Calculating Break Even

Let's talk about calculating your breakeven in your practice. In the Associates on Fire program, we have our accounting 101, our accounting 102 and our accounting 103. In accounting 102, we talk about calculating your break even and we define your breakeven as three types. Number one, just keeping your doors open in your practice. Break even. Not taking home anything for yourself. Break even. Number two is keeping your doors open by paying your overhead and your debt. And then it's also paying for your current living needs, your lifestyle needs. Break even. Number three, which is by far the most important, is called your goals based breakeven. That's paying for your practice needs. It's paying for your personal living expenses today and then it's paying for your future self by funding your net worth statement of assets and paying down liabilities. And if you're a client of practice cfo, everything we structure, everything we do in our planning is to accelerate the day that you become financially independent, to give you options in life and let you pursue that sort of life that gives you the most value and the most reward. So your break even and understanding that is no small thing. If you work with a practice management consultant, they may come in and call it a bamboo and that bam is how much they believe you need to collect. Now sometimes they do their best to go through this exercise, I'm going to go through with you, and they do a good job at it. Other times it might just be sort of pulled off the shelf and say, here's what I think you can collect. Let's go for it. I like calculating it this way because I want you to walk in the office every day thinking, as I meet with my team, as we set goals, as I talk with my patients, I think about my life. I want to know that I have context and purpose to what I'm doing at work every day. I don't just go into work and do dentistry because I love it. Now you may love dentistry and I hope you do, but I want you doing dentistry not only because you love it, but because it's helping you accomplish those things in life that give you a sense of value and a sense of purpose. So let's start off with calculating your goals, business based break even.

And let's start off by saying, what are your current or defining, what are your current monthly collections? Now you can pull it up from your practice management software for the prior year or the past 12 months and let's say that that's 120,000. Now it may be 40,000, it may be 400,000, depending on the style of practice, your specialty. A lot of factors go into that, but let's say it's 120,000 per month. Now remember, every cell in this Excel spreadsheet that is white is automatically calculated for you. You only need to enter or complete the gray cells. And I mentioned that up here, that just complete the gray cells. Now you may need the help of your CPA for the tax projection section and the third party administrator or TPA for the 401 projections. If you have a 401k, the TPA can help you know how much you have to contribute. For the employer contribution to the 401k which would go both to you and the portion that would go to your staff as well. You can also see that on your corporate tax return. But halfway down on the main page that shows all of your expenses and you'll see a row for pension contributions. Pension profit sharing plan contributions.

But we're going to go through that in a lot of detail here in just a moment. The result is that your goals base breakeven is going to automatically calculate up here at the top. You'll see I've given you an example over here on the right of just pre populated numbers so that you have some context there. But I want to go through step by step and actually sort of talk you through it so you have context and understanding. So you put in what your current average monthly collections are. Here's the monthly column and here's the annual column. Some things are either easier to calculate on a monthly basis. Other things are either easier to calculate on an annual basis. Whichever one you enter in, it'll calculate automatically the other one either by dividing by 12 or by multiplying it by 12. And notice that this column which is very or this row which is very important, says you either have a surplus or a deficit. Now, right now, because you're collecting 120,000 and it's saying that your goals based breakeven is zero because we haven't populated it yet, it's saying that you have a surplus of 120,000 bucks per month of extra cash. Well, let's actually populate it to define whether you actually have a surplus or whether you in fact have a deficit. And then what do you do about that? And I'll talk about that briefly as well. All right, so let's define your personal living expense needs. This isn't funding your future and savings and paying extra down on debt. This is what do you need to Land in your personal checking account on the 1st of the month or whatever to get you through the rest of that month, which is going to include paying your rent, your food, your entertainment, your if you have a car loan, your basic car loan, your mortgage, if you own your house and your family needs, etc. How much do you need? Well, if you live in certain rural areas, that might be lower, closer to 7,000 or $8,000. In other parts of the country like Southern California and New York, that might be north of 15,000. I've even seen that get up to 25,000. Now, a lot of that depends on your personal planning and how much you want to spend today versus how much you want to spend in the future. There's just a, there's a lever or there's a fulcrum of sorts that if you spend more today, you're going to have less later to live on or you're going to have to work longer. So that's a really important financial planning question is how important is it for you to live today relative to living in the future? And you got to find the right balance there. Let's say that you've met with your financial planner or you've met with your practice CFO advisor and we've agreed that $15,000 per month is the right amount to cover all your personal needs, which by the way would include your student loans, your student loan payments, if you have those. Now we're going to come down to this area called your personal goal funding. This is where you are funding your personal net worth. You're building your personal net worth by either adding to your savings or building personal assets or you're paying down personal debt. Your net worth is simply everything you own less, everything you owe or your assets less. Your debt equals your net worth. And your financial independence is by and large determined by by your net worth. Net worth does not equal self worth. I'm sure you know that intrinsically. I hope you do. But it is a really important number when it comes to financial planning for your future. And you need to be if you're prudent funding your future. So let's make a plan around that. Let's define in my goal to fund my future, what's my goals based break even so on your 401. 401ks are divided between the employer portion and the employee portion. I'm going to assume for a second you are a single Dr. S corporation. You might be an LLC or PLLC. But remember that is not a tax filing status. That is the type of legal entity you are set up as. And some states allow that, like Washington and Oregon. California doesn't allow that. So you have to set up as a professional corporation. But both of those are filing as an S corporation. Typically, you don't want to be a C corporation. Usually want you to avoid being a sole proprietor. If there's multiple owners, you can be partnership. But let's say here that you're a single Dr. S corporation and you want to fund your max employee portion, meaning you as an employee of your own corporation, not talking about your staff. You in 2020, if you're under age 50, the max you can do is 19,500. If you're older than age 50, you can do an extra 6,500, which gives you $26,000 total. I'm going to say 19,500. Let's say you're 45 years old. Let's say your spouse is on payroll as well. And a great reason to put your spouse on payroll isn't to save taxes, it's to fund a 401k which in turn saves your taxes. Don't put your spouse on payroll unless you're funding a 401k is generally our advice there. If your spouse is working and let's say they're funding $10,000 into their 401k at their current employer, then you could fund 9,500, which is the difference. The sum of the two employers is going to be 19,500. Now, a lot of times your spouse isn't actually coming in and doing work. So this is largely a tax planning strategy. But I'm sure you talk to your spouse plenty and she's somewhat involved in the corporation from that standpoint. Or maybe she's on your corporation as a director or some other role in the corporation so we can justify a W2 to him or her. And you want to pay them just enough to basically fund their 401k. Now, there's a lot more to that. Meet with a planner, meet with with us, and we'll help define all of that for you specifically. Then there's this thing called the 401k profit sharing. Sometimes it's known as the elective deferral and profit sharing. I'm sorry, not the elective, the safe harbor and profit sharing. And it's the portion of the 401k contribution that isn't coming out of your or the staff's own paycheck. This is what you're putting in as a benefit and paying as a benefit. To you and your staff, yes, to you, because you're an employee of your corporation. So you can make an employer contribution to yourself. Now, the max you can fund in as of 2020 into your 401k if you're under age 50 is 57,000.

So but that includes your 19,500. So we have to subtract that portion out. Not your spouse, just you, 2,500. So the max you can fund if you add those two up, you can see it down here, is 57,000 max. Now, if you're older than age 50, you can throw in another 6,500 up here in the elected deferrals. There is no catch up contribution for the employer portion of the safe harbor profit share. And so that's 37,500. You'll actually have another $500,000 or so for the employer contribution, your spouse as well. So let's put 38,000 there. Actually, DB is a defined benefit contribution. And this is for doctors who are older than perhaps age 50, 55. They have relatively few staff or they're older than by 10 years on average. They're staffed and they have plenty of surplus cash flow, maybe because they have no debt at this point and they're really in stride and can save 150, 250, $350,000. This is like a very glorified 401k. It has more rules, but. But if it's managed right, it is a total silver bullet to reducing most of your tax burden and accelerating dramatically your retirement date or your financial independence date. And we set up a number of these for our clients and have done so very successfully. Never had a single problem with those if they're managed correctly. But let's say you're 45, so you're not funding a defined benefit plan at zero. Let's also say you want to fund your IRA account, your individual retirement account. These are great cause they don't come with employee, they don't come with staff required contributions. They're held personally at Vanguard or Fidelity or Charles Schwab. We manage a lot of these for our clients and help them fund it. And since you're under age 50, we're doing 6,000. Let's say you do the same for your spouse. That's the max. You're old on age 50, throwing another thousand, you're at $7,000 each. Let's say you fund your health Savings account, which 2020 max is 7100. And now let's say, okay, we've maxed all of our tax advantaged accounts, 401ks, IRAs, HSA. Now let's say we're going to fund our kids, 529 accounts and we want to fund $250 per child per month. You got two kids, let's put in $500 there. Let's say you also have a high credit card debt or you have a car payment that you want to get out of. So we're going to pay more than our, more than our basic personal debt. Now, up here in your spending needs, we're already factoring in your mortgage and your basic rent, I mean your basic car payment, whatnot up there. But down here, this is if you want to pay more than that to accelerate the payoff. And let's say you want to do $500 a month. That's my goal. I want to be out of this car debt by the end of this year. I need to do an extra $500 per month or I want to pay off my house an extra two years, three years earlier. Let me fund an extra balance there as well. Now we get down into the business and we talk about your business. Fixed overhead. Your variable overhead are your labs and your supplies, your fixed overhead. I know some are sort of somewhere in between. But we're going to say everything that isn't your labs and supplies is going to be your fixed overhead. That's going to be your labor. Excluding you, the doctor and your spouse, it's going to be your labor, front office, assistant, hygiene, any associates that you have, whether they're independent contractors or W2s, it's going to be all your labor, the benefits, the payroll taxes for them, everything there. That's going to be your facility costs, that's going to be your rent, that's going to be your utilities, that's going to be your maintenance costs. And then we have marketing and then we have admin. Admin is going to be a lot of small stuff like your phone bill, your accounting costs and your tax costs, your travel and lodging costs, your Amazon and Costco. That's for the business. Those costs, you can wrap that all up here. Your business insurance, like malpractice and things like that. And that's your admin. So you add all that up, you put it in here, you put it in here. And let's say that that is.

$55,000 per month, 606,000 per year. Your fringe benefits, doctors fringe benefits. You see the two asterisks? Let's come over here. They include your doctor and family Health insurance premiums, your automobile costs, any meals. You run through the practice and you shouldn't be. But if you pay your personal insurance through the business, like your disability insurance or your life insurance, then that would go included in here. I don't want you to pay those through the business because we don't want a tax deduction for those. Take a tax deduction, then the proceeds upon disability or death are going to become taxable. Terrible scenario. The only thing maybe run through there is going to be your business overhead expense, disability policy and practice. CFO can help you with all of those types of policies. We really shop around for good rates, good companies on that. But let's say your fringe benefits added up is $2,000 a month. Now we get down to your profits, your 401k for your staff. Notice that's not up here in goal funding with your other 401k because this is your 401k. But you got to do something for your staff and let's say that's $20,000. Now you might say, Wes, why would I fund $20,000 for my staff? I'd rather not do a 401k. Well, for a number of reasons. If we add up your total 401k contributions, those four cells you look down here on the bottom right, it says $87,000. If you take your marginal tax rate, let's say it's 40% times $87,000, that's $34,800. That's a lot more than even what you're paying for the staff. Plus you're getting tax deferred growth for a long time compounded. And yeah, you'll pay taxes on it way down the road. But all that buildup stays with you in the meantime. And when you pay taxes, you may be in a lower tax bracket when you're in retirement as well and your staff are pretty thrilled that you're funding for their retirement. You communicate that the right way, like I'm doing this because I really care about you guys. It's just a win win situation. The only person that really loses is the IRS there. But they do that to incentivize you to save so that our Social Security doesn't entirely break. Okay, let's go to our taxes. Our taxes have federal, state and your payroll taxes, that's fica. Speaking of Social Security and Medicare. And let's say that for the year you met with your cpa, did a projection and they say, I think you're going to owe total for the year $70,000, not just what's left to pay. I mean total for the whole year. Because we're trying to define your break even for January 1st through December 31st in this column right here. So for the whole year, 70,000, let's say state is 20,000. And your FICA taxes, which are 7.65% as of today, 2020, up to about $135,000 or so on your Social Security portion, Medicare. So 1.45% of that goes on indefinitely. Let's say that ends up being about $10,000 for the year. Then we come down to your business debt, your practice purchase loan. Let's say you're paying $8,000 a month on your practice purchase purchase loan and you're paying 2,000 bucks on an equipment loan like a CAD cam or a CT or you did a build out or some Patterson or Shine loans and any other debt you have, just enter them here and put in your monthly payment there. Pretty straightforward. Now we have everything from your personal living today to your savings for your future to your business, fixed overhead, doctor fringe staff, 401k and taxes and your debt. This is the global universe of everything. The only thing that we haven't factored in yet are your labs and supplies. The reason why we call those out is because the more you collect, the more those are going to be. It's not just a fixed number every month. So we have to sort of reverse into that by calculating what is your break even before that and then adding an amount equal to your variable cost percentage. Let's say your labs are running around 8 to 12%. If you have a CAD cam, they might be down to rock bottom. 2% more, closer to typically 4% or so, maybe 5% max, depending on how much you're using that CAD cam. And let's say your supplies are roaming around 7%. Let's just throw 15% in here. So your labs and supplies are 15% and all of your other overhead costs are 85%. So now if we scroll up, what it's going to do is going to take all of this fixed outflow, which equals $100,000 plus it's going to then gross up an amount needed to cover your variable costs to arrive. Drum roll at your goals based break even of 117,853 bucks. Well, guess what, you're already collecting 120,000 bucks. You have a surplus actually. And if you've done your numbers right here, that should mean that you have a build up in your accounting. You're periodically Taking some money out and spending it on maybe travel or stuff beyond this. $15,000 a month, that's a good scenario to be in because then you need to act like a bank and think, what am I gonna do with my surplus, my extra money in my vaults? How am I gonna get a return on that? And that might be paying down debt, or it might be funding a taxable retirement, a taxable account at Charles Schwab, or it might be funding more for your kids education costs or building your emergency reserve. Personally, or maybe even in your business you're short on cash. If you've got 100,000 bucks going out every month and you've only got $30,000 in the bank account, you should probably build that up to somewhere around 80 to $100,000. So you have sleep insurance that you're not going to run out of money when you hit payroll time. And if you meet with practice CFO in our board meetings that we typically have two to five times during the year, we look at all of this globally and look at the interplay between all of these numbers to optimize a plan that's going to increase your net worth by the largest amount we can between January 1 and 1231. And we do that every year. And it is amazing to see how quickly our doctors can accelerate their financial independence by having a structured plan like this and by knowing what their break even is. So that when they go in the office every day they have that sense of purpose of I'm going in to collect this amount because it helps me meet my living goals that create happiness for me and my family and help me feel prepared for the future. It is a purpose driven, goals based break even. Now let me run a scenario here. Let's say you're spending a little bit more perhaps than you should. I'm going to put that at 20,000 bucks a month. And let's say that your overhead is actually quite high and you're at $65,000 a month there. Maybe you're spending a little bit too much on your meals or running too much Costco through the practice and it's causing you to spend more than you normally would just because you think you get a tax deduction. So I'm going to actually that would be in your admin cost that would be up here. But let's say you bought too much of a car, now you're spending a lot there. And maybe you've taken on a lot of build out loan and you have the nice new shiny practice and so you got to build out loan and you're paying, I don't know, $4,000 a month on that. And now you're living in the nicer house, you've got the nicer car, you've got the nicer practice, etc. But remember, when you drive that nicer car or the nicer house, other than some car deduction doesn't help you save in taxes on that. Nor does the principal portion of paying out your build out loan save you in taxes. The interest portion will. So your taxes aren't going down even though you have more spending here. So I'm going to keep your taxes the same. And in fact, if that caused you to have to reduce your 401k contributions, your taxes will actually go up. So what does this now do to our break even? Well, now you got 140,000 bucks and you're feeling stressed and your cash balance is always running low or negative. When you factor in your credit card balance and you're thinking, this isn't why I went into dentistry, it's because you don't have a plan. It's because you're overspending. It's because you don't know what your break even needs to be. It's because you're not thinking about your future. It's because. It's because you haven't created a system of wealth accumulation and a financial discipline that's going to get you to where you need to go and help you have a peace of mind in the meantime. Now you may say, wes, I still want to drive that car, Wes, I still want to live in that house, Wes, I still want to do my build out, et cetera. Fine, you just got to get your collections up. So now you got to figure out, how am I going to do that? And, and you can do that. It's amazing. I've seen when doctors feel the heat, it's amazing to see what they can do, but it doesn't come easy. You got to be a leader. Go into your practice with a charismatic approach every day, set goals with your team, maybe structure the right incentive compensation program, maybe get rid of those insurance PPOs that are cutting.

Your UCRS in half and you're getting 550, 600 bucks on a crown. You got to deal with that kind of stuff. Which means, how am I going to get patients in the chair if I don't have my health insurance? Well, we have modules on really all of this stuff to talk about how important it is so that if you can get your collections up to 140, let's say 140. 1,000 bucks. Well, now you're good. Now you're still saving. Now you're living within your means, etc. You could spend, for all I care, you could spend $50,000 a month. If you're producing the right type of practice and you have the type of peace of mind and the contentment that a good life is, can bring, that's totally fine. I'm not opposed to living a good lifestyle. I'm opposed to living an overly good lifestyle that doesn't correlate to your income level. That's what I'm opposed to. And if you're a client of practice, cfo, that's what we work toward. And if you're not there not willing to work toward that, then we actually don't. We're not a good fit. We've actually turned down some clients because they're trying to run their plane through the business and they're two brand new Teslas. Again, all of that's totally fine if you have the right level of income. But if you don't, you're not willing to make those changes, then you need to really rethink and restructure the way you look at your personal finances and your life. All right, so what do you do if you can't get to 140,000? Well, you come down here and you talk with your spouse and you bring your living expenses back down to where they need to be. You go through your P and L and you restructure things. So maybe you're at 60,000 there in your overhead. Maybe we don't eat out as much through the business. We're at 1500 there and we don't do that build out. And how are we doing now? Well, we don't do the build out 60,000. Oh, I did 15,000. Knew something was wrong. Under fringe benefits, that's 1,500. Now we're down to our goals based, breaking it even at 123. You're at 120 now, you're not that far away. A little bit of extra effort in the office, maybe a couple hours open more per week or a couple times a month and you can get there and that becomes very achievable. So you just have to define what matters more for you today and how much do you want to stretch yourself at work, in your office, and set the right program in place. That is the right equation for what's going to make you feel like you are living the life you want to live and you can meet your goals, defining your break even and being, you know, being content that way. So I hope this has been helpful for you. As one of our resources and our Associates on Fire Guide, we do this all the time with our clients, and we believe with a little bit of help, you could even do it for yourself. And we look forward to possibly working with you if you feel like you can't and you need to get a good advice and plan around all of this.