One of the things that has been on my mind the last week is practice financial management. It is this time of the year that I sit down and do financial projections for my office. Years ago I learned a method for looking at the numbers in the practice that let’s understand where everything is going and plan for how I want it to be different. As I was going through my numbers for 2012 I have to ask myself the question what will my payroll be? Answering this question again for another year made me remember the first time I became clear I need to treat myself like an employee to make sense of my finances.
At the time my answer was the later. The challenge of taking what is left over is planning and budgeting. When times are good and the money left over is a larger number, we have a certain set of emotions about our financial situation, and will make financial decisions and commitments that we may not be able to truly afford. When times are tough, we take less and play the game of cash flow management delaying bill payment at the office in order to cover our personal needs. We can also make financial decisions, like letting team go, or cutting back on supplies that affect the health of the practice. When you take what is left over, you have no idea what you truly make, can live on and how to plan your personal expenses. Lastly, with this approach the practice bank account is often cycled completely of funds and no monies are left in reserve to manage when equipment fails or to buy that something special you see in an exhibit hall.
When I take a salary, just like my team, I know every two weeks the amount of my paycheck. This knowledge leaves me confident in my ability to plan my personal finances and make decisions about what size house payment and car payment I can afford. This approach also allows for very even cash movement in the practice. When I take a paycheck I have very little stress and uncertainty at a personal level about money, and come to depend on the business for consistent support. Money can be set aside in the practice as a reserve. When I do this and I plan for the year, I can look at the practice finances on a quarterly basis and if there is money after the reserve I can pay myself a bonus. I love these moments!
I have been paying myself a salary as a system for many years, and I can not tell you how much more I enjoy my practice and how much easier it has made my personal and practice financial life.
Lee:
In my work as a CPA/Wealth Advisor for dentists, I have learned about behavioral economics – mostly from David Laibson, PhD, a Behaviorial Economist at Harvard. The more you put on auto-pilot, the better. So, paying yourself a salary, having taxes and your 401(k) withheld, making an automatic deposit to your personal investment account, automatically enrolling your staff in the 401(k) plan when hired, etc. Once the wheels are in motion, powerful things can happen financially. As for the employee 401(k) enrollment, if you put them in the plan with a default 60/40 allocation, 90% of the folks will not change it. Left to their own devices, only a handful will enroll in the 401(k).
Great blog!
Haden