice. But it also can get owners into trouble if they forget all the obligations a practice owner must honor before paying themselves.
Before anyone worries that I don’t want you to make any money, let me acknowledge this important fact about you as a practice owner:
You own your practice for two reasons: your desire to have control – over how you care for your patients and who you work with – and the income premium you can receive by delivering better care and service to your patients than your competition.
And my job is to help optometric practice owners earn more income. But it’s also to take the stress out of managing practice finances. Stressful things like:
All of these will either cause or be caused by tight cash flow. My best definition of tight cash flow is this:
Tight cash flow happens when there isn’t enough cash in the business to pay the owner what he or she wants AND pay all the bills.
In most cases, owners need to remember this about the net income on their P&Ls:
First, the government gets paid.
Second, creditors get paid.
Then, and only then, can the owner pay himself or herself.
Let’s consider how those factors affect when and how you pay yourselves.
We all know the saying ‘the only sure things in life are death and taxes’. You are sure to owe taxes, so you need to plan for them. Work with your CPA to plan for your quarterly estimated taxes. Have a separate account for taxes and contribute 25%-35% of your total income, less what you withheld on your regular paycheck.
Owners can choose to make capital equipment purchases, run more or fewer personal expenses through the practice, or take on more aggressive tax-preferred savings vehicles. But if you’re making money, you’re going to owe taxes.
When you buy equipment remember, you only save the taxes – about a third of what you spend. If you want to spend more to save on taxes, IDOC has a special dues program just for you!
Finally, pay all of your income and payroll taxes. Having seen a few cases where practice owners have fallen behind with the IRS, let me assure you that you don’t want to be in that situation.
Secondly, you must repay your creditors – people who have lent you money. Debt is not a bad thing. With interest rates as low as they have been for almost a decade, using a bank’s money to fund your growth is be a great way to accelerate your growth.
But growth is key when taking on debt. Avoid excess debt by making sure you have a clear path to growing your revenues and profits before taking out a loan. Unlike taxes, you can control your debt load.
If you’re buying equipment, be sure that your patient volume and the fees the equipment generates will cover the note or lease from day one. New equipment doesn’t increase the value of your practice UNLESS it increases the revenues and profits.
And be careful with revolving loans (credit cards or lines of credit), don’t come with a baked-in plan to pay them off. Credit card debt really ought to be paid off every month. Lines of credit too, but occasionally be stretched to three months.
If you have credit card debt or a line of credit you can’t retire within two or three months, consider restructuring that debt as a fixed installment loan.
Finally, once you’ve accounted for taxes and debt service, you can pay yourself. And you should pay yourself as much as you can. But there’s still a bit of a timing issue.
Let’s say you’re the solo OD-owner of a $900,000 practice which should net $300,000 (33% of Gross Revenues), which is your pre-tax income. Since $300,000 ÷ 12 months = $25,000 per month, should that be your monthly income (accounting for taxes and debt service, of course)?
No, because your practice results vary month-to-month. You will be fine some months, but others you will be taking out more income than the practice will have profits and cash flow to pay you. So, set your regular draw or salary comfortably below your total expected income.
Set a cash reserve target for the practice: the max you should need is one month’s expected expenses (everything except the owner(s)’ pay). Monthly or quarterly, take out any cash above your targeted reserve amount. If you’re below the target, wait a month or two for the cash to build back up.
So you can’t just take money out of your practice willy-nilly, but here’s the most important thing. Once you’ve met all your obligations to the government, your creditors, and to prudent cash management in your practice, take every red cent out of the practice that you can. Pay yourself first – build up your personal wealth and savings – and then enjoy the fruits of your labor!
Your practice is worth far more for the income it provides you than what you can sell it for. Extra cash left in the practice doesn’t do anything for the value of the practice and is likely to get spent on stuff you don’t need. Reduce stress by taking care of your other commitments first, then maximize your income. That’s best for you today, and it has the effect of increasing the value of your practice.
Every year people tend to make goals for the upcoming new year. Somehow a new year inspires others to reinvent themselves in some way and like most initiatives, they lose their luster after a few weeks. I was supposed have rock hard abs like 3 years in a row. If ever... Read more
A friend of mine was out in the job market and applied for a job as a Dental Assistant. She called me for some advice around interviewing, and during our conversation, she mentioned a shocking reality. She said, "Geronda, there were a few companies that I was interested in, but the job... Read more
By now, most of us are familiar with online reviews and understand their reach and influence, particularly on Google, Facebook, and Yelp. As a marketing consultant at IDOC, I work with optometry practice owners and managers to increase the number of new patients at the practice, retain... Read more
During a phone call with my favorite sister (now, let's not share this with anyone else), she shared the following sentiment with me, "I was just as excited for my kids to go back to school this year, until I realized that I have one kid staying home and doing virtual learning and the... Read more
Let’s say one day after an exam and a visit in your optical, a patient reviews their experience on your Google business listing and Yelp.
The review includes many details which makes it clear to anyone reading that they visited the practice, had an exam, and worked with an optician.... Read more
Take a step back and think about your business. Are you in tune with the performance of your optical? Are you achieving your desired results? If not from you, where are your patient’s purchasing their eyewear? Why? How do your offerings compare to your competition? Investigate, by... Read more
“I’m shockingly flush with cash. My checking account balance is fantastic.”
This isn’t what I expected to hear on the tail end of the most prolonged economic catastrophe of our lifetime. But many practices, after leaning out all their expenses during the... Read more
“I’m thinking of selling my practice.”
“Should I sell my practice now while prices are at all-time highs? How long does the private equity phenomenon last?”
Practice owners often focus on market trends in the pricing of practices when deciding when and whether to sell. Let me... Read more
Careful frame and lens purchasing habits are needed in an unpredictable time.
Many optometric practices are experiencing a surge in eyewear purchases due to pent-up demand and the ability to... Read more
Capture rate is a key performance indicator; possibly the most significant component in measuring and increasing revenue per patient. Capture rate can be influenced by several factors. The good news is that you can have an impact on all of them.
Multiple Pairs:... Read more