Chris Barrow’s Blog

Dear Coach:
Last time we spoke about setting personal budgets, so that I could determine my personal living expenses up to a year in advance, using an Excel spreadsheet. I’ve done the work on that, including a scary weekend looking back through our real living expenses last year, (quite a revealing exercise) – so what’s the next step?
Dear Dentist:
I want to start by taking you back to my days in the 80’s as a financial advisor. I discovered early in my career that people were bored with the idea of listening to me talk about pension plans. So, I came up with a little game to peak their interest – I would ask potential clients to create an imaginary scenario of where their money goes at the end of the year. Here’s how the story would go:

Imagine that the government has created a new system for the financial management of small businesses – at the end of each year you would collect all of the money that customers owe you for the entire year.
So, on New Year’s Eve every year, you deposit all your funds into a gigantic, inflatable cash register, and everybody you owe money to will be invited to make their withdrawals.
Who are the first people who will walk up to the cash register and take their cut of what you earned? Most people will say the ‘tax man,’ but in UK law, it is actually the customs & excise people who collect their VAT.
Second in the queue is the ‘tax man;’ third in the queue are your staff; next comes your secured creditors (people who you owe money to who have a charge against bricks and mortar that you own, like a commercial or domestic mortgage secured against property).
Then, comes all the other secured creditors, including all of your trade creditors. Then, if you’re in dentistry, your dental laboratory, and the supplies and materials people – basically everybody else you owe money to would come next.
Where do you come in the queue?
After all of the legal creditors of the business take their cut; it’s finally your turn.
You press the button on the cash register, the drawer opens, and one of two things happens:
1.) You scrape the loose change from the year into your pocket and walk away;
2.) You find that there’s an IOU note at the bottom, written by you because you withdrew too much money.
Most small business owners take the view that they should be last in line when it comes to paying themselves. So, this giant cash register is an excellent metaphor for what tends to happen in small businesses in real life.
After going through this exercise, I used to ask my clients, ‘How does it feel to have been working for a year and be the last one at the cash register?’ The answer I usually got was, ‘Absolutely lousy’.
So I would show them that by diverting cash into a pension fund, they could be the first to withdraw from the year-end cash register, provided that they were solvent.
As a business coach, I’ve been coaching my clients on how to put themselves at the front of the queue as well – and that’s what I want you to do now.
So let’s start with an explanation of fixed and variable expenses – if we look at your practice, what is the distinction between the two?
Dear Coach:
Our practice may differ from others because we have a number of associates. However, this concept applies to all practices.
The variable expenses are impacted by the sales and dental income. In our practice, these would include:
• The associate(s) wages
• Dental hygienist(s) wages
• Lab bills
• Dental materials
• Credit card charges
• And many more…
Subtracting such variable expenses from the total sales for the business will leave us with a gross operating profit for the practice.
Out of that operating profit would then come all the fixed expenses, including:
• Rent/mortgage for the premises
• Insurances
• Staff salaries
Dear Dentist:
To summarize, fixed expenses are the things that stay the same year round and variable costs will change throughout the year?
Dear Coach:
Yes. But it is important to take into account that the fixed costs will increase due to inflation, which means my prices have to go up to compensate for this.
Dear Dentist:
When you calculated these costs for the first time for your yearly budget, where did you get the information?
Dear Coach:
I have an accountant who produces a profit-and-loss statement – this allows me to see the sales from previous years, and the variable and fixed costs. By looking at these statements, I can get a good idea of the trends and the numbers needed to prepare a professional budget spreadsheet. I’m beginning to see the light here…….
Without a budget in place, what tends to happen is that I just look at the total profit and may end up taking more money out of the business than it is generating in future years – in the past, I’ve not really been aware of what the profit and loss statement can tell me.
For example, I have historically under-estimated the expenses of the business, which means I have effectively under-charged the patients!
I cannot recoup this from staff salaries, so at the end of the day it’s me and my family who suffer.
So, I can see that it is important to plan my budget ahead of time each year to prevent this from happening. The first time around, just like the personal budgeting, I need to look at the numbers from historical profit and loss statements.
Dear Dentist:
So, what is the purpose of creating a professional budget spreadsheet a year in advance? How does this allow you to achieve your personal financial goals?
Dear Coach:
Last Time I calculated the total cost of my personal expenses and came up with a figurer of how much I will need to make this year. The key is to incorporate this number into my professional budget. Make this number the first on my list of fixed expenses, because it is the most important.
Once I have created my professional budget spreadsheet, it will just be a matter tracking my progress – always being aware of my financial targets so I can make course corrections when necessary.
Dear Dentist:
And can you now break down your yearly budget into an average daily target?
Dear Coach:
Yes, but I will have to set a realistic target.
Creating a professional budget not only allows me to establish a daily target, but it can give me a good idea of what I need to charge as my hourly rate.
The first step is to look at how I work, and how many days I’m going to work in a year. Multiply the total hours by my hourly rate for my total sales for the year.
Then, I can look at my variable expenses – which I can get from previous accounting years.
Now, I can add in my predicted sales for the year, fixed expenses for the year, and my drawings for the year (determined after our last conversation). Subtracting the total of all my expenses from the total sales leaves me with my total profit – hopefully this will be a positive number.
Dear Dentist:
You might then want to ask yourself, ‘Have I put enough money in my expenses to cover unexpected eventualities? Does that profit look healthy for what I want from my business?’
If the answer is ‘yes,’ then you’ve predicted your sales figures correctly.
If you look at the final figure and it’s a loss, or you feel the profit is too small and it’s not covering potential unexpected disasters, then you’re going to have to increase your sales performance.
This means you’re going to have to ask, ‘How can I increase my sales?’
The first thing you can do is increase your prices, then you can look at how you work – can you work more efficiently? Can you do more high-profit treatments for your patients for their benefit?
If you’re not going through this process, how do you know how your business is going to perform and whether you’re going to have enough money to pay your bills?
One of the things that I’ve noticed in working with dental practices is the fluctuation of hourly rates – some dentists calculate their hourly rate based on what the competition is charging; some base it on an estimation of the expected number of clients per year.
Many will establish an hourly rate that will meet their financial goal, but end up discounting that rate for things like new patient appointments or routine checkups. So, is it correct to say that unless you stick rigidly to your hourly rate, you are always going to wind up with a shortfall?
Dear Coach:
This is a good example of the importance of keeping an eye on your budget on a continual basis. Yes, you can take a lot of profit off quite quickly by discounting your hourly rate, but if you see this impacting your monthly target in terms of your budget, you can compensate for these types of shortfalls.
Once you have created a professional budget, you can start making decisions about what you have to alter within your business to make the whole business function without going bust!