123: Dental Financial Planning: Turning Chaos into Financial Freedom - Part 11

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Welcome back, everybody, to another episode of the Dental Boardroom podcast. You know, one of the biggest mistakes I see dental practice owners make isn't in the treatment room. It's actually in how they manage their financial planning rhythm. And too often owners treat planning as a one time event instead of what it really is, an ongoing cycle. Think of your business and personal finances like a patient and you give them care. You don't just clean a patient's teeth once and call it done. You schedule them six months a year. You monitor, you adjust. Financial planning works the same way. So today I want to talk you through the recurring sequence of activities every practice owner should build in their calendar. How often should you revisit your business plan? How often should you update your cash flow forecast? When should you sit down for a tax strategy review? And even how often you should reassess your personal risk tolerance in your investments. By putting these on a deliberate cycle, you create financial hygiene that's just as critical as clinical hygiene in your practice. So, as you know, up to this point we've covered the four phases of financial planning for dental practice. And each of these phases sort of has some subsections to them. But the main phases are to organize your team, your strategic team. Number one. Number two, complete a personal financial plan for financial independence. Number three, complete a business financial plan that supports your personal plan. And now number four, implement, monitor, revise and repeat. That is the substance of today. What does the cadence of activities and meetings look like so that you are maximizing the rate of financial hit independence? All right, let's go ahead and show these. Here's a little grid that I've got. And if you're watching on YouTube again, you can see this. For those not, I will narrate it on the screen. I show a column for each month of the year and then the rows are the following, the following activities. These are financial planning activities. Number one, reviewing your financial statements in your practice. This is your profit and loss. This is your balance sheet. If you're with practice cfo, we do a CFO analysis every month that dives deeper into your economics and breaks down into each category like labor or collections or operating income, cash balance, debt payments, that kind of thing. So review these. That's number one, review financials. Number two, update your long term financial plan. This is where you go back to the, to the whiteboard and you say, okay, previously we, we had wanted to retire at age 63 and have X amount for living, yada yada. And how often do you go back to that whiteboard and update that based on changes to your life and changes to your desired future. So that's updating your long term personal financial plan and then there is updating your personal spending plan. How often do you revisit your budget on how much you need to spend? And then number four is to complete a tax projection. Number five, how often do you update your family payroll? How often do you change your own payroll structure for you? And if on payroll, your spouse and kids, then we have, what is this number 1, 2, 3, 4, 5, 6 is updating, okay, the doctor payroll. So actually have two here, updating the family payroll. How often do you do that? And how often do you update the doctor payroll? And then lastly complete a cash flow forecast or projection and allocate surplus capital. So in the last couple episodes I talked about this financial forecast. This is where the rubber meets the road and you get traction in your financial planning progress in is that financial planning forecast? Because then you make critical clinical decisions around what to do with your dollar in order to grow your personal wealth. So how often are you doing that cash flow forecast and allocating out your surplus to different financial planning strategies? So those are the seven different items that I have on here that are inside of this sort of process of financial planning for a dental practice owner. How often do you do these and how often do you do them with somebody who is helping coach you? Now, in my case, it's with the CFO advisor. And here at practice CFO we have, I think, 10 CFO advisors who are meeting every day with our clients. They're doing the clinical planning around this whole process. In these past 10, 11 episodes I've done here on financial planning for a dentist, they are making sure that it's happening, that it's being regularly revisited and that all action items coming out of meetings are executed properly. So that's what the CFO advisor does. Maybe you can get your tax cpa. You're going to have to, you're going to have to direct them a little bit. And because I don't think most CPAs are going to be doing this stuff out of their own free will, they're not really designed to do forecasting and future planning. They're designed to do historical data gathering and give you a financial statement and file a tax return.

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So it is a sort of a unique type of person that does this type of financial planning specifically for a dental practice owner. All right, so the first one reviewing your financial statements, that is done every month. So as you go across the page, there's literally an X under each month column. So January X, February X, March X Every month you should be reviewing your financial statements. Now here at Practice cfo, as you know, we have a report that targets certain goals and these reports will show you whether or not you achieved those goals. So review those. Ask questions. What doesn't look right? Ask us. Ask your CPA when something does not look Right. Be an informed reviewer, an informed reader of these financial statements and in time, every, the more you do it, the more it becomes natural and the more you become versed financially the rest of them. I had doing that with a financial advisor, specifically a financial advisor who can speak the language of dental cash flow in a dental practice, who speaks the language of dental tax planning, who speaks the language of dental 401k planning and structuring your payroll W2 to be a specific way for specific outcomes. Most financial planners are very generic. They're going to tell you how much you need to save every month in order to retire at a given date. They'll plan Social Security income, they'll plan inflation rates, rates of return on your investment, all that stuff. But that's very, very standard. The real financial planning where you get traction and actually create surplus cash that you then invest for growth is by going deep into the business cash flows. That's a very specific type of financial planning service.

And so what what we do at practice, CFO with our CFO advisors is in these other areas doing the long term financial plan update, updating the personal spending plan, completing a tax projection, updating the doctor and family payroll and completing a cash flow projection. That's what essentially we're using our tools to do. You come into the office or we do a virtual meeting and we revisit each of these and have the discussion what's going on in your practice? You have eyes into things that we don't. What's happening with your labor, your team, what's happening with your building and renovations and equipment and your schedule and your hygiene and all of that? What's happening? We need you to inform us that and then we can bake that in to our financial forecast and then we can sort of make all of these decisions very precisely. So how often do you do update your long term financial plan? So this is the plan where you're looking out on the future of your life and you're defining your life. How often do you revisit that? I recommend once a year and I like that to be in the first quarter. Now on the page here that I'm displaying, it's in January where you say, okay, it's a new year. What's changed in my life? What's changed in my perception of me, my relationship to myself and what I want out of life? And what do I want that's going to have a dollar sign attached to it or a cost? What do I want for my kids education? Has that changed? What do the Goals I want for my life or my spouse and I, what are our goals together? And just revisit that once a year. By doing that, you're becoming very intentional about the way you live your life. And that's where financial planning for your life is very much an aspect of life planning in general. So I would say once a year to update your long term personal life plan, slash financial plan. All right, on to the next one. How often should you update your personal spending plan? Meaning how often do you go through and sort of add up how much you're spending in the different areas in your personal life? Just do that budget. You know, it might take an hour or two, shouldn't take that long, but I think it's a good idea to do that once a year to really understand. So if I say how much, how much do you spend personally? You should be able to know that answer fairly precisely. It gets a little tricky when you're a business owner because some of your personal expenses you're running through the business.

And, you know, and whatnot. But, but you should be able to have a pretty good handle on what that number is. And I tell you, people get it wrong, typically by up to 50% all the time. Oh yeah, Wes, I spend $10,000 a month. In reality, they're spending $14,000 a month. We tend to underestimate our spending. Okay, So I think it's a good idea to do that once a year. Now, if you're with practice cfo pretty much every time we meet, I'm asking you, what do you need in your personal checking account every month to live? And every few months or so, or every, every year or so, a client will say, hey, Wes, it's it that 10,000 you've been depositing twice a month, it's actually too much. Or that 5,000 twice a month isn't enough. And then we adjust it. And if we adjust it, let's say I add another 3,000amonth, then I have to tell you in my financial forecast, what does this mean? Does this mean we have to fund less into our IRA or 401k? Does this mean we have less to save for that second house? Does this mean we have less for this and that? Yeah, something's going to give when you need to spend $3,000 more a month and your taxes might go up because of that. Because now we may not be able to fund our tax deductible 401k as much due to that consequence. So there's an interrelationship happening across These different variables in your financial ecosystem. Okay, so update that personal spending plan once a year. Next one, complete a tax plan. How often should you complete a tax plan? I recommend completing a tax plan once in June and once in the last quarter of the year, preferably October. November is okay. December's getting a little tight. And here's why. In order to do a good tax projection, you usually need the tax return from the prior year done, because that's your starting point. Cause then what we do is we say what variations are going to occur this year compared to last year, and then we determine what is the tax effect of those variations. So assuming there's no big change in tax law, now we did just have some tax, a tax bill rollout, the one big beautiful tax bill, which by and large kept the tax code as is. So in a way, it prevented the tax code from reverting back to its pre2017 tax rates, which was a little bit higher, and it kept them at that lower rate. And so in many ways, this tax bill essentially perpetuated the status quo. So as long as there's no big tax code change from year to year, tax planning is fairly straightforward. Once we have your prior year tax return done, and so we try to get as many tax returns as we can done on their original due dates, which is March 15 for corporates and April 15 for the individual. However, given we only have about five weeks to do those corporate returns, it's really difficult to get them all done. But that said, we do our best. And, and then by June, let's say we have, we have most of our clients corps done by June, and their personal now June or July, we can do a really good tax plan. We have two things. We have the prior year tax return done and we have enough data in the current year, namely five or six months of financial statements in order to project out what your tax liability is trending toward. And now with those two things in place, we can now make adjustments to your tax withholdings on your W2 in order to meet your tax obligations. And we can also start doing our tax strategies that I talked about in my last episode. And then, so you do that in June, you adjust how much you're paying the IRS with each payroll, or if you do quarterly payments, how much you're paying quarterly. And then in October, November, you have now another three, four, five months of data on your financial statements to revisit your tax plan and say, are we on track with what we thought back in June? And if you ended up collecting a lot more or your expenses were lower, we may need to withhold a little bit more in taxes for the past for the remaining month or two and vice versa. If you're collecting less, we can lower the amount of of taxes that you're paying. But the key thing is, is that we are adjusting as we go. We are adjusting as we go. We're not waiting until April 15, after the year is over to do our tax planning because by then it's too late. And that's when you get hit with the surprises. And then you detest your CPA at least for that moment because you owe 20, 30, 40, 50, 80 grand in taxes unexpectedly. But if you do a tax projection in June or October around those dates twice a year, you shouldn't be hit with any surprises unless you didn't pay the tax estimated payments or adjust your payroll tax withholdings out of your W2 that your CPA or advisor told you to do. If you didn't do what they told you to do, well, then that's on you. But assuming you do, you shouldn't owe anything unless you just have a really ineffective CPA or financial advisor doing this tax flow, this tax projection. All right, let's go on to the next one. How often do you have to update family payroll? Well, to be honest, if your kids and spouse are on payroll just to maximize the tax deductions and to fund the 401 for the spouse, then you can get that set up in January and then just fix it. And you don't need to change it for the rest of the year because by January, you know what the tax code is around 401k contributions and the standard deduction. You know what you need to in order to set up the family payroll, that's your kids and spouse. And then you just set it and forget it for the rest of the year. And then you revisit that in January of the next year. Sometimes I'll even do the full payment in one pay period, knock it out, then it's done. And you don't pay that $1.50 per deposit per paycheck. You know what I mean? If you really want to get efficient. But it looks more legitimate if they're paid evenly throughout all pay periods of the year. It looks more legitimate to the irs. So update the family payroll. Really, once a year is all that's needed. Now the doctor Payroll, that's different. Come January, everything that is phased out on your payroll deductions resets in January. I'm talking about your Social Security, which is the big one, which phases out at somewhere around 120, 25 right now, I think it's around 170,000 plus or minus. Once you hit 170,000 in W2 for a year, let's say you're in October and you hit it and your total comp is 230 for the year. Anything above that, roughly 170 isn't subject to the 12.4% FICA tax or Social Security tax, any which is 6.2 employer, 6.2 employee. And so if your payroll is fixed every month, as soon as you hit that 170,000 for the year of W2, your very next payroll, you're going to see a net deposit increase. You're going to see a larger amount deposited in your personal account from payroll. You're going to see that larger deposit occur because it didn't have the Social Security withheld out of it. And that's a beautiful thing. Some states have like state disability income that has to be or insurance that has to be deducted that phases out. Different states have different things that are phased out. But in January everything resets. And so that's why if you adjusted your payroll in the last quarter of the year after you hit the Social Security target, in order to get your fixed budget, let's say your budget's 15,000amonth for living expenses, come January, that 15,000 is going to drop to like 13,200 because the FICA tax and all the phase, the things that are phased out kick back in and now you have to actually pay those again. So in January I like, I like to do, I like to, to do a, an update to the doctor's piano. Sorry, the doctor's payroll. And here at practice cfo, our December, early January, so busy getting all of our doctors payrolls set up so that we're starting off the year right based on an initial early, early forecast for the new year for tax withholdings, tax deductions, 401k contributions, that kind of thing, kids on payroll, spouse on payroll. Then as the year goes on in those same months that we like to do the tax update, we like to do the cash flow projection and update the doctor's payroll. So that's June and October roughly. That's when we like to update the doctor's payroll based on how the year is actually panning out.

And then the last item, complete a cash flow projection and allocate surplus. So that's that critical activity of forecasting your cash flows and then making clinical decisions about what to do with your money that is also the same months as your tax projection and updating your doctor payroll. Those three things happen collectively at the same time. You do a cash flow projection, it allows you to do a tax projection. You analysis, you analyze those two things in relation to each other and then you structure the doctors, the owner's payroll for the right amount of tax withholdings, the right 401k withholdings, the right net deposit for personal living, and the right gross W2 in order to maximize that 401k or defined benefit plan contribution, which is a function of your gross W2. So there's a lot of elements that are tethered into structuring your payroll. You've got to do a cash flow forecast one out of that, a tax flow forecast. Then you revisit the cash flow forecast to update it with the tax forecast. And then you structure the doctor's payroll to make sure that all of these obligations are being met effectively.

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And so I have this as a PDF. I'll see if I can get it added to the show notes. You can set it, lock it in your calendar and do these things every month. Review the financial statements once a year, long term financial plan once a year, update your personal spending budget once a year. Update your family payroll. And then multiple times a year in January, June and October, update the doctor's payroll. And in June and October do the cash flow forecast and the tax projection. And really what is the business financial planning doing that in January, June and October is the best scenario? That is the cadence, everybody. If you do this cadence, I guarantee you your financial hygiene is going to be remarkably clean. And those, those financial teeth, so to speak, they are going to do the job. You are going to get financially independent way faster, by a significant magnitude faster than your average dentist who isn't doing these things. Because this creates clarity of the pathway, it creates accountability, it creates good decision making and it does it on a regular systematic basis. And that right there moves the needle every week, every month, every year. And it's amazing how fast a good dentist that's cash flowing well in their practice can become financially independent and create so much flexibility to live the life that they want. And with that, that concludes the financial planning for dental practice owner turning financial chaos into financial freedom. This is a, this is a, this is a process, everybody. This isn't a product, it's not a one time solution, it's not a quick fix. This is behavior, it's habits, it's systematic, it's reporting, it's activity, it's meeting with your advisor. It is a fluid living thing. Do that and you will look back 10, 15, 20 years and you will be so grateful for, for yourself for putting forth that effort to do this type of financial hygiene and defining your life. It's a beautiful thing. Thanks everybody for listening to this extended series on dental financial planning for a practice owner. Going forward, we've got many other great topics coming ahead for you in the Dental Boardroom podcast. Stay tuned until next time.