Chris Barrow’s Blog

Dear Coach:
As a dental practice owner, what is the benefit of preparing a personal budget?
Dear Dentist:
The overwhelming majority of dentists work as hard as they possibly can for the year, and take drawings out of the business on a monthly basis. It’s almost as if they are the last in the queue to get paid – the Inland Revenue has to be paid, the suppliers have to be paid, the staff have to be paid – then at the end of all of that, the business owner gets paid.
Imagine what it would be like to sit at the front of the queue of your business every year and say, “I’m going to get paid first – I’m going to create the business that will meet all of its obligations to creditors and staff so everybody gets paid what they are worth, including me.”
Dear Coach:
How do we plan for our personal finances a full year in advance?
Dear Dentist:
One of the things I’ve talked about in the Dental Business School is the idea of taking an annual retreat, spending 2 or 3 days away from the business to answer the following 3 questions:

• Where do you want to be in 3 years, both personally and professionally?
• What do you want your calendar to look like next year?
• What do you want your finances to look like next year?

Focusing on the third question, specifically in terms of your personal finances, I recommend that you create an Excel spreadsheet outlining what you think your personal living expenses will be for the whole year.
So, you’ll have a target income which will include:

• The necessities of your personal life – mortgage, utility bills, food, etc
• The luxuries of your personal life – your holidays, home renovations, etc.
• A provision for the taxation that will accrue on your income.

The idea is to create an outline of your projected personal expenses for the next calendar year, based on your historical records.
This first time around, you will need to dig out your personal financial statements from the past few years in order to get an idea of your typical yearly expenses. And, you may need to make some assumptions for inflation and other increases in order to keep your expenses up to date.
Dear Coach:
It sounds like creating this spreadsheet will take a lot of time and effort – is it really worth it?
Dear Dentist:
Absolutely. This step is the first rung of the ladder to effectively managing your finances.
The actual investment of time and effort required to create this spreadsheet is minimal in the grand scheme of your year. In my experience, it takes a full day to gather your personal records and put the spreadsheet together the first year – this is the most time-consuming part of the process.
Once you have this foundation however, it will take you no more than half a day to update and revise the figures each year moving forward.
Dear Coach:
One of the problems I’ve got as a dentist is I run everything in one bank account – my personal account is mixed with my business account. Is that a problem?
Dear Dentist:
I think it’s very important from the point of view of business efficiency to separate business and personal bank accounts – to have a debit and credit card for your business account, and a debit and credit card for your personal account.
It’s also important to exercise strict controls on each card for expenditures – make sure to establish a wall between the two lines of expenditure. This will not only make life much easier for your bookkeeper or accountant, but it will give you a more accurate picture of how you spend your money.

If your business and personal expenses are combined, I would suggest beginning the process of separating them.
Dear Coach:
So in order for me to create my personal budget spreadsheet, I’ve got to get my ‘financial shoebox’ and go through all my bank statements from the past few years? Isn’t there an easier way of doing this?
Dear Dentist:
First of all, I am a great believer in internet banking – using a software package like Quicken or Microsoft Money makes it very easy to print annual reports of what you spent in each category.
However, if you have not been using this software, I would suggest that at your hourly rate, even for an average dentist, you would be better off employing a domestic bookkeeper for 8 pounds an hour to collect and organize this information for you.
Dear Coach:
And once I put all my information in the spreadsheet, how do I make a provision for taxes?
Dear Dentist:
My experience has been that if you are earning less then £100,000 a year, making a provision that all of your income is going to be taxed at an overall marginal rate of 33% is usually close to the mark. This is taking into account the effects of personal allowances, various tax rates, and the thresholds at which basic and high rate taxes are paid.
You’re obviously never going to be 100 percent correct, but 33% should be very close for this level of income. So, for approximately every £70 you want to spend, you need to earn £100 gross before tax.
If you are earning over £100,000 a year, then it’s best to assume a tax rate of about 40%.
Dear Coach:
It seems like all we’re doing is putting a bunch of numbers together – how will the spreadsheet actually help me achieve my financial goals?
Dear Dentist:
Imagine that you had completed this spreadsheet in August of last year, and determined your desired personal income for 2005.
You would be looking at a number – whether that’s £60,000, £90,000 or £120,000 – once that number is in front of you in a concrete form, your brain automatically starts to think, ‘What does my business have to look like in order for me to be generating that level of income?’
It’s as if you’ve created a vision, and now have a clear picture of how much you need to earn to support your desired lifestyle. Now, it’s just a matter of determining how you will achieve your desired personal income through your business (which we can perhaps discuss in our next conversation).
Of course, if you’ve already got a reasonable understanding of what kind of revenue your business is generating, then that information can either fill you with inspiration or gloom. You might look at the numbers and say, ‘I can do this – I can get my business in shape!’ Or, you might look at the numbers and say, ‘How am I going to do this?’
Either way, what I’m trying to do is get you thinking about your business very early on, before the year even starts, to get a clear picture of what you need to earn.
Dear Coach:
Is it too late to start this process now for this year?
Dear Dentist:
Absolutely not! You can still create a spreadsheet and determine what level of income is needed to support your desired lifestyle during 2005 – the idea is to begin the process and set the foundation for your financial future.
Really take a look at what level of income is going to keep you motivated – what is the pay off for tolerating the lunacy of self-employment? It boils down to the fact that this is not really about the money – it’s about managing your finances in a way that rewards you with the lifestyle you deserve.