There comes the day as a dentist when you realize just how much cash flows through your business. The challenge becomes too much flowing through and not to your business. You know how to make money by producing and collecting. Sales seems to be growing from all your hard work. But how much are you keeping? Do you even know where all the money goes?
Maybe it feels like a big leak or a drain sucking money from your account. The worst part is, you’re not sure how to plug the leak or even where to begin. Here’s the formula you are likely operating with.
SALES – EXPENSES = PROFIT
Profit comes at the end after you pay all the bills – and only if there’s some money left over. Honestly, when was the last time you took a true Profit distribution? What is Profit? Is it your compensation? Is it what you pay taxes on at the end of the year? How do you define Profit?
According to Merriam Webster Profit means
- A valuable return; gain
- The excess of returns over expenditure in a transaction or series of transactions, especially the excess of the selling price of goods over their cost
- Net income usually for a given period of time. This defines the formula I gave you above.
But I’m not OK waiting for the leftovers. I’m not OK with Profit being last. I’m not OK working harder and taking home the same amount of money. I believe no dentist should ever have to worry about paying their team, their bills or themselves ever again!
I offer to define Profit as additional money you keep above and beyond paying yourself or your taxes. It is true cash reserves your business produces and you save. Profit is money you keep. Profit is money that grows. Profit gives you freedom. The big secret to this kind of Profit is to take it first.
SALES – PROFIT = EXPENSES
Flip the equation for a simple strategy of cash-flow management. This is the Profit First System. There are four core principles to the system. I’m going to share all four here and how they are customized for dentistry.
Before I tell you about these principles, however, I want you to dig deep and find your own personal why. What motivates you to own a business? This is not what motivates you to be a dentist, but rather what motivates you to own a business. You can be a dentist and work for someone else. If you work for yourself, I want you to get in touch with your why. What about owning a business makes you happy? If you were living your best life as a dental practice owner, what does that look like? How would you design your ideal day? What would that look like? Why does that motivate you?
Seriously, do this exercise. It’s important. Do it now, or at least block some time in your schedule to do it sometime very soon. I think business owners get lost in the day-to-day grind and forget why they went into business in the first place. This is true for you as a dentist owning your practice.
Your why is what motivates you to continue on. Your why will be the motivation for any kind of change you seek. If you want to do Profit First, knowing your why is very important so you’ll push on when it seems hard. I want you to go into it with commitment and follow-through.
To understand Profit First and how it can transform your business and your life, you need to grasp these four core principles.
A trick for people who want to lose weight is to use a smaller DentalEntrepreneur.com Dental Entrepreneur Winter 2021 19 plate. The small plate holds less food, and therefore they will eat less and still feel satisfied they ate everything on their plate. Of course, it’s important what type of food is on the plate, but more on that in a minute.
Transfer this principle to your bank account. Having one bank account where all the money flows in and out is like eating from one big plate. The more money in the account, the more you spend. Imagine having four other accounts, each holding smaller amounts of money designated for a specific purpose. It’s been proven when there’s less money in an account, less is spent.
When people who want to lose weight eat their veggies first. They satisfy their hunger and have less room to eat junk food. What comes first matters!
Now imagine your bank account and the money that flows into it. If you want to make sure you have Profit, you take it first. You transfer money out of your main bank account to a savings account and you do it first. Just like eating the veggies first, if you take your Profit first, you won’t even miss it when it comes time to pay the bills. Your business will be forced to be healthier when you get serious about taking your Profit first.
If someone is trying to lose weight, it would be important to NOT have junk food in the house. Take the temptation away. The same is true of your Profit First money. Once you move money to your Profit account, it’s important to put it in a place (another bank across town) where it’s harder to access, so you won’t be tempted to use it. You remove the temptation to spend it.
ESTABLISH A RHYTHM
One of the best things to do when losing weight is to eat smaller meals more frequently. This keeps your metabolism higher and burns more calories.
When establishing Profit First in your business, it’s important to set a schedule for making allocations or transfers from your main bank account into the additional accounts. By establishing a set schedule, you are more likely to follow through.
Here’s how the Profit First system works in a dental practice: All the money flows into one big income account. This account is used only to hold the money as it accumulates each week. We do not pay the bills from this account. At the end of each week, after all deposits have posted in this bank account, we allocate by percentage to four other bank accounts (small plates). These four other accounts are for Profit, Owner’s Compensation, Taxes and Operating Expenses. Allocations are made in this exact order. Remember to take your Profit First. Once an allocation and transfer is made, it can only be used for that specific purpose. One of the biggest challenges is determining the exact percentage to allocate for each account. To figure it out, use the prior 12 months of financial data and divide all your expenses into the four categories of Profit, Owners Compensation, Taxes and Operating Expenses. Calculate the percentage. This is a starting point.
If this is too complicated or you’re just not ready to go all-in with Profit First, start by opening one additional account and name it Profit. Begin to allocate and transfer 1 percent of all collections each week into this account. That’s it! Super Simple! Set aside your Profit First. Develop the habit.
This one step alone will move you from making money to keeping money!
If you want to learn more, please reach out to me at email@example.com. I’m currently co-writing the Profit First for Dentists book with Drew Hinrichs, CPA, and pre-orders will be available soon prior to our publishing date of February 1, 2021. If you’d like the link to order a copy, please email me and request it. Again, my email is firstname.lastname@example.org.