Most practice owners are in a financial crisis.
Crisis is a strong word. It is defined as a “time of intense difficulty, trouble, or danger.” Examples of this would be a drug crisis, a drought crisis, a food crisis, or some kind of health crisis. It is a word that elicits fear, uneasiness, and anxiety. It is a situation that most people would not want to confront. So when I say that most private practice owners are in a financial crisis, I am not embellishing or trying to create a problem that doesn’t exist. I have been on the front lines and this problem is real.
For the last 10 years I have personally worked with hundreds of private practice owners which include veterinarians, physical therapists, optometrists, dentists, and chiropractic specialists. I have had over 10,000 conversations with owners on the subject of money. I have seen, observed, and witnessed almost every financial scenario that a private practice owner will face. Everything from purchasing a new practice to selling a practice and everything in-between such as: buying equipment, refinancing to a buy a new building, remodeling their current space, negotiating lease agreements, hiring associates, paying taxes, and on it goes (and that’s just the positive list). There is nothing that a practice owner could bring to me that I have not seen 10 times over.
I have made it my personal mission and the mission of our financial planning firm to help practice owners improve their financial condition so they can actually recognize the fruits of their labor. My vision is to show owners that financial freedom is attainable, but it starts with financial IMPROVEMENT. With that said, I can tell you that there is a REAL financial crisis happening amongst private practice owners. I have seen the household and business financial statements of enough private practice owners to say with confidence that the vast majority of owners are only a few steps away from financial ruin, but they are also not far from financial abundance either.
Let me start there. There are 2 ends of the financial spectrum that one could achieve financially. The first would be financial abundance. This could be defined as a financial condition in the household where one has:
- An abundance of cash flow coming into the household from multiple sources
- Where there is no bad debt
- Where the business is profitable, sustainable, and transferable
- Practically all assets are shielded from loss
- And one has time to pursue all of their life purposes
The other end of the spectrum would be financial ruin. This could be defined as a financial condition in the household where one has:
- A scarcity of cash flow (typically coming from only one or two sources)
- Has suffered large losses of income, investment value, and assets
- Over-leveraged finances with burdensome debt
- Has few to no advisors or solutions apparent
- And has lost all hope that the current financial condition can be rehabilitated
In my experience, most private practice owners are MUCH closer to financial ruin than they are financial abundance. As a matter of fact, the majority of practice owners:
- Have less than $10,000 in their business checking accounts
- Do not have enough in reserves to cover more than 1 payroll
- Have over $1,000,000 in personal and business debt combined
- Have had someone in their organization steal or embezzle money
- Have a profit margin of less than 10%
- Save less than $10,000 a year towards building future wealth
Although this financial crisis amongst practice owners is vast and for many varied reasons, allow me to name a few based on my experience:
Crisis Reason #1:
Practice Owners have never identified what Financial Zone and corresponding financial status they are actually in compared to the zone above or below where they fall.
I’ve outlined 7 different Financial Zones a practice owner can be in with corresponding financial status characteristics: Zone 0 – Trapped, Zone 1 – Scarcity, Zone 2 – Insecure, Zone 3 – Content, Zone 4 – Expansion, Zone 5 – Abundance, Zone 6 – Power, Zone 7 – Indestructible Wealth.
It’s important to identify where you are, however most practice owners have never examined their actual financial condition compared to an optimum one. This then leads to why they are not applying correct actions steps to help get out of the lower financial condition which typically then leads to stalled progress or worse. It’s understandable—comparing oneself to the Joneses is not a correct tool of measurement.
Crisis Reason #2:
Practice Owners have no comprehensive financial plan specifically designed for them.
This sounds fairly rudimentary, but the importance of a good financial plan cannot be understated. I am not talking about a sales pitch disguised as a financial plan. I am talking about an actual written plan that aligns the exact financial goals of the household, assigns an income target needed for the practice to produce, utilizes correct financial statistics to measure the progress, provides specific action steps needed to correct any non-optimum condition, and is built on gradual steps allowing for the practice owner to see financial “wins” and celebrate them along the journey.
Crisis Reason #3:
Practice Owners listen to OPOs (Other People’s Opinions) about financial matters.
Everyone always wants to put their 2 cents in when it comes to other people’s financial situation. Unfortunately, 2 cents is about all the opinions are actually worth. One of the most difficult tasks in my job as a financial advisor has been handling the opinions of “other” advisors, friends, colleagues, insurance guys, brokers, local financial advisors, accountants, uncles, parents, and the list goes on.
Unfortunately, practice owners will listen to what I’ll call “traditional financial advice” of gurus or people they think are financial experts for whatever reason. These “experts” speak to the masses and although they may have knowledge about insurance, investments, or tax preparation independently, the majority HAVE NO IDEA what exact steps will help bring a private practice owner’s household into a higher and more abundant financial condition. Here’s how you know: look at your current financial condition. Do you like it? If not, then stop following the advice of these advisors. I’m not saying they don’t mean well, but good intentions don’t always bring about a positive change in one’s financial situation. Correct financial advice (specific for a practice owner family) and correct application done in the correct sequence will bring about financial results.
Crisis Reason #4:
Practice Owners assign the financial responsibility of the practice to someone other than a direct or indirect owner of the business.
As a private practice owner, nothing is more important than the financial solvency of your practice. NOTHING. Solvency means there is MORE money coming in than what is going out. In my experience, most practice owners simply don’t want the burden of “doing the books” or they say “my accountant handles that” or worse “my office manager handles my finances.” This is not an indictment of anyone, and there is certainly nothing wrong with having someone handle paying bills and entering financial data into QuickBooks. But when a practice owner gives over control of the financial condition of the business to a third party, then huge trouble is on the horizon for that owner.
This is important—you should ALWAYS have access to all bank accounts. You should ALWAYS know your balances in your checking and savings accounts. You should have weekly finance meetings with your team. AND MOST IMPORTANTLY…you should NEVER give someone the ability to write checks on your behalf unless you have a dual sign or approval process. There is a long line of private practice owners who have lost $50k, $80k, $100, $200k, and more in revenue because they gave over the financial responsibility to someone else and took their eye off the books.
Crisis Reason #5:
Practice Owners take on too much debt.
Number one on everyone’s financial goal list is to be debt free. Yet most practice owners have no problem carrying over $1,000,000 of personal and practice debt combined. Let me be clear: debt itself is not the problem. Bad debt is the problem. Bad debt is defined as credit cards, car payments, house mortgages, or anything that doesn’t provide any cash flow or doesn’t appreciate in value. However, bad debt can be tricky and be disguised as good debt. Huh? You might be wondering what that looks like. I have seen many practice owners borrow HUGE amounts of money “claiming” it was good debt. Unfortunately, they borrowed the money when they were not in an optimum financial condition, either in the practice or personally, and the business didn’t make enough money to cover the new debt service so they constantly struggled financially because of it. In addition, I’ve seen examples of practice owners buying bigger homes, second homes, and better cars without actually having the cash to do so. The effect is almost always leaving the household in a declining financial condition or subject to foreclosure if the business has a bad stretch.
Crisis Reason #6:
Practice Owners do not understand the tax system.
The second largest expense of most private practice owners is taxes. It is the most predictable expense and yet it is the one most owners have trouble paying. Because most practice owners are set up as an S Corporation or LLC taxed as an S Corp, the PROFIT of the business passes through to their personal returns and they are liable for the tax. The issue with this is most practice owners either spend the profit somewhere else or the business eats it up in expenses which are not deductible. As a result within the owners I’ve consulted with, 80% have had issues paying their tax bill at the end of the year. In fact, many need to borrow more money or take from their personal reserves to pay their tax.
In addition, many practice owners will listen to their accountant’s advice and NOT take certain tax deductions for fear of “being audited” as if the IRS has a “red flag” book hiding somewhere. Here’s the truth: the price you pay for your accountant being able to sleep at night can cost you tens of thousands to hundreds of thousands of dollars.
Crisis Reason #7:
Practice Owners underestimate the amount of income the practice needs to produce to be solvent and expand.
The number one expense of a private practice is the money they never made and should have. The primary cause for this is simply never determining how much the practice actually needs to make every month for the practice to grow and serve the financial needs of the household. Most practice owners never grasp that their practice will try and spend every dollar that it makes and then some. The only way to pay for basic expenses, taxes, expansion, and other investments is to factor in ALL of these items when determining what amount of income is actually needed to operate the business to be solvent and expand.
Crisis Reason #8:
Practice Owners have not discovered and/or disconnected from “Financial Foes.”
When I really took a step back and looked at the financial condition of those practice owners that (despite all efforts) could never get ahead, were always broke, had onerous debt, and could never accumulate any reserves or buffers—I always found that there was someone in the business actively trying to do them harm. This is so true no matter how hard it is to find. It could be as subtle as not pushing a needed service, not rescheduling someone, not filing the correct claims for insurance reimbursements. Or it could be as savage as hiding checks, ordering unauthorized products and services, embezzling money from the accounts or poisoning the staff with toxic rumors.
Most practice owners simply don’t want to confront the obvious—that a staff member in a line of production is actively blocking income to the practice or is being irresponsible with spending the practice funds. Either way, this inability to spot and disconnect these individuals is a primary cause of financial hardship and ruin of a private practice.
Crisis Reason #9:
Practice Owners do not have someone holding them accountable to their financial condition and actions to attain their goals.
In business, there is no nobility in going it alone. Especially when it comes to making financial decisions without any training in the subject of money. In my experience, a practice owner needs someone to help them plan, set correct targets, and hold them accountable for their financial actions. Otherwise they tend to make decisions on what they “think” they need now or what someone else tells them they need without any premise or proven results. In the DIY (Do It Yourself) scenario, there is no sound strategy, no step-by-step plan, and no experienced advisor to bounce ideas off of. Having a trusted, financial coach to hold you accountable—one who really understands the direction, goals, and purposes of a practice owner—can literally save hundreds of thousands of dollars in bad decision-making, mal-investments, and lost opportunities. This is not a go-it-alone venture—your family, staff and community are depending on you to survive.
Crisis Reason #10- Practice Owners have a poor attitude about money.
Most people were brought up with the idea that “You shouldn’t talk about money” or that “It’s impolite to boast about money” or other such restrictive notions regarding money. This leads to the single biggest issue regarding money that most people have—money is scarce. Having an abundance of money is simply not a realistic concept to most people. Financial freedom to most people is a myth. I’ve heard: “No one can be trusted regarding money,” “My financial future is uncertain,” “Life has taken away all of my wealth.” False! These statements are all poor money attitudes. If you walk around all day with these destructive attitudes towards money, then you will most likely always be broke. We create our own self-fulfilling prophecy.
EVERY practice owner needs a financial advisor who understands how important their business is to their household, stands by them when they have a bad week, holds them accountable, and guides them towards financial success.
We want to be your guide. It’s what we do for practice owners like you! Let us guide and advise you on your financial journey—no matter what phase of ownership you are in. Our goal is to empower you to make the best financial decisions which will lead to financial success, and we are experts in what we do.
Schedule an appointment today to learn more about how we can create a road map for you.
Do Well, Owners!
Eric Miller
Advisory Services offered through Econologics Financial Advisors, LLC., A Federally Registered Investment Advisor.
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