Most dental practices have debt of some kind. It could be a large practice loan or smaller equipment loans or even credit card debt. It’s all the same thing…you owe someone else (the bank) for a past purchase.
Debt payments are typically monthly fixed expenses so you’ll need to first make sure you have enough cash flow to manage these payments. Having a plan for your money is key here. Some people would call this a budget. What it really means is you create a plan for how much money you can expect to come in and then where that money will be used and what for.
Profit First is a Cash Flow System. It’s all about Money In – Money Out. The money out part has to be monitored closely. There are always opportunities to work on either side of the equation. You can increase sales or you can decrease expenses, or you can do both.
Profit is a part of the Money Out in the equation. Treat Profit as an expense just like any other bill you pay. But now you’re paying yourself…and that feels great!
I know the big question here is why would you set aside Profit when you have debt to pay down? Seems counterintuitive. But it’s not. Let me explain.
If you keep thinking you should put all your ‘extra’ money towards the debt, you’ll continue to stay in survival mode. You’ll keep existing week to week and month to month. When a bad month comes along, you’ll be stressed out.
If you have a Profit Account and you fund it every week, you’ll have money in the bank giving you a cushion for a bad month that comes along. You can also use some of this money to make extra debt payments once you get into the rhythm of Profit First.
Here’s how it works. All the money flows into the Income Account. We do not pay the bills from the Income Account. Once a week we allocate money to 4 other core accounts; Profit, Owner’s Comp, Tax, Operating Expense. We use the money in those accounts for the specific purpose they were created for. The Profit Account is created to give the owner a Profit Distribution every quarter. You may decide to use part of that distribution to pay down debt. The remaining profit stays in the account.
Attacking debt on a quarterly basis works well because it allows you to strategically plan over time how much you are saving and how much you will use for debt reduction.
Mike Michaliwicz says in his book, Profit First, “You must enjoy saving more than you enjoy spending” if you want to stop the madness of increasing debt. You must put a freeze on any new debt. Freeze those credit cards. Begin now to run the practice from the current cash flow and stop borrowing money to make ends meet.
The first step in all of this is to get honest with yourself about the cash flow in your business. How much debt do you have? How much income do you have? Examine the debt and list each loan with the amount and the interest rate and the current payment. Start out by attacking one loan and keep paying on it until it’s paid off. Then use that money to work on the next one and so on. This is the method Dave Ramsey teaches for personal debt. It works for businesses too.
My point is this; You can build up your Profit Account at the same time you are paying down debt. It’s possible and it’s smart! I challenge you. Are you in?
Barb Stackhouse RDH, M.Ed.