Dental Financial Planning: Turning Chaos into Financial Freedom - Part 9

Welcome back, everybody, to another episode of the Dental Boardroom podcast. It's Wes Reed, your host, fresh off my trip to Europe. Three weeks starting in London, up to Inverness, Isla Sky, Edinburgh, with an Oasis concert mixed in there, which was absolutely wild. Down to France, Paris, saw all the big ones, aloof, the Versailles palace and others, and had some of the most amazing croissants ever made in the history of mankind. Then made my way east into Germany, Bavaria area, Nuremberg, met with a good friend of mine, and then east further into Krakow, Poland, where I learned a lot about the horrific incidents upon the Jews in World War II. It was eye opening, it was saddening, it was awakening. It was so many of those things in the Auschwitz concentration death camp and Birkenau right next to it. So this was a journey through history for me. I love history. Those who don't know history are bound to repeat it, as the quote goes. And so learning about the monarchs, learning about the, going through all these museums, you know, you learn about the armory, you learn about the battles, you learn about the kings or the popes, you learn about all the history in Europe. And I absolutely soaked it up, walked about a hundred miles and I am ready to be back and into a rhythm of life. And so this is my first, first podcast being back. And as you know, before I left, we were on this journey of itself in financial planning, in turning chaos into financial freedom for a dental practice owner, and that is doing a business financial plan, doing a personal financial plan, and ultimately running your financial ecosystem in a way that accelerates your financial independence. You absolutely deserve it. You went to dental school, you took on a lot of debt, you started up a business or bought a business. You pay employees, you pay a lot of taxes, you pay debt. You deserve to be financially independent as much as anybody. You deserve to be financially independent for the tremendous amount of work that you put into where you are today. Now, while I was gone, I had my beloved colleague Drew Phillips do a couple episodes as well. Hope you enjoyed those. But now I am back on track to finish the series on financial planning for dental practice owners. Now, up to this point, we covered how to organize your team, which is sort of like your platform. You really can't run a successful cash flowing dental practice and converting that success into accelerated financial independence without a good team around you. One of your biggest and most important valuable strategic decisions that you have to make is who's on your roster, who's your team. And I'm not just talking about your front office and your hygiene and your assistant, but I'm really talking about also and most importantly here, your strategic team. Who is your sort of operations advisor. Call that a practice management consultant, call it a business coach, whatever. And then who is your financial coach? That's the cfo, as I call it here at practice cfo. That's the role that we play is an outsourced or fractional or part time chief financial officer for our dental practice owners who we specialize in to help them organize all of the chaos in their financial ecosystem and harness that into a great plan that will accelerate financial independence. You hear me say that a lot because that is the theme of what we do and that's the theme of this podcast. So let's now carry on. Now we're in the most important part of a financial plan for a dental practice owner and it is completing a cash flow projection and allocating any surplus capital. Now, capital is a term that we finance people use. It's essentially the money, your free money that you have. What do you do with it? Because you got the entire world vying for that capital for that dollar, from suppliers to the IRS to the banks to your vendors to your employees to your family, your own preferences of what you'd like to spend on your future self through savings. You got so much demand on your dollar that one of the most important things you can do, period, in financial planning is allocating that dollar in the most effective way and in the most prioritized way. Are you looking to buy or sell a dental practice?

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And they're going to tell you all the million reasons why you do actually qualify. And you could apply for it and never get hit by the IRS in an audit. But the IRS has stated clearly over the past couple years that they know this is being abused and that they've got and if it's abused and if they consider it tax evasion, there is no statute of limitation on that. It could be 10 years later and they can come and slap you to pay it all back and a lot of penalties and fines. And then the company that sold you on IT and took 30% of the tax credit, they already rode off into the sunset. They're long gone. They're not paying for anything. So when it comes to good tax planning, I don't like these big, these big kind of.

Schemes. I'll call them beware of schemes. I've seen so many dentists just buy into these things, pay ton of money to the sellers of these schemes and then they're the ones holding the bag with the risk with the irs. And a lot of, a lot of times it comes back to bite them in the butt. And so when you go to your, your state dental association event like the California Dental Association, I see companies there, a lot of them are sometimes attorney firms, but they're out there selling these schemes. And every time I just sort of, I'm like, yeah, their booths are full. Dentists line up to listen and talk to them because they get this big Fat tax deductions being sold to them. And it sounds so appealing and it's just dangerous because it's not worth it. It's not worth it. You are crossing the line with a lot of that stuff. You just got to trust me on that. I'm the one who has to be there when the IRS comes knocking. And the salesperson for that tax scheme is long gone. I'm the one who's got to help you through it. And guess what? Not only are you going to have to pay it all back, but you're going to have to pay us to represent you because you're going to need representation to the IRS going through that process. So my bottom line here is effective tax planning is A, it toes the line, it doesn't cross it. B, it's a wide net. It's covering a lot of different things that in the aggregate amount to a lot of taxes saved. C, a lot of it is around the way that you time your payment toward different expenses and debt and investments. How you use the 179 depreciation deduction. It's all of those sort of levers. There's 30, 40 of these levers that you gotta line up in the right way. And, and that's how you significantly reduce the amount of taxes that you would be willing, that you would pay. Now, one comment I'm gonna make here, and this is important, if you can live off less money personally, I can save you more in taxes, period. Because money that comes out of your practice and goes to you personally for personal consumption has to go through the tax screen. And therefore it costs, it costs you more taxes to get the money out to go and live off that money. So instead of, let's say living off of $20,000 a month, you can live off $12,000 a month and that saves $8,000 in the practice. Now, if you just let it sit there in your practice checking account, at the end of the year, you're somewhere around 100,000 bucks extra. You're still going to pay taxes on that because as an S corp, your profits flow through to your 1040 and you pay taxes regardless of whether you pulled the money out of your practice or not. Doesn't matter. But here's what we can do. If you leave $100,000 in your business checking account because you spent $100,000 less in your personal spending, we can then go and route that into a 401k or defined benefit plan, or you can use it to build out another operatory. You can use it to buy a piece of equipment that's going to make you more money. But if you can take that $100,000 and put it towards something that's going to get you a return, whether a business return, like good equipment or hiring an associate or maybe a marketing campaign, or you put it in investment stocks and bonds, mutual funds, index funds, through your 401k and defined benefit plan or IRAs. Now it's tax, it doesn't go through the tax screen. And therefore what would have gone to the IRS $100,000 or would have gone to consumption in your personal spending is now added to your balance sheet or is added to your business producing machine known as your practice. Because you bought more equipment or more build out or an associate, you are reinvesting and reinvesting and reinvesting. Think of it this way.

Jeff Bezos when he started Amazon he was so reluctant to pay taxes. And so what he would do is he kept living on a very low income for many years and he would take the money in the corporation in Amazon and he would reinvest it into building out new aspects of the business. New facilities, new manufacturing line, new equipment, new hiring, new trucks, whatever it was, adding on Amazon prime, adding on Amazon Fresh. He was always reinvesting money. And guess what? When it got reinvested, it never went to the irs. So it basically co opted the IRS to reinvest and build out new income producing mechanisms in his business. That is a way to fast track wealth accumulation because the value of his business went up and went up and went up and went up. And even though the value of the business goes up, you don't pay the IRS when your practice or when your business goes up in value. So if it was worth a million bucks and five years later it's worth 2 million bucks, you don't pay the IRS taxes on the million dollars of appreciation. Now eventually when you see created with a thousand formulas built and weaved throughout, in order for us to do our analysis, in order for us to get a really healthy financial X ray and then to do this financial forecast that comes from all of those different financial data sets. And we always start with the following. When we do a cash flow forecast, we have to define what is the amount of cash that we want to keep in our business checking account at all times. Meaning that if you go below that number, you might lose some sleep at night. We don't want you to lose sleep at night. That's why I call this cash cushion. Your sleep insurance, if you have that in there.

You are insured to sleep well. And now I have a different podcast episode where I talk for about an hour on this subject of how much to keep in reserves and cash, both in your personal checking account and then also in your business checking account. So right now I'm just focusing on the business. Now, when I say your net cash that you don't want to go below, that is net of any credit card debt. So if at the end of the month you have $100,000 in your checking, business checking accounts, let's say you, I'm just going to assume that you have one, but if you have two or three, just aggregate those together. Your total cash is 100,000. Your credit card, let's say, is 30,000 on your credit card on the last day of the month, you have net, therefore 70,000, $100,000 cash, less $30,000 in your credit card. That's 70,000. The 70,000 is the number I'm talking about. That is your cash reserve as if you paid off your credit card on the last day of the month or at any day in the month, at any point in time, net out your credit card liability against your existing cash. And that's your true cash. Now, if you're a client of practice cfo, we have various reports. One of the reports shows what is your true cash and it will compare it to what is your target cash balance. And if you're under that, well, then we have, we focus first and foremost on getting you to a healthy place with your cash. Then anything above that cash, we want to allocate out to a productive use to get you a return on that extra dollar. That is key. I've said this a thousand times, I'll say it a thousand times more. I want you to, as a dental practice owner, to view yourself a little bit as if you were a bank. And a bank is required to keep a certain amount of cash in their vault, in their reserves. And the Federal Reserve and the government is who dictates how much reserve they have to have in their account relative to what is sort of lent out for investment. So you want to have the least amount in reserve to feel comfortable and safe in your cash balance. And then everything above that almost immediately should be used to invest, to pay down debt, to open an investment account, it can be used for setting aside for kids education funding to pay off credit card debt. Personally, there is a sort of a ladder that I go over in that prior podcast where I say, here's the first thing you want to pay off. You want to pay off bad credit card debt. Let's take care of bad credit card debt and very high interest loans, especially loans that aren't tax deductible. Then let's fund our IRAs, then let's fund this and then let's fund that. And eventually you get to the very top where you're funding a defined benefit plan, which is where you can fund a tremendous amount of money into those if certain circumstances are met in your life. But bottom line here is going back to my analogy of thinking of yourself as a bank, you want to identify what your vault reserve requirements are. And then from there you want to have a game plan on what to do with every dollar that goes above that. And on our financial reportings for our doctors, at the end of the month, it will sort of lay out, here's what to do with your extra dollar. All right, so how much to keep in reserves? Now, I typically say somewhere around one month of total cash outflows. One month of total cash outflows. So if your practice is doing $100,000, to use a nice even number here, and let's say your overhead, that's your labor supplies, lab facility, marketing and admin, let's say that that's $50,000 and your debt is $10,000. So that's $60,000. And then you pay yourself and you fund your own retirement plan. And let's say that is all $30,000. And so all in, you're at $90,000. 50, overhead, 10 debt, 30,000 personal living, taxes and funding your retirement plan, that's $90,000. That's global money going out of your practice every month. So theoretically, if you're doing 100,000 in collections, you would have 10,000 going up in your bank account every month because you had 90,000 go out, your collections are 100,000. So every month you have 10,000 of surplus. So in that case, I say you should probably keep in cash reserves. Remember, net of credit card around $90,000 about one month. Now, if you're really averse to a lower cash balance and, or maybe you have more fluctuation in your collections from month to month for whatever reasons the nature of your practice, you may want to have 1.5 or even 2 months. But just know that every dollar that sits there unused is essentially losing you money because inflation is eroding the value of that dollar. Now, could you in your business account have sort of a business savings account and Invest that getting 2, 3, 4%? Possibly, yes, possibly at your bank, that's not a Bad idea. However, generally speaking, if you target, let's say 90,000 of cash in your account, what's going to happen is payroll's going to go out and payroll might drop you just below that, might drop you down to 70 or 80. And then as you start collecting again, it, it passes that 90,000 reserve mark and it keeps going and you're fine. So you're always sort of hovering around this and dipping below it a little bit. And so how much you have as that reserve is really a function of two things. One is, as I said, the total cash outflow. But two is the psychological factor for it. And I have some clients who may be doing 150,000amonth, but they are sitting on $400,000 in cash because they just sleep so much better that way. And that's okay, because at the end of the day, as much as I want math to drive every one of your decisions and statistics, that is Probabilities, I want that to drive your decision making. I also understand that there's a soft element to it as well, which is your psychology in your relationship with money. And we all grew up with different circumstances around money. For some of us we were deficient. For others it was very abundant. And so your psychology matters. I'm not going to say it doesn't. Now I will generally try to push you to that boundary of your discomfort in order to maximize the return on your spare dollars. So if you're like, hey Wes, you know, I need 200,000 to feel comfortable, and let's say you're collecting 120,000amonth, I'm going to try to push you to maybe sit on only $150,000 so that we can get that extra $50,000 invested. Because it adds up. If you could get a 5% rate of return on that $50,000, that's $2,500 for the year. And the next year, if that were invested now, you're at 50,000, $52,500 that next year because of that interest that you earned and that gains interest and compounding interest. And it may not seem like a lot in the beginning, but over a 15, 20, 25 year period, it adds up a lot due to the nature and the power of compound interest. That's why I don't like to allow too much cash to just be sitting there unused.

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Okay, so let's say we've defined our working capital base, our net cash reserve that we really don't want to go below at $70,000. So if you're looking at my screen on the very top it says working capital base $70,000. We don't want to go below that. Then you'll notice on the left hand side I have a row for every cash inflow and outflow of your dental checking account, starting with your collections. Then your practice overhead, which includes your labor supplies, labs, facility and admin. I have marketing by the way baked into the admin in this example that's your overhead. Then you have your debt, which again is not overhead. Your debt is not overhead. Your debt is just paying somebody back. It's not an expense. Overhead are expenses things you get tax deductions for your practice debt. At least the principal portion of the payment is not tax deductible. So I pull that out separately and I have a section in my cash flow forecast for debt service. Now in this particular practice there are two loans. There's a bank practice loan and then there's a Patterson Sarec loan. You may have five loans depending on build outs or other equipment loans or sensor loans or whatever. You might have your car in the in the practice and so there's a car loan in here as well. But you want to have all your loans, each one having its own row in the practice debt section. Then the last section is the doctor costs and taxes. This is everything for you as the doctor. This is your own budget that you need to live on. And let's say that's $12,000 a month. And we deposit $12,000 a month into your business check, into your personal checking account through payroll. It's going to be that 12,000 plus the taxes you pay. So if you pay 4,000amonth in taxes, we're going to add on the 12, we're going to add four, that's 16,000. Then we're going to add, if you have a spouse or kids on payroll, we're going to add money in there for your 401k elected deferral, which is the portion of the 401k that comes out of your own paycheck. It's the employee portion, not the employer portion. So we have all that coming out of here. Then we have draws which are just transfers out of your business checking account to your personal checking account outside of payroll, those are just called dross. And then we have Dr. Perks. That's things that aren't really true. Overhead expenses, that's your meals and entertainment, a lot of personal stuff that we tend to run through the practice to try to get more tax deductibility from it. Those are what we call the doctor Perks. And then lastly, I have the employer portion of the 401k. And if you have a defined benefit plan, this would be there as well. And so that's everything. That's your overhead, that's your debt, that's your personal living, that's your taxes, that's your savings, that's, that's your draws, your doctor perks, employer contributions of the 401. That is everything. There's not a single dollar that will go out of your account that isn't categorized somewhere in that list.

Now there, I take that back. There will be some other things that you take out, but they're specifically designated for building your wealth. And I'm going to go over those here in a little bit. So that was on the very far left column is all of those rows of where your money is here coming from, I. E. Collections and where it's going to in overhead, debt and doctor Costs and taxes. Then each column going across the page is a different month. And in my example it's January through August. So I'm doing eight months here of a forecast. And depending on your circumstances and where you are, we may do 12 months. We may even do eight months. We may just be doing four months. But if we're meeting every three to four months, as we do with our clients, then typically a six to eight month forecast is plenty sufficient because three or four months down the road we're going to revisit this forecast, we're going to re extend it out again. And it's a live, running, constantly constant, self educating experience to do this. So we make the right decisions with our money. All right, so in this case, this practice is collecting 95,000amonth. And you can see that going all the way across the page in the first row of collections. Now the first row is actually what is your beginning bank checking account balance? What is your beginning cash balance net of credit card? That's what we have to start with. And then as you go down, it's just arithmetic. What's your beginning cash plus your collections for the month less, your overhead less. Your taxes less, all your Docster costs and savings less. And what's left in the bank account at the end of the month? That's very simple arithmetic. Starting balance plus collection plus everything going out equals your ending balance in your bank checking account, which becomes the beginning balance on the next month. And so in this example, 95,000 is coming in. And then I have labor at 22,000, dental supplies at 4,500, lab services at 4,000, facility costs at 6,251 and administrative costs at 7,658. And so the total operating income, which is the 95,000 of collections less that overhead is what's left is $50,000. And then the $50,000 has to pay for the debt. And we have roughly $9,000 paying for debt. So that leaves around $41,000. What's left has to pay for your living expense, it has to pay for your taxes, has to Pay for your 401, for your meals, entertainment, all that slush we run through the practice and the employer contribution of a 401k. And in this scenario, what's left after all that, you started off with $75,000 in the bank account. At the end of the month you have 86,831. So you went up by $11,831, which just means you collected $11,831 more than you had of total outflow, sort of your baseline mandatory outflow to cover all of those costs.

So if we said that you needed to keep $70,000 in the practice in order to meet your financial obligations going forward and to sleep well at night, that means if you're, if you're at $86,831 at the end of the month, you have an extra $16,831. And you can see I even call that out in a formula. So it says specifically, what is your surplus? The amount over $17,000. In this case, it's 16,831. This is where immediately we want to do something with that $16,831. You don't want to let that just sit there, not for one month, not even for a week. You want to get this going right away. And so here's what we do. We make a prioritization of your goals, and then we start to target those aggressively with that extra surplus. So in this case, you can see on my screen, those of you watching my screen, there are three areas of focus right now for this doctor. Number one is we're going to open up a defined benefit plan and we're going to start funding that with $8,000 a month. $8,000 a month because it's 100% tax deductible. It grows tax deferred. It's a beautiful silver bullet for reducing taxes. So in that, in that case, that's almost $100,000 that's going to go into that defined benefit plan and will probably save around 30 to 40 thousand dollars in taxes. The next one is to fund a Roth IRA for the doctor and for the doctor's spouse. Now, you may be saying, well, I make too much money in order to fund a Roth ira. Well, that may or may not be true because there's what's called a backdoor Roth ira, and I won't go into that now. But assuming you don't have another regular IRA with a balance in it, you can basically go into your IRA and then convert it to your Roth ira. And there is no income limit to be able to fund through the back door this Roth IRA for you and your spouse. So I have that being funded. And then lastly, this particular doctor was just adamant to pay down their home loan. Now, I actually remember this case. I, I really discouraged the doctor. It was about a 4% tax deductible on schedule, a rate that is a very low rate that's getting close to free money. I would much rather see money go and get invested in the market before paying off what is essentially about a 2 and a half to 3% loan. Because if you can get a 7 to 10% rate of return in the market, that spread is what's going to work better for you. Remember, I said to act like a bank. Banks will pay their depositors a little bit of money, not much on checking account. It's hardly anything. But let's say they pay on average, the depositors, half a percent of interest and then they go loan it out for business loans, car loans, home loans, and let's say they're getting on average 6% rate of interest. So the bank, that's how they make their money is on that spread. On that spread. Same thing with you. I don't like paying down low tax deductible debt because that's debt usually that we use to buy an asset like your practice, that's an asset. I don't mind taking on debt to get an asset. I don't like debt to take on consumer spending. That's why I prefer not to use debt for a car because that's consumer spending. A car, sorry, not an asset. Could you resell it? Yes, for a little bit, but not much. It loses its value fast, eventually isn't worth anything it doesn't appreciate. I don't like taking out debt on things that don't appreciate over time, which means things that don't go up in value over time. I am good to take on debt if it's wise. Debt at a good tax deductible rate on assets that go up over time, if that's done carefully. Now in this case, I conceded and I, and I said, okay Doc, let's go and pay an extra fifteen hundred dollars a month toward your home loan because I know you want to get that paid off before you retire. I get it. So those were the three area focuses now for you. You think through what matters for you. Is it a, if you're, are you younger, trying to save up for a house? Is it maybe a second house? Is it setting aside money in your kid's 529 education savings account? Is it getting a small house for your mom? Is it setting aside money for medical bills for a family member? Whatever that is that is important to you should be prioritized and then it should be attacked, meaning that your surplus dollar should go toward those things on a consistent, regular, automated basis. So in this case, we add about 16,000amonth of surplus here and we allocated that 8,000 to going toward the defined benefit plan. Then about 2,500 going toward IRAs and the home loans. We didn't fully allocate the full 16,000 in this example. You could add another row and add some money, say to a 529 education account. But bottom line is you want to try to use up that surplus. So now you can see we used up that surplus and now at the end of the month, we're at 76,240. That becomes in the next month, in this case February 1st. That becomes the beginning balance of 76,247. Then you run through the rhythm again. You add the collections, you take out the overhead, take out the debt, take out the doctor's costs and what's left. In this case, there's 87,763, so that's 17,673 remaining. So again, we allocate it toward that defined benefit plan, etc. Now, I don't necessarily see every month you looking at your report and saying, okay, I have X and going in, logging into your bank and sort of remitting it over to the defined benefit plan into the IRAs and the home loan. Instead, what we do is we say, let's set this up so it's automated. And every month we're going to have 8,000 going to the defined benefit plan. Or if it's a 401k, we're going to have 4,000 going to the 401k or your IRA, we're going to have a thousand going to the IRA every month. Or we're going to go to your bank that has the home loan. We're going to log in, we're going to add an extra 1500 dollars payment every single month and just set this stuff up on Automated wealth accumulation is enhanced through automation. If you don't automate it, I'm telling you, you are significantly slowing down the rate at which you will accumulate wealth. And then when we Revisit our forecast 3, 4, 5 months down the road, if cash is getting a little bit tight or we want to reprioritize the use of our surplus, great, we can go ahead and adjust each of those automated contributions, turn them off, add them to it, set up a new one, etc. But it's that iterative, iterative process every roughly three to six months doing another cash flow forecast and defining where that extra money goes. That is the way to fast track building your personal wealth and financial independence. Now, a few things I want to bring up when it relates to doing a cash flow forecast. Number one is seasonality. All things considered relative to other businesses, dentists have a fairly stable, consistent collection sort of rhythm. Now, that said, there is definitely some variability. And in certain locations or certain specialties, you see more variability. I have a client who lives in Palm Desert, and a lot of people leave Palm Desert in the Summer because it's so hot and so their collections drop every year in, in that or pediatrics, when school comes out, when school starts. So there are causes for variations month to month in collections. And so in most cases with doctors, we will adjust that six to eight month cash flow forecast based on what we're seeing on the schedule and what historically has occurred in those months for that given practice. Then I go through each one of these, I go through labor and I say, hey Doc, any changes in your labor, Are we hiring anybody? Any raises coming up, any terminations coming up? And then I will model that in to the cash flow forecast. Any changes in supplies, labs, facility, or is your rent going up, for example, and administrative costs, Maybe you're going to go on a marketing campaign, you're going to drop three grand a month for six months. Well, we want to make sure to add that in there. So that's where we don't just take the historical averages. The historical averages are just our starting point. What have you collected over the past 12 months? What has your labor been over the past 12 months on average per month? Those are all just starting points. And then once we have the starting point in, that's when the conversations happen about variations off of those averages going forward into the future. Now you get down to debt. Debt's pretty straightforward because generally speaking, it's the same month to month. Unless you're on a, an interest only or a variable rate loan, or if you add a new loan or a loan is paid off, we need to make those adjustments. But the debt is usually pretty easy on here. And then lastly, we will always do your budget. And this is where we start to get into your personal life. And it's really important that you make some plans for the next six months or a year. Are you going to Hawaii? How much do you think it's going to cost? Let's have that conversation. Are you going to do like I did, a trip to Europe? How much is that going to cost? In other words, how much are you going to need to pull out of the practice other than your normal fixed costs every month for groceries and mortgage and all of that stuff? What anomalous activities are coming up that are going to cost something? And then we bake that in there as well. Once you have all that in there, now you really can see how much leftover cash you have and start to make financial planning decisions with that, with that extra money. Now if you find that you're running negative and that your cash balance is going down without even funding These additional things like 401ks and IRAs and home loan pay pay downs and student or kids education funding or second home savings. If your cash is running negative just for paying your overhead debt and your basic lifestyle and taxes, if your cash flow is going down, guess what, you got a bigger problem. Your problem isn't really budgeting. Now, maybe you're overpaying a little bit here and there in your overhead, but 80% of the time the problem is your collections aren't enough. You're not producing enough collections based on the platform of resources you have, which is your team, your equipment, your chairs, your platform, your real estate, your platform of resources that you use to generate money. You're not generating enough money out of that. So that's where a practice management consultant can come in and help. That's where maybe marketing can come in and help. Now those are hit or miss. I've heard amazing success stories and I've heard many stories where it's just money in the wind. And that's why vetting, doing a good due diligence, getting sort of reviews, feedback before you hire a good marketing or practice management consultant is indispensably important so that you get a return on that dollar. So if you're not producing a surplus cash flow, you got to fix your top line collections. Once you fix your top line collections, now we can come back to the table and start having a conversation about what to do with any residual surplus every month. All right, a couple other things I want to emphasize here. Tax planning. Now, I've always said that good tax planning is embedded in, in a cash flow analysis like this, a good cash flow forecast. Because with a good cash flow forecast, I'm going to see what is your forecasted net income and therefore your forecasted taxes more effectively than just by using last year and estimating a small increase. That's typically what CPAs do. That's basically covering your base minimum. But we want to be more accurate than that here at practice cfo. That's why we do a tax forecast. But we use this cash flow forecast in order to generate that tax forecast. Once that's done, then we will deduct out of your payroll the amount of taxes needed to cover those tax obligations. For most of our clients, we deduct all of their taxes from their payroll and we don't have them do a quarterly estimated tax check that they write to the irs. It's inefficient, it's manual, and it can be late. That's why we do it all through payroll. And so every time we meet with clients and every time you meet with your CPA or whoever's helping you do your cash flow forecast, you need to decide based on your 401k goals and based on your personal living budget and based on your tax projection, what should your W2 structure look like. And that's what I covered in my last episode here in this dental financial planning series. You've got to get that in place and then come into your cashflow forecast. And here's the thing, is that this all relates to each other. It all relates to each other. Your overhead relates to how much you're going to pay tax, which relates to your payroll, how much you fund into your 401k affects your taxes, which also plays into your payroll.

All of this is sort of the circular reference that it's all sort of referring to each other in different ways and in different relationships. That's why it's like you have all those pieces, a thousand pieces of a puzzle on the table and they're scattered all about. And the way you do it, it's not perfectly linear. You don't just go from one corner to the, to the other opposite corner or one side to the other side. It doesn't work that way. You just start taking these pieces and you're passing them all together. And finally when it's all coming together, then you take these big clumps and you move them back together and now you've got the whole picture. Good financial planning for a dental practice business owner is like that. You've got to sort of get your basic P and L in place. That's one big module. You got to look at your 401k situation. How many staff do you have? What are the, what are the, what are the employer contributions going to be? That's one big variable. Are we going to do a db? What is your personal spending needs and what do you have going on this year with travel and big one time expenses? You know, that's one big set of pieces from the puzzle and you're putting those things all together. And then so once you get all these kind of big modules together, then we start to bring them together. When you bring them together, then you start to find the connections between them and start adjusting everything so it all fits seamlessly. Now that's a totally a metaphor, but that is exactly how it works. So when a doctor calls me and says, what's my tax liability going to be at the end of the year? Well, I can give you a ballpark but you want me to get this right? We got to get these. We need you to come into the office and let's do this cash flow forecast. Let's structure your W2. Let's make sure we understand any changes going on between now and the end of the year with your spending and equipment and any.

Let'S say, renovations in your office or any hiring, all of that stuff. We need to have that conversation and bring it together. And then I can tell you what you're expected to owe. And then I can tell you what are the tax strategies that would be most effective for you. Because depending on where you line up on the tax code at the end of the year, depending on what your income is going to be will drive some of our strategic tax decisions into practice. For example, if near the end of the year, let's say you're married, married, filing joint, it's right around 5 to $600,000 of taxable income, where you start to phase out of various tax deductions like qualified business income deduction or child tax credits and other credits and deductions. You start to lose once you get up above a certain amount. And so if you're right around that amount, let's say you're right at 600, 650,000 taxable income. You know what I'm going to do in December? I'm going to have you hold the last two weeks of deposits and deposit them in January. I'm going to have you accelerate the purchase of supplies from January and February into December. And we're going to play that system through timing. We're going to, we're going to tax time these things, because if I can get you from 600,000 down to 550 or 500,000, where maybe we're going to fund an extra $40,000 into your 401k, or maybe we're going to pop open a defined benefit plan and fund 150,000. And if I can get you down to 450,000 or so in taxable income, I may have just recovered $25,000 of lost tax tax credits and deductions that you would have paid without doing that planning near the end of the year. Now, if you're already over a million dollars in taxable income, that's going to be hard to get you down 400,000. Maybe you pop open a defined benefit plan and drop 450,000 in there. But a lot of people don't have that much cash, so that's probably an unrealistic scenario. But my Main point there is that when you do a cash flow forecast, which then converts into a tax forecast, then we know what kind of financial decisions we need to make. Around buying, around depositing your collections, around your debt, around your personal expending around 401k and defined benefit plans. Now we know how to maneuver all those levers so they're all positioned in such a way that we mitigate your taxes. That's good tax planning. It's not somebody coming in and trying to sell you on the research and development tax credit, the R and D tax credit. It's not somebody coming in telling you to set up 4,000 trusts and transfer money all over the place between these trusts to get around the tax code. No, those are tax evasion. That's tax evasion. Yep. I said it. Here at Practice cfo, I'm aggressive, but I don't cross the line. And when it comes to the R and D tax credit, I'm sorry, unless you're a rare dentist inventing a new technique or inventing a new technology, I'm sorry, but you're not doing research and development and therefore you don't get the research and development tax credit. Now an R and D tax credit salesperson is going to come in and they're going to tell you all the million reasons why you do actually qualify. And you could apply for it and never get hit by the IRS in an audit. But the IRS has stated clearly over the past couple of years that they know this is being abused and that they've got. And if it's abused, and if they consider it tax evasion, there is no statute of limitation on that. It could be 10 years later and they can come and slap you to pay it all back and a lot of penalties and fines. And then the company that sold you on IT and took 30% of the tax credit, they already wrote off into the sunset. They're long gone. They're not paying for anything. So when it comes to good tax planning, I don't like these big, these big kind of.

Schemes. I'll call them beware of schemes. I've seen so many dentists just buy into these things, pay a ton of money to the sellers of these schemes, and then they're the ones holding the bag with the risk with the irs. And a lot of, a lot of times it comes back to bite them in the butt. And so when you go to your state dental association event like the California Dental Association, I see companies there, a lot of them are sometimes attorney firms, but they're out there selling these schemes. And every time I just sort of, I'm like, yeah, their booths are full, dentists line up to listen and talk to them because they get this big fat tax deductions being sold to them. And it sounds so appealing and it's just dangerous because it's not worth it. It's not worth it. You are crossing the line with a lot of that stuff. You just gotta trust me on that. I'm the one who has to be there when the IRS comes knock in and the salesperson for that tax scheme is long gone. I'm the one who's got to help you through it. And guess what? Not only you're going to have to pay it all back, but you're going to have to pay us to represent you because you're going to need representation to the IRS going through that process. So my bottom line here is effective tax planning is A, it toes the line, it doesn't cross it. B, it, it's a wide net. It's covering a lot of different things that in the aggregate amount to a lot of taxes saved. C, a lot of it is around the way that you time your payment toward different expenses and debt and investments. How you use the 179 depreciation deduction. It's all of those sort of levers. There's 30, 40 of these levers that you got to line up in the right way. And that's how you significantly reduce the amount of taxes that you would be willing, that you would pay. Now, one comment I'm going to make here, and this is important, if you can live off less money personally, I can save you more in taxes, period. Because money that comes out of your practice and goes to you personally for personal consumption has to go through the tax screen. And therefore it costs, it costs you more taxes to get the money out to go and live off that money. So instead of, let's say living off of $20,000 a month, you can live off $12,000 a month. And that saves $8,000 in the practice. Now if you just let it sit there in your practice checking account at the end of the year, you're somewhere around 100,000 bucks extra. You're still going to pay taxes on that because as an S corp, your profits flow through to your 1040 and you pay taxes regardless of whether you pulled the money out of your practice or not. Doesn't matter. But here's what we can do. If you leave $100,000 in your business checking account because you spent $100,000 less in your personal spending. We can then go and route that into a 401k or defined benefit plan or you can use it to build out another operatory. You can use it to buy a piece of equipment that's going to make you more money. But if you can take that $100,000 and put it towards something that's going to get you a return, whether a business return like good equipment or hiring an associate or maybe a marketing campaign, or you put it in investments, stocks and bonds, mutual funds, index funds, through your 401k and defined benefit plan or IRAs. Now it's tax, it doesn't go through the tax screen. And therefore what would have gone to the IRS, $100,000 or would have gone to consumption in your personal spending is now added to your balance sheet or is added to your business producing machine known as your practice. Because you bought more equipment or more build out for an associate, you are reinvesting and reinvesting and reinvesting. Think of it this way.

Jeff Bezos, when he started Amazon he was so reluctant to pay taxes. And so what he would do is he kept living on a very low income for many years and he would take the money in the corporation in Amazon and he would reinvest it into building out new aspects of the business. New facilities, new manufacturing line, new equipment, new hiring, new trucks, whatever it was, adding on Amazon prime, adding on Amazon Fresh. He was always reinvesting money. And guess what, when it got reinvested, it never went to the irs. So it basically co opted the IRS to reinvest and build out new income producing mechanisms in his business. That is a way to fast track wealth accumulation because the value of his business went up and went up and went up and went up. And even though the value of the business goes up, you don't pay the IRS when your practice or when your business goes up in value. So if it was worth a million bucks and five years later it's worth 2 million bucks, you don't pay the IRS taxes on the million dollars of appreciation. Now eventually when you sell it, yes, but it's tax deferred and it's going to be taxed at long term capital gains lower rates. So that's why when you reinvest into your business to either reinvest in something that gets you interest, dividends, capital gains growth, et cetera, or reinvest in something that will produce more collections for you over time or you reinvest in buying your building. So now you have an asset that goes up in time, whatever that is. When you reinvest and you reroute money that would have gone to the IRS to be spent on who knows what you now are adding. You're, you're contributing to this wealth accumulation machine. You're just fine tuning. You're building it, you're making it better. And so that's why if you're really having a struggle, if you're really struggling to say, where's all my money going? Why don't I have more assets? Why am I not more financially independent, more financially secure? It's probably because your consumption to income ratio is too high, meaning that your personal consumption is too high relative to the income, the net income that you generate in your practice. If it's too high, you're not going to be building wealth. In fact, you might even be taking on debt to fund that personal consumption, which may be turning your net worth negative. Or if it's the other way around, you live off significantly less than the net cash flow of your business. Now you're going to significantly promote your wealth building train. Okay, so those are some of the key things I want to emphasize here on this cash flow projection. I will always ask, are you going to be investing in new equipment? Are you taking that trip to Hawaii? Are you going to be putting a down payment on a house? Are you going to be needing extra cash over and above the usual cash demands in your practice? All right, now, next episode I'm going to go into is what are specific financial planning strategies? Stay tuned. I'm going to be talking about 401k profit share plans, find benefit plans, Roth conversions to invest rather than pay down tax, deductible debt, home office, kids on payroll, spouse on payroll, fringe benefits, pass through entity tax, raising your fees, transitioning to fee for service, automatic savings, home rental to your practice, among others. These are financial planning strategies we apply day in and day out for our clients here at practice cfo. All embedded in a really clear cash flow forecast because that is your financial X ray to dictate where you want your money to go. And by doing so, you control your money. Your money is not controlling you. And until next time, everybody have a great one.