4 Common Financial Mistakes Made By Dentists by Tim Greaves, CPA

4 Common Financial Mistakes Made By Dentists 

A wide-scope overview of how practice owners can bolster and maximize financial considerations in 2021 and beyond

by Tim Greaves, CPA

The road to financial freedom is paved with good intentions, especially for dentists. Inherently driven, not to mention intelligent, it’s no surprise dentists are successful both clinically and professionally. Those who go a step forward and choose a path of ownership typically share the same spirit for growing their dental practice to reach their personal financial goals.

Although I’m not a dentist, I know how difficult it can be to juggle both patients and a business. For more than 20 years, I’ve been able to guide many of Cain Watters & Associates’ 2,600 dental clients along their journey to reach their long- and short-term financial goals. I’ve had a front-row seat to see the life cycle of dental practice owners, from overcoming dental school debt to buying a second or third location and transitioning into retirement.

Clinically trained for an extra four to six years in postgraduate studies, dentists come out of school prepared to hit the ground running—mostly. What could be lacking for these young and hungry professionals? Business acumen and training on how to successfully run a multimillion-dollar practice.

For dentists to be effective in meeting their personal financial goals, they need to be successful in their business. Which is usually not a problem for most practices, but then 2020 happened.

Dealing with last year’s hurdles and unknowns is the perfect example of how business owners can take their mind off long-term goals because they’re distracted by a set of immediate new challenges. For example, many doctors returned from the shutdown to busier-than-ever practices, government stimulus opportunities and new state safety mandates. At times like that, it’s easy to take one’s eyes off staff management, accurate accounting and retirement planning.

Practices could always be running more efficiently, just like there’s always room for improvement in a personal financial plan. Based on these observations and more, I’ve selected the top four mistakes I see doctors making. They are a hybrid of personal and practice, because the health of the personal plan relies heavily on the health of the business.

1. Not assessing fees annually

Nobody likes to raise fees, and many owners believe that higher prices could become a barrier to entry. Fees should be assessed annually and sometimes increases must be made, especially with 2020’s cost increases on things like personal protective equipment. 

Additionally, ask yourself:

Are you charging enough, compared with other practices in your area? With my clients, I consult various fee publications, which allows a practice to see where its fees fall compared with practices in the same area. Gradual increases are almost unnoticeable to patients, yet can make a big difference on your profit. For example, a 3% fee increase for a $1 million general dentistry practice would equate to a $30,000 increase in net profit.

Following practice closures, are you behind on your hygiene patients and missing out on diagnosing more profitable perio treatments? After COVID-19 closures, many practices returned to packed hygiene schedules that reduced the capacity to perform more lucrative (but time-consuming) periodontal treatments. Some practices may want to consider bringing on a temp position or even expanding hours to Friday mornings just to catch up. The perio isn’t going away; it just isn’t getting treated like it was prepandemic.

Lastly, how much you are writing off each year? Dentists are typically invested in their community through schools, church, events, etc. They know a lot of people, which sometimes leads to doctors discounting fees. Adjustments can be within 8–10% on average, but when you pass 10%, you need to question if you’re writing off too much in discounts.

Consider having a plan of discounts in advance, quantifying the number of free cases and setting a standard discount percentage for your selected group, rather than making it a free-for-all.

2. Not managing staff salaries

Dentists traditionally have great relationships with their staff, resulting in low turnover. Although this is good, when long-term staff have been given 3–5% raises annually, this can lead to staff wages above national and regional averages. Our new Dental Practice Comparison Report, featuring average salaries by specialty and size, is available to download for free so you can see how you compare.

Staff salaries can be a practice’s largest overhead expense and should be around only 20–24% of collections to remain healthy. If a practice finds itself over this percentage, it’s time to regain balance.

Similar to fees, being off by only a small amount on salaries can really add up. For example, a 1% overage on staff salaries for a $1 million general dentistry practice would equate to $10,000 each year, while a 4% overage would be $40,000. The difference could be the deciding factor in whether or not you’re able to fund your share of a profit-sharing plan.

Look to see what other practices in your geographic region are paying and how you measure up. (Remember that hourly rates can vary significantly depending on if you practice in a rural, suburban or urban area.) It’s important to give raises to underpaid individuals, but employees whose salaries are within the average range should receive only cost-of-living increases on an annual basis.

Production-based bonuses are a great way to reward based on performance. This way you can offer incentives based on growth and profitability, rather than a blanket hourly increase.

If you have staff members who are overpaid, unwinding this is one of the hardest things to do. No staff member will volunteer to take a cut, and turnover may be needed to regain control.

3. Not leveraging tax efficiencies

As successful small business owners, most dentists are high-income earners, which positions them in high tax brackets.

With the current proposal from the Biden administration on increasing the tax rate 5% for the top tax bracket, some dentists in certain states could end up paying 50–55% in federal, state and payroll taxes. With these proposed changes and changes to capital gains tax rates, leveraging tax-deferred plans such as 401(k) plans and cash balance plans will be essential.

To think that you may be taking home less than half of your earned income is frustrating. Thankfully, there are strategic ways to reallocate money, including tax-deferred retirement plans, and defined benefit and cash balance plans. These types of plans become advantageous when the tax rates are soaring above 50%.

When you contribute your money to these types of savings vehicles, you immediately get a return of 50% by not having to pay the taxes on each dollar. You will have to contribute some money to the practice staff, but chances are it will be significantly less than the 50% tax benefit you’re receiving. These types of plans can offer owning dentists $50,000–$200,000 in additional tax-deferred savings.

Cash balance plans can be a great tax strategy for doctors looking to sell their practices. If you structure the plan the right way, this plan can be set up a few years before you retire, giving you the ability to put money aside, protecting the funds for when you need it. This can be especially helpful should the tax rate change.

Although most dentists are already incorporating some of the larger tax benefits of ownership, they may be missing out on some of the smaller strategies that can really add up to significant savings.

Dentists may only attribute business travel expenses for continuing education events, or when the expense has the potential for other travel as well, such as annual corporate meetings or events. Also consider writing off some auto expenses.

Although you cannot write off your daily commute to the office, consider other mileage like visits to referring doctors or study club meetings or trips to the bank or to pick up supplies. If there is a business reason, you should be running travel and auto through the business.

Meals are another area that has potential for savings. For 2021 and 2022, business meals are now 100% fully deductible instead of only 50%. (Make sure you keep all itemized receipts for any business meals.) Entertainment expenses, such as tickets to shows or sporting events, are still not deductible.

If you have children, consider employing and paying them out of the practice. During the pandemic, some dentists’ children worked in the office taking patients’ temperatures or shuttling them out of cars. Children can also help around the office by marketing within their sports or school club or even modeling. Children can earn up to $12,000 before they’re required to pay federal income taxes.

The bottom line is that there are more deductions out there than just your cellphone and internet. Moving expenses from your personal accounts to the business, when justified, can add up and save you a lot in taxes. Working with a CPA familiar with both the dental and small business tax landscape can make a big difference.

4. Not taking advantage of retirement savings opportunities

Leveraging your business as a vehicle for retirement savings is an extension of being tax efficient. As high-income earners, dental practice owners have the ability to deduct $57,000 for the doctor into a 401(k) plan, and $63,500 if over 50. If the spouse is working in the practice, there’s the potential for another $19,500, or $26,000 if over 50. With the ability to get $76,500–$89,500 annually into a 401(k) at a 37% tax rate, that saves the doctor a significant $28,000–$33,000 each year.

There is a common misconception that it would cost too much to run your own 401(k), cash balance or defined benefit plan. I disagree and suggest searching out a different pension company if you are in this situation.

Not all 401(k) plans are created equal. Ask for a proposal from a pension administrator based on your employee census. Many factors determine how much money you have to give the staff. It is important to test the proposed plans. One of the hard parts about retirement plans is that few people understand what fees they are paying to the TPA, attorney, recordkeeper, investment advisor, etc.

Additionally, a common question centers around if extra money should be used to pay off long-term debt like business loans or home mortgages. With interest rates at historical lows, instead of paying extra on debt, it’s best to take extra money and save it. If interest rates are 3% and rate-of-return on an investment is 7%, you will make more money by saving.

Business ownership, management and personal finance isn’t easy, especially after a year like 2020. But if you spend more time planning your vacation than your financial plan, it’s likely time for a change. There were many unknowns thrown at dentists, making it easy for them to take their eyes off the fundamentals of their financial plan. The good news is, it’s not too late.

No matter how old you are, if you are still practicing, you can make a difference. With the help of an adviser, dentists can look forward to reclaiming efficiencies and new strategies to make this year the best yet.

Cain Watters is a Registered Investment Advisor. Cain Watters only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets. Past performance is not an indicator of future results.

Author Bio
Tim Greaves Tim Greaves is a certified public accountant and investment adviser representative. He is a partner and financial planner at Cain Watters & Associates. He is also a member of its accounting steering committee and spearheads a team of financial planners with whom he shares his insights and expertise. In addition to his role as a CPA and adviser for dental clients, he is a mentor and leader in the recruitment and hiring efforts of the firm.

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