Coach Barrow

Over the last 5 articles, we have taken an in-depth look at various aspects of dental practice finances, including:

·� � � � � � � � How to set up a personal budget a year in advance;

·� � � � � � � � How to set up a professional budget (that will support your desired lifestyle) a year in advance;

·� � � � � � � � How to pay associates and hygienists and remain profitable;

·� � � � � � � � The difference between Profit and Cash Flow – and why it matters;

·� � � � � � � � Applying the Chaos Theory to dentistry by conducting a “what-if” analysis.

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This time, I want to wrap up the subject of “finances” by considering:

The 4 Business Hats of a Dental Practice Owner

Dear Coach: OK – I’m intrigued; can you describe the roles associated with these four different hats in more detail?�

Dear Dentist: The benefit of calculating the four different sources of income that your dental practice can pay you is that you will be able to calculate a revised gross revenue target (as covered in the second step) - this in turn will help you set your fees.�

So, let’s begin by taking a more detailed look at the 3 different hats:�

• As the dentist, you are doing the clinical work that brings the income into your business, so in terms of your budget, treat yourself as an associate. For example, you could use a model of paying your self 45% of all gross fees, after your lab bills and other large, variable expenses.�
• As the CEO (or Managing Director), you are putting in time running and directing the business. Even if you have a practice manager, you are very likely still playing this role to some degree, at the very least thinking about direction and strategy. So, you should be paid for that time.�
• As the investor, you have invested money into the practice, so you should get a return on your investment;
• As the property owner, you have invested capital and time into the purchase of a freehold property, on which you are entitled to receive a commercial rent.

Dear Coach: Paying myself as a dentist and as the property owner is pretty straight forward, but how do I determine the amount I would get paid as the CEO and investor?

Dear Dentist: Let’s look at a simple example:�

John is a private, single-handed dentist who has been grossing £200,000 per annum for the last 3 years.�

• His variable expenses (lab bills, etc) are £60,000 per annum.�
• His hygienist grosses £60,000 per annum.�
• He leases his premises (so we can ignore the property owner hat) and he has bank loans of £60,000.� �
• His equipment and stock are worth £95,000.�
• He works 4 days a week as the dentist, and 1.5 days as the CEO.

Let’s look at his income applying these principals�

1. The Dentist�

This is a very simple formula: £200,000 - £60,000 (variable expenses) = £140,000.�

Applying 45% = £63,000 per annum for John.�

2. The CEO�

Again, this is a very simple formula. John would work a total of 78 days per annum (1.5 x 52) as the CEO.�

Now, consider what it would cost to employ someone in this role� - let’s assume £70,000 per annum for someone to work 5 days a week.� At 1.5 days a week, John is working 30% of the job, and therefore should get paid £21,000 per annum.�

3. The Investor

This is a little more complicated - most business owners are not used to looking at themselves as investors in their own companies.�

But, consider what would be involved with selling your practice. Typically in a dental practice, you would be selling the goodwill (intangible assets like name, reputation, customer loyalty, location, products, etc) the equipment, the stock and possibly the lease or building.�

Then, after paying off any debts, you would hopefully be left with a positive cash sum - this is the money you have locked up in your business. In other words, your investment in your business equals the total of what it is worth (or the selling price), minus any of the debts associated with the business.� This sum could be anything from a few pounds to hundreds of thousands of pounds.

In the world of business, companies are typically sold for 3 to 20 times their annual profits or turnover. In dentistry, you would typically only get 30% to 50% of the turnover. So, you are not going to get fantastic capital growth in your investment.�

Historically UK dental practices have not sold for any great value, so it is unrealistic to expect that your dental business is going to make any great capital growth - therefore you need to look at their your business as a cash cow - i.e. it needs to compensate you for all of your time, money and effort by turning out really exceptional profits every year.

People who invest in other businesses want a return on their money – either through large capital growth, or through a good annual return - otherwise why bother?

So, why not look at yourself as being an investor in your own practice that deserves an annual return?� �

Investors would likely be looking at rates from 20% to 50%+.� In terms of your practice, you can choose whatever rate you want – but 20% seems a reasonable figure with a moderate risk.

So, going back to our example with John, we will assume a rate of 45% of the practice turnover for goodwill value – there are many ways of working out goodwill value, but the reality is, it is only worth what someone will pay!�

The following chart breaks down his investment:

So, let’s say he wants an annual rate of 20% on his capital investment - this would equal £30,400 (152,000 x 20%).� This is referred to as the Return on Investment (ROI).

So, John’s total annual income would be:

Dentist� � � � � £63,000
CEO� � � � � � � � £21,000
Investor� � � � £30,400

Total� � � � � � � £114,400� � � � � � � �

We will call this figure the Ideal Minimum Scenario (IMS)�

Clearly, if John’s current levels of gross revenues do not support this level of drawings, he needs to increase productivity or prices to compensate – back to the “what-if” analysis we looked at last time.

Dear Coach: Well I’ve never considered this before, so how do dentists actually pay themselves under these four different hats?�

Dear Dentist: Once again, it is a matter of including these costs in your budget. It may take some trial and error, but by working with spreadsheets, you will be able to see how your financial situation will support this payment structure.�

For example, if your annual accounts show a profit of more than the IMS for your situation – well done. If your profits are less than your IMS, you have some work to do in improving your business. To improve your situation you have only two choices – increase your sales income or reduce your expenses. Or of course, do both.

Summary/Key Points�