Why Dentists Should Have (and Max!) a 401(k) Profit Sharing Plan

Nate Williams Investments, Practice Management Leave a Comment

For years we have been advising clients to establish and make the maximum contribution to a Safe Harbor 401(k) Profit Sharing plan. Of course this advice is always tailored to each client’s specific circumstances. Most of our clients have heard this advice enough times from several different sources, that they readily agree to get on board. Recently, however, we were asked to speak at a dental society meeting to a group of 40 dentists and decided to quantify the effects of having a 401k or not.

Some of the general benefits of having a 401k include:

  1. The ability to setup an automatic savings plan (this is like “auto-flossing” while you sleep).
  2. The ability to get a current-year tax deduction at a time when we reasonably think you’re in your high earning and therefore high tax bracket years.
  3. The ability to allow the money to grow tax-deferred, meaning no tax on the income from the investments from year to year, allowing your money to grow unrestrained by taxes

So how does this actually play out in real dollars? To answer this question let’s compare two doctors, Dr. F and Dr. W. They are both 35 years old when they start. Dr. W follows the advice to open and contribute to a 401k plan and invests $71,500 per year into the plan ($53k max for Dr., $18,500 for spouse); Dr. F ignores the advice and decides instead to invest the $71,500 in a taxable account that will give him more control over his money during his working years (i.e. the ability to spend it). Some other facts include:

  • They are both in a 35% tax bracket; they are in a 25% tax bracket in retirement
  • They both earn a flat 8% investment return, and inflation = 3%
  • They both stop working and contributing at age 65; at that time they both start withdrawing $120,000 per year from the account (in today’s dollars; this grows of course with inflation)

What are the big differences? Investor F had to pay taxes on the money at 35% this year and so he had less to invest. Investor F also had to pay taxes on his investment gains at 35%. Investor W didn’t pay any of those taxes, but paid taxes (at the lower 25% rate) upon withdrawing the money. Most importantly, we want to know how much money they both have at age 65? And how long will their money last? And should they be concerned about signing the Giving Pledge (givingpledge.org)?

Here are the cold, hard numbers:

  Dr. W Dr. F
Portfolio value at age 65 $11,965,652 $4,887,730
Portfolio value at age 95 $59,323,099 $0
When do they run out of money? Never Age 89

 

What advice would PFG give these two doctors?

Advice to Dr. W: stay the course. Sign up for the “Giving Pledge” (https://givingpledge.org/)

Advice to Dr. F: to quote a good friend of mine who died just short of his 90th birthday, “If you get a chance to die in your 70s, take it.”

“Much Ado About Nothing” (the over-hyped Section 179)

Nate Williams Accounting, Taxes Leave a Comment

Here’s the summary; do these things and you don’t have to read further:

  • Don’t ever spend money just for a tax deduction
  • Buy equipment in your practice when it makes business sense to do so; ignore taxes in this analysis
  • When your equipment rep starts talking about section 179, smile and show him the door
  • Set a goal to pay as much in taxes as you can (What!? Did my accountant just tell me I should pay MORE taxes??)

December has to be the best month by far to be a dental equipment sales rep. They must love walking into doctors’ offices, showing off their fancy toys, and then saying those magic numbers that make every dentists’ ears ring: 1 – 7 – 9.

When that happens, the dentist wisely calls his run-of-the-mill accountant who thinks, ‘crap, I have no idea how much this guy is going to owe in taxes.’ Then the behind-the-ball accountant says, “sure, buy the equipment, that sounds like a wise purchase, doctor.”

At PFG, because we care about more than just how much your tax bill is going to be, we think about things a little differently. And you’ll be wealthier for it. Here’s why:Read More

How to Avoid the Dark Side of Investment Forecasting

Brian Hanks Investments Leave a Comment

Most of us hate uncertainty. And it’s our dislike of uncertainty that keeps the weather man and economic forecasters employed. But when was the last time you checked your favorite forecaster’s track record before acting on his or her prognostication?

Chances are . . . never.

Why bother, right? The weather forecaster gets close enough most of the time – so the economics guys on CNBC and in the newspaper are pretty close most of the time, right? They’re paid to be investment forecasters, after all.

Wrong. And that belief could be costing you money.

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Profitable Practice Rule #3: Avoid the Taj Mahal

Nate Williams Practice Management Leave a Comment

In this post I’d like to speak about your physical space – your office. This is a tough post to write as many of the readers have already made the decision about where to practice. I might contradict decisions you’ve made. I’m sorry for that. Even if you have already signed your lease or purchased your building, hopefully there is something here for you, or hopefully you can help someone else by passing this on.

The Principle of Non Distraction

Years ago I served as a missionary for my church; we had a strict dress code, which included a suit with a white shirt and tie, and to always keep our hair combed with a conservative style. I often wondered why we did this until one day I learned that the purpose was to not distract, by our appearance, from the message we had to share. If we looked sloppy the listeners would question the quality of our message. So we wore a suit, white shirt and a tie; and we tried to keep our shoes shined. To emphasize, the point was to not distract, not to draw attention.

Therefore, it did not matter if our shirts were from Nordstrom or Van Heusen, or if our suits were from Armani or JC Penney, or if our shoes were from Brioni or Payless. Our attire simply needed to be nice enough to not draw attention.

This principle applies perfectly to your building. Your facility needs to be nice enough so that your patients don’t question the quality of your work by the appearance of your building. Beyond that and you’re simply wasting money.

In fact, one of our highest producing clients furnished her office from IKEA!

Your building doesn’t make you money; it costs you money

Most dentists get this wrong. They think a bigger, nicer space is going to make them more money. Wrong. Actually, you doing dentistry makes you money; your building is included in the long list of things you have to pay for just to have the privilege of fixing teeth. So if your building is more expensive, that simply means that you have to pay more for the pleasure of making people smile.

To be clear, in dentistry, dentists make money. Buildings cost money. If you can figure out a way to get patients to come see you in a tent, do it!

To become wealthy, you actually don’t have to own the building

This is not my opinion: several of the wealthiest dentists I have ever seen do not own their own buildings. I recently talked to one doctor who is taking home over $1.3M annually out of a building he rents and our conversation went like this:

Me: “Do you have plans to buy your building or to build a new building?”

Him: “No, why would I?”

Me: “I don’t know; most dentists naturally want to do that when they make as much money as you.”

Him: “Will it give me more time or money?”

Me: “Well, no.”

I can’t wait for his retirement party at age 48. He’ll be happy at that time not to have the hassle of dumping an expensive building onto the next guy.

Your building is not that great of an investment

Most doctors think that they’ll buy a building, then they’ll sell the practice and rent the building to the new owner forever. Maybe. Or that they’ll sell it for a huge gain. Perhaps. But think hard on this one; when you’re ready to sell the building it could be 30 years old or older; how many of you are excited to pay top dollar for a 30+ year old building?

Conclusion

When you’re looking for your next place to practice, or looking to remodel, or upgrade or whatever, you will be wise to remember the purpose of your building: give you a place to do your work that doesn’t distract from the perceived quality of your work.

Also, you will be wise to remember that the financial goal in dentistry (assuming you want to reach financial freedom as efficiently as possible) is to maximize profits, not collections. Regarding your building, most of the time this means doing as much as you can in a modest building; if it’s a little smaller than you’d like, perfect!

 

Was this helpful? If there is a specific topic you’d like to see addressed, email us at info@practicefinancialgroup.com.

Profitable Practice Rule #2: Reduce Dental Supplies Expense

Nate Williams Practice Management 2 Comments

The average dental practice has a 60% overhead, or 40% Operating Profit Margin (the percentage of money you keep after paying all operating costs of the business). This means that the average doctor keeps $.40 of every dollar he/she collects. Our clients are not average, so we’re not satisfied until we see a 50% operating profit margin or better.

In our last blog post we emphasized the importance of focusing on production and all but ignoring everything else in order to increase profitability. Because most of the costs in a dental practice are fixed, this approach is critical.

But there is one cost we do want you to be aware of and to focus on continually. Clinical Supplies. We tell our clients to “spend 95% of your time and energy on production (making money). Of the other 5% that you can direct towards saving money, spend 95% of that energy and time on reducing clinical supplies.” This is sound advice. Do this and prosper.

This cost is purely variable (it “varies” with production), so you’re always ordering. And there is a big markup on most supplies. In summary, this is a warning! Your dental supply cost, if not watched carefully, can easily balloon out of control costing you a lot of money.

With careful oversite, and some effort, we have seen many doctors save big $ by getting their dental supply bill to 5% or less of collections (yes, collections, not production. Collections is really all that matters). Here are some tips to help you lower this cost (for simplicity, we’ll assume the person ordering the supplies is a female):

  1. Assign one person in your office to be responsible for ALL supply ordering (not you). It is critical that nobody orders other than her. Why? You need to hold her accountable; if other people are ordering you cannot do this. Train and retrain her over time on how to effectively order supplies.
  2. Give her a budget of 5% of the prior month’s collections (not production).
  3. Require that she keep your inventory sufficiently stocked so you don’t run out of necessary supplies.
  4. Introduce competition among vendors. Dental and medical supplies are heavily marked up; so to fight for your business, it is common for a vendor to mark down – significantly.
  5. Buy in bulk if there are sales to do so.
  6. Check online options such as eBay or net32.com for deals. We have heard mixed reviews about the quality of the products being sold on these sites, so pay attention.
  7. Consider giving your assistant a performance-based bonus for success in this area. Remember that a 1% savings on a $1M practice is $10,000 per year in your pocket, so paying your assistant for performance makes both of you better off. Talk with us about how to administer this bonus before implementing.

In conclusion, if you’re going to watch just one of your costs, for your sake, please make it be dental supplies.

Profitable Practice Rule #1: Focus on Production

Nate Williams Practice Management Leave a Comment

In my last blog post I addressed this question: “Why is running a profitable dental practice is so important to a good life?” If you haven’t read the post, please check it out here.

I also promised that my next three blog posts would address the next logical question: How can I run a more profitable practice?

There are many different answers to this question – running a small business is complicated. But over the years we have learned a lot by analyzing hundreds of practices from all over the country, and by observing the doctors who run them. Additionally, the average PFG client has an Operating Profit Margin1 of almost 10% higher than the average dental practice in America. So we know we’re learning from some of the best.

So here is how:

Rule #1: Focus on Production/Collections

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Why is a Profitable Dental Practice Critical to a Good Life?

Nate Williams Practice Management 1 Comment

Practice Profitability – The “Why” of running a profitable practice

Every day I talk to dentists all over the country. Many of them are filled with zeal for growing their practices, which is great. But when I start hearing about new buildings or satellite offices I often find myself asking, “why?”

When you start adding all this mass (overhead), and finance it all with debt, most of the time what ensues is more work, more stress, more taxes, more time at the office, and less time and money for the doctor and his/her family.

Why are you working so hard?

So what about you? Really. Stop reading and answer the question. Why am I working so hard?

We believe in work. Many of life’s greatest joys are the fruits of hard work. It takes hard work to run a business and see the profits therefrom; it takes hard work to keep yourself physically fit past your 30s; it takes hard work to have a meaningful and fulfilling marriage; and it takes hard work to raise good, well-adjusted children who contribute positively to society.

But I’m talking about your practice. Is your life’s highest aspiration to be a doctor? When you get to the end of life do you want people to look back and say, “Man, that guy placed a lot of implants!”

If you’re like most people, it will be your contributions and experiences – mainly your relationships – outside of work that bring you lasting satisfaction. If this is true, then why are you working so hard? Why do we meet doctors who, time and again, are successful at work (i.e. they produce a lot) but flounder in their personal lives? Or maybe not “flounder,” but they just don’t spend enough time at home. Are you one of them?

I’m not suggesting you stop working. I am suggesting you work smarter. And by doing so, you take more of your life back!

What is “working smarter?”

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5 Simple Tools Dentists Use to Better Understand Their Financial Statements

Brian Hanks Accounting 1 Comment

On Saturday my 8 year-old shattered my view that I’ve been a good dad. After a solid 10 minutes of watching college football next to me on the couch, he asked me, “Dad, what’s the score?”

The score? It’s been on the screen for 10 full minutes! Plain as day! How could he miss it?

Of course, after I thought about it, I realized that I’d never taught him how to read the scoreboard on the screen.

We spent the next few minutes talking about the four quarters. Which numbers meant points. Which numbers indicated time-outs left. I described the play clock and how that’s different from the game clock. Etc, etc.

It only took a few minutes, and now he gets it. Dad-of-the-year status firmly back in hand, I started thinking about you, dear dentist. You need to be able to read the score in your dental business. But you probably don’t. At least not very well.

You must know how to read your financial statements.

You must know if your financial statements are good or bad.

This post will tell you how to do both of those things. Let’s begin:

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Your First 10 Years Determine if You’ll Be a Wealthy Dentist

Nate Williams Personal Management 1 Comment

countdown

Do you want to know a secret?

The financial decisions you make in your first 10 years of dentistry will make or break you financially.

Your decision on how frugally to live in dental school – is make or break.

Your decision on whether to buy a practice – is make or break.

Your decision on when to buy that first “dream” house – is make or break.

Your decision to pay down loans, or open your 401k – is make or break.

 

“Well, duh.” I can hear you saying, “Everybody knows that.”

 

No, they don’t. Let me show you what I mean.

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Why Dentists Need Good Accounting

Nate Williams Accounting 1 Comment

Chances are, you know someone like Mike. You might even be Mike (a real client, but a made-up name).

Mike had over $250,000 stolen from his dental practice. When he laid his paperwork on my desk during our first meeting, it only took a minute to see the problem. Mike hadn’t been robbed at gunpoint. More commonly, he had been embezzled by his office manager and most trusted employee, Deb.

Mike contacted me after Deb was indicted on charges of embezzlement from another job and Mike started to look deeper to into his own numbers. When he brought his past tax returns to me it was easy to spot where Deb had hidden the money and how she had committed the fraud. Over four years Deb had charged over $250,000 to her own credit card and paid it off from Mike’s operating account. Deb, who was also the “accountant” (kept Quickbooks for Mike), conveniently coded all these payments to “Lab Expense.” During these four years, Mike’s “Lab Expense” totaled more than 25% of collections. Deb was able to steal the money and clean up her tracks in the books. Mike’s local CPA, who didn’t specialize in dentistry was oblivious to what the lab expense should be and therefore didn’t ask any questions.

Mike, like so many others, was actually pretty smart.

He was an excellent dentist clinically, personable and well-liked by his patients. He was even smart enough to figure out QuickBooks himself and do his own accounting for a while before “delegating” this job to Deb.

Mike lost $250,000 because he had a bad accounting system.

But Mike’s losses don’t end there.

Mike lost out on even more profit – well over $250,000 – over the years because he didn’t have the business insights that come from good accounting.

It’s not just that Mike’s numbers were wrong (they were). Mike just didn’t know the difference between bad accounting and good accounting.

You have to understand the difference between bad accounting and good accountingto be a successful dentist. Good accounting doesn’t just protect you from thieves. The real power of accounting lies in the ability to make good business decisions. 

The biggest, most successful and best run companies in the world – Apple, Google, Microsoft and thousands of others – know the importance of good accounting. They spend millions of dollars on sophisticated accounting systems and people every year.

Savvy business people understand the value of good accounting. As a dental business owner you should too. 

Why?

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