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Morgan Hamon lives dangerously. He started his career as a fighter pilot and then became a tax accountant. The fight against taxes is real, and Morgan’s firm, HDA Accounting Group, is the first line of defense for hundreds of dentists across the country. Because he works exclusively with dentists, Morgan has a deep understanding of tax issues faced by practice owners. In this Dentist Money™ interview, he answers the most common tax questions asked by dentists, explains the tax implications of owning a building, and specifies how much you should spend on staff and overhead to maintain sufficient profitability.
Speaker: This is Dentist Money, now here is your host, Reese Harper.
Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I am your host, Reese harper. We just flew in a friend of mine from Denver, Mr. Morgan Hammond, who is a retired Navy pilot. He has spent the early part of his career serving our country and the latter part of his career building a bookkeeping and tax firm that services hundreds of dentists all over the country. He has a really cool story and a great background. He is a very genuine, sincere person. He is very thoughtful about what he says. I have always appreciated his take on things. I think this interview is going to be particularly insightful for people who want to understand their financials. Those who want to understand where their margins should be, how much they should be making, how much overhead should be in different categories, and how to look at your practice finances and manage them. We have put Morgan’s contact information in the show notes for this episode on dentistmoneyshow.com. I know that he would be happy to answer any questions that you might have. You can also schedule an appointment with us or one of our advisors on the website. Feel free to follow us on Instagram and Facebook for more helpful tips. Thank you for listening, enjoy the show, and carry on.
Reese Harper: How are you doing, Morgan?
Morgan Hamon: I am good, Reese, thank you.
Reese Harper: Now, for people who don’t know you, which is probably just a few of our listeners, you are one of my favorite bookkeeping and tax shops. I think you guys do a really great job but you keep a pretty low profile. You aren’t quite as loud as other people with your marketing. I want to have everyone here recognize you. You work wth hundreds of dentists all around the country and you have some great context to bring to the listeners. I think we should start by letting people know a little bit about your background. How did you get into accounting and how did you get started in dentistry?
Morgan Hamon: Ya, I took the long road to accounting.
Reese Harper: Yes, but I think it is such an interesting story.
Morgan Hamon: After graduating from college, where I was on Navy scholarship, I went active duty Navy. I was a Navy Pilot for eleven years. I carried carrier based F18’s on the West Coast. I had a lot of fun and made a lot of good friends.
Reese Harper: Great memories.
Morgan Hamon: I was deployed in the middle East, and yes, a lot of great memories.
Reese Harper: When were you deployed?
Morgan Hamon: In 2000, to the Persian Gulf and Iraq and then I left the Navy in 2005. It was time to grow up and get a real job. I was fortunate to join with my dad in private industry. He is a career CPA. It seems like all of my family are accountants. It is in the DNA.
Reese Harper: So you went from flying planes and putting your life at risk for the country to accounting?
That is a normal transition, right?
Morgan Hamon: Right?
Reese Harper: Once you left you joined up with your dad and have been doing that ever since?
Morgan Hamon: Yes, doing that ever since. We fell into dentistry a bit. It was an opportunity and we realized that it was just a fantastic niche to work in. We had acquired a few CPA firms and merged them into one, and one of the firms we acquired had a nephew who was a dentist. He has a practice management seminar. We helped him with his accounting, and he really saw the value in that and invited us to come to a seminar where we started meeting some dentists. Our practice was always very business oriented and the more we could specialize was always a desire of ours. We got to know dental practices inside and out. The more dentists we worked with the more we liked it. We stopped taking any other clients until eventually in 2011, it was all dentists and we have never looked back. We work with dental practice owners only.
Reese Harper: That is great! Let’s jump right in on your feedback with different issues dentists face with their accounting. One of the most general questions that I think people would like to know is about early on in their career. When they purchase a practice or buy something they don’t pay a lot of taxes for a few years. They get these tax benefits.
Morgan Hamon: Correct.
Reese Harper: These buzzwords that they throw around are depreciation, or 179 expenses, and they talk about all of these benefits in the first few years. People are also buying homes, and making investments into their practice early on. They are also starting to establish their lifestyle and so sometimes for those first few years, they just don’t pay a lot of taxes.
Morgan Hamon: Right and in many cases in year one, depending on how the practice is structured and how your results are, there is often a very favorable refund that can be realized that first year. Then year two and three you are exactly right, the tax liability can be low because there is so much first year depreciation under section 179. Those tax benefits can produce some very favorable tax results. Usually though once the practice is up and running for a few years there are some disadvantages. If you expense a piece of equipment that first year, then the benefit is gone. There is no more deduction in subsequent years. So by year three, practice is doing well, you are at million or a million plus for a single doctor practice and now some real tax start to come due.
Reese Harper: And a lot of times it is a surprise for people! Do you find that can cause some anxiety, stress, or anger towards the CPA?
Morgan Hamon: It is! It can be a bit of a shock, particularly if they have undertaken a new house and some other expenses. We only do tax work for our monthly clients so that we know the practice inside and out and we are very familiar with what the revenue is looking like.
Reese Harper: You mean you only do the tax keeping for people you re doing the bookkeeping for, right?
Morgan Hamon: Yes, correct. To help alleviate some of that anxiety you have to look at that tax liability throughout the year. Nobody can wait until April 15, and say, “Oh, by the way, you have to write this big check!” We are very hands on in trying to set that reasonable expectation at what the tax liability is and everybody should be looking forward to that tax liability and having some plan whether it is through wage withholdings or through estimated payments to spread that out a bit so that it is not so much of a surprise at the end.
Reese Harper: Is it fair to say that instead of taking all of the depreciation in one year sometimes it makes more sense to spread it out? Your taxes are paid on a bracket, right? Where the more you make the higher the rate you pay?
Morgan Hamon: Correct.
Reese Harper: So if my expense that year wipes my income down too low then I have kind of not utilized that equipment purchase or those TI’s, my build out expenses, maybe they weren’t as fully realized as they could have been? What if I would have spread them out a little bit more?
Morgan Hamon: That is exactly right and a good point. That is part of effective tax planning. You need to look at when those benefits make the most sense. It may not make sense to take section 179. If the practice is growing and you expect a higher tax liability in the next few years then you could take regular accelerated depreciation and you get the biggest benefit on that in years two and three. It can make sense to phase those out. I also, along those lines, think that sometimes the year end is approaching and they might be considering buying some gear and everyone knows this section 179. I have talked to some doctors where there is some anxiety. I need to buy it now or I will lose the deduction! The point is, you never lose your deduction, it is all a matter of timing. If you don’t take section 179 or you are over the limit then you take accelerated depreciation. You always recover your costs.
Reese Harper: It might be over five years or something, but it doesn’t disappear. Sometimes that is your buddy the equipment guy speaking, ok? That is not the tax man. Sometimes there are a lot of people that have incentives to tell you things that may not be entirely at face value. They create a little more anxiety than they do truth.
Morgan Hamon: You will always recover your costs. If you do not recover it year one, then you do accelerated depreciation and you will have the majority of those benefits in the first few years.
Reese Harper: A lot of people think of taxes and books as the same thing. They think that they can do their books and someone else can do their taxes. Maybe some people have an accountant doing their books and their taxes. I do not like to see doctors doing their own book keeping for their entire career. I guess I don’t mind it if they have a strong inclination to want to do it for a little while, but my general recommendation is that you can learn a lot about your books without doing the data entry. In accounting, as you know, there is managerial accounting and then there is financial accounting. Financial accounting is the part where the dirty work gets done. You put the numbers in and you reconcile things and make sure that it is accurate. Managerial accounting is when you make smart decisions about those numbers. What I typically see happen is people only get the financial accounting part done, and it is usually not done super well, it is just slapped together in two hours a month. Then the managerial stuff, forecasting, marketing, etc. they can’t do it! They wasted all of their energy just getting the financial accounting done.
Morgan Hamon: Yes, absolutely.
Reese Harper: Sometimes people make the excuse about how they just want to have a good handle about what’s going on in their practice. That is ok for a while, but you can still get a good handle by doing the managerial accounting every month. You can look at it and understand the percentages and ratios and looking at your books!
Morgan Hamon: Many accounting firms are fairly tax oriented and with the book keeping, a lot of firms won’t even do it. They view it as not profitable. They, rightly so, pride themselves on the quality of tax work they are doing so a lot of firms won’t offer book keeping solutions. This leaves a dentist to either do it themselves or maybe have somebody come in and do the books every once in awhile. We take the opposite approach. The books have to be prepared at year’s end for tax purposes, so why not do those throughout the year and keep excellent books where you can then use that data that is being aggravated truly for tax purposes, but then we can use that to make smart, intelligent decisions along the way. Along with the books, when you have financial statements each month, there is a lot of information within there, within those statements, that you can use to make smart decisions about the practice. I think the reading of those financial statements is not necessarily as intuitive as some people might think that it would be. The profit and loss, that is a fairly intuitive statement, and if our clients are going to read a statement that is the one that they are going to read. It will be like, here is my revenue, here is my expenses, and then they see net income. Then I get this very common question, especially form newer owners, “Morgan I looked at my net income and then I logged into my bank and net income looks great and my bank account is not very good. Where is the disconnect?” That leads into, “well, we have a balance sheet and we have items that are accounted for that are not shown on the PNL, and the big three are the shareholder or owner distributions, and usually most people will remember those checks because that is one they write themselves…
Reese Harper: Because that is the one they bought the car with! The corporate boat! That is the one the corporate boat was paid for with.
Morgan Hamon: That, and the big ticket item, speaking of items that are not necessarily intuitive, but the debt service on the business. Those are big numbers!
Reese Harper: That’s right. That’s huge because people do not realize that those debt payments that they are paying on loans, those are not expenses.
Morgan Hamon: They are nondeductible.
Reese Harper: They do not make your taxes go down!
Morgan Hamon: Right, the interest is fully deductible but when you get into the full amortization on that loan, the bulk of those payments going to the bank is nondeductible. It is paid for with profit dollars and you pay tax on that money going to the bank.
Reese Harper: So you said shareholder distributions, debt service, and…
Morgan Hamon: …and then equipment. Initially, that is accounted for during the year. It is paid for by profit and then it is either depreciated or you take section 179 at year end. A comment I hear often is, “I bought a bunch of equipment, I finished out those last two operatories so we are going to see a hit in our profit margins.” Not necessarily. Those are fixed assets we account for those on the balance sheet. It doesn’t affect the profitability of the practice because in terms of profitability on the balance sheet they are more operational costs that we are measuring.
Reese Harper:Ya, not necessarily capital.
Morgan Hamon: They are usually amortized over seven years for equipment.
Reese Harper: So to finish out all of my space right? To finish out my last operatories might be able to be an expense in one year, but it can vary depending on what it was right?
Morgan Hamon: Yes, it can vary, absolutely.
Reese Harper: So what are the typical time frames that I can write different things off under? If I buy a building, I can’t write that off in one year right? How does that work?
Morgan Hamon: A building is real property. With a building, that is depreciated over forty years.
Reese Harper: So that is a really long one, right?
Morgan Hamon: Yes, so what we recommend when you buy a building is to get a cost segregation study. The purpose of that is to try and classify as much as what went into the build out on it, such as equipment, so that we can recover those costs quicker than if it is real property.
Reese Harper: I think a lot of people don’t realize that when they buy a building, although there are a few tax advantages to owning, those tax advantages, most of them, get spread over a really long period of time.
Morgan Hamon: Yes, a really long time. This is the other thing about owning a building, if a practice owner chooses to buy a location, it does not affect the practice itself really at all. The practice is still going to have the same expenses, it is still going to pay rent, except the landlord is the dentist and they are going to have a separate holding company and a separate real estate LLC that will collect that rent. Typically the rent is enough to cover the mortgage on that building, plus maybe a reserve. That, in most cases, is going to be pretty equivalent to what the market rent is that you are paying. So on the practice financials you see almost zero difference between paying a third party landlord and then paying your own real estate holding company. I always advise, and this is another question I hear frequently, whether they should buy or lease a building. My advice is own commercial real estate if you want an investment in commercial real estate, it won’t affect the practice. There are a few ancillary benefits to the practice. There may be less uncertainty about turnover, lease escalations, not having the lease renewed. It is your building. The costs are fairly fixed, so there are a few benefits. In that regard there is also additional risks with commercial real estate.
Reese Harper: Totally, additional expenses that come up randomly. I own the building that we are in right now, ok? But our air condition and heating unit, for some reason, this is a new building, ok? It was built in 2000 and something, there are some pipes in the roof that let the hot air out and for some reason, birds keep climbing down these pipes and flying down into the HVAC unit. They fry my HVAC every time!
Morgan Hamon: And whose problem is that?
Reese Harper: I’m like, WHAT!? How did a bird get in there, it is like the fourth time! Last year we had two birds that made it in and completely fried our heating and cooling units! I am like, ok, well that is my problem. I just think a lot of people think that buying is the holy grail.
Morgan Hamon: It is a second business. You have to want to be in that business of commercial real estate.
Reese Harper: I always tell people, if the location is the best location for where you want to be, and it is for sale, then fine. Maybe that is the only way that you can do it. If you can lease or buy, it is still not a no brainer to buy it, but if it is only for sale and it is a great location and you want to be there, then fine.
Morgan Hamon: And you know that you want to be there long term. There are definitely some benefits, but I agree, that it is not always the right choice.
Reese Harper: I am not saying in my case, it hasn’t been worth it at some level, it is just not the holy grail. I feel like too many people think if they get a personal rental property or two and they get their building and own some real estate then they will finally be in a place where they are secure financially. In order to get secure financially through real estate takes many, many properties not two or three. If you are going to live off rental income and profits you have to really scale up and acquire a dozen or dozens of properties in order to make that be the equivalent of three or four million dollar in savings for retirement. It takes a lot of property and a lot of risk and it is a full time business.
Morgan Hamon: To give some perspective, the vast majority of our client base, lease. I don’t have a percentage, I want to say maybe, maybe 15%-20% of clients own their real estate?
Reese Harper: …and the 80% are constantly wondering if they are doing the right thing. Anyways, you are in good hands if you are leasing and if you own that’s not necessarily bad, but don’t let that drive the decision. Ok, let’s jump back to the importance of bookkeeping and how bookkeeping and tax are a little bit different. Lets just recap why keeping a very clean set of books on a monthly basis is more important than just coming in and slapping it together at year end or maybe a quarterly reconciliation, why do monthly books matter?
Morgan Hamon: First and foremost it is the managerial accounting that you mentioned. It is knowing what is going on in your practice. Think, for example, about a very common question or concern, “how much money can I take out of my practice?” You can only answer that if there are a few things that you know and you only know if you have books. So if you want to know how much money you can take out then you have to know your break even point. There is more than one way to calculate a break even point, but the way I do it is total expenses, not including salary to the owner, I add back depreciation, amortization, and good deal tax benefit but it doesn’t necessarily affect your monthly cash. Then I add in the full loan payment, not just the interest on the P&L, but it is a hard cash acquirement, so you might as well count it. You have to know what that number is. A very common break even for a single practice doctor collecting something in the neighborhood of $900,000 to a million, maybe $50,0000 is the break even a month. You have to know that number. Then you have to know from a tax perspective that you don’t want at year end to have profit over distributed you have to know that. But the big picture is, ya know, once the break even we know what that number is, then we have to decide what type of cash reserve do we want. Our minimum recommendation is a one to one ratio. Some people sleep better at night if it is a two to one. It is totally up to the owner. Those practice owners where they only have half a month’s reserve, they start sweating when payroll and rent is due. You have to know that number in order to make an informed decision to know how much money to take out and you only have that number if you keep your books up to date every month! The other example is what we call benchmarking. The average, established practice, in my opinion, should have profit margins of 35%. You will only know that if you have current books that are done properly. Once we know what that profit margin is, then the profit will come out through either a combination of salary and owner distribution if they are an escort, or just profit distribution.
Reese Harper: But at minimum they should be at 35%, but it could be as high as maybe 40% plus?
Morgan Hamon: Absolutely. 35%-40% is very healthy, but we have plenty of practices that are 45% plus. If you start getting a profit margins about 50%, you start wondering. It is doable, but it is a small club. This is an important thing to point out, I think people with a financial background think in terms of profit margin and a lot of dentists think in terms of overhead. So a 35% profit margin is 65% overhead, it is the same number. When I am visiting with our clients they will say, “oh I was at this study club and this guy is telling me that he had 40% overhead or 60% margin.” That is unusual. I kind of caution people when they hear those stories, just having seen several hundred practices over a lot of years. I know, industry averages 35%. 35%-40% you are doing well. 40% plus profit margin is definitely achievable, but let’s go the other way. Say profit margin is 25% on a practice that has been around for a while. That is not enough. That is not enough for the owner after all of the risk that they have took and hard work that they have put into establishing that practice and you have to know why it is that low. The answer is not always expenses. It could be, but if it is, then the first place is are we over spending? You have to bench mark, you have to know. What are my clinical dentist supplies, lab fees, non doctor staff costs, associateship costs, occupancy, and marketing. You have to benchmark to know if you are off the beaten path. Then it can get challenging when you look at the bench mark analysis and say everything is tracking. Let’s say staff costs are a little bit high, which is a common one to be high. Staff costs for a regular, non doctor staff costs, typically run about 25%. If the profit margin is low, and the staff costs are high, maybe we see staff costs at 30%-35% which is too high. Again you will only know that if you have books. But this is where the conversation about managerial accounting comes into play, are we overspending on staff? I always ask the doctor how do you feel about staff? Are you about right? Are we understaffed? No we are about right, if anything we are working pretty hard. To me that is indicative of well, maybe we have a collection problem. Who is in charge of submitting claims and collecting money. Let’s also take a look at your AR aging. Is money being collected because these calculations, both the taxes and when you are keeping books on a cash basis, it is measured against the money you actually have not necessarily the production. If money is not being collected then the practice can still be producing, everybody is doing their part and working hard, but we will still see a low profit margin. If the profit margin is on the low side it is not necessarily that we are going to cut our way out of this problem it could be that revenue is the issue. If we really make this something tangible that you can take away you have to remember that for any service business we can break this down into the rule of thirds. The staff always get paid, they get their third. Although for dental practices it needs to be more like a quarter. The next is overhead needs to come into a bout 1/3. That includes everything. The owner gets paid last, if the profit is not there, then the owner is the one that is short at the end of the day.
Reese Harper: That is a great way to look at it. You talked about how if I have a problem with my overhead percentages then I might have an overhead problem, but I might have a revenue problem. Sometimes when I hear people talk about this, and I see someone that has an overhead problem, it can go kind of both ways. We just did our PR calculations, because for our purposes, in our financial planning we want to know how much discretionary income is someone likely going to have this year so that we can set up the right retirement plan contributions and make forecasts about when they are going to be able to retire. What we will see sometimes is that somebody will have a 52% margin or something and they will be going, man I just feel like I am running ragged.
Morgan Hamon: They probably are!
Reese Harper: Yes, they probably are right! When you drive too high of a profit sometimes that means you are understaffed or maybe you are putting a little bit of pressure on your quality control, or maybe you are not marketing or protecting the future. It is hard to know.
Morgan Hamon: You know what I think, it can come down to there is only so many days of the week. When I see a single doctor practice with no associate, when their collections hit about the 1.5 million annual mark, that is usually pretty close to the ceiling. You are not going to grow unless you begin to leverage an associate.
Reese Harper: That probably varies a little bit based on market.
Morgan Hamon: Yes, and we will see some docs who hit about 1.2 and they are getting pretty tired and then we will have the total machine out there that is clocking in like 1.8 mil and hitting it five days a week.
Reese Harper: You are talking, this is generally GP practices we are talking about.Specialists would have a little bit of different ratios, don’t take this too seriously. I think the principle here is that they higher your profit margin, which we sometimes use as a badge of honor, now if you are a start up company in silicon valley or you are a start up business anywhere in the country then profit is not actually something that they want you focused on day 1. They want you to get your systems in place and get the proper marketing established and get the right infrastructure and sometimes I feel like doctors obsess over pushing their margin higher a the expense of building the right team. Sometimes not making the right investments in marketing and not making the right investment and compensating their staff appropriately so they don’t have turnover. Just having the right culture, I don’t know, that is a concern I have.
Morgan Hamon: This reminds me of a recent conversation I had with a client. It is a small practice, but he does 50% margin. He knows that, and he is afraid to see that deteriorate. It has created a situation where it is inhibiting his growth a little bit because you do have to make those investments. For example, hiring a hygienist, they are expensive, but if they are productive than they are going to grow.
Reese Harper: They are a huge asset at some point!
Morgan Hamon: Yes, huge asset. Along the same lines though, we talked earlier about hitting your limit on how much you want to work. Let’s say you have a fantastic profit margins, 45-50%, but they want to keep growing because they can’t do it. We have to change the mindset a little bit to grow. We are going to bring an associate in and we are not going to replace the doctor we are going to add capacity within the same overhead and the results are always very favorable. If it is done right, but we have to prepare ourselves, we will see that profit margin come down.
Reese Harper: Short term it will decline a little bit.
Morgan Hamon: Well, I think it will come down long term, because your associate costs for your full time associate working shoulder to shoulder with a dentist in one practice and they are working extended hours. Now they have more capacity that associate cost will average out somewhere between 10-15 maybe even a little more. That comes out of the owners profit margin. So instead of 45% it is going to come down to 40% or even 35%. But as a total of income, it is a smaller slice of a much larger pie.
Reese Harper: No questions.
Morgan Hamon: So at the end of the day it is more dollars. I always brace our clients when they are bringing on an associate. We have to move the goal post a little bit for the acceptable profit margin is going to come down but what we are going to see is a lot more dollars added to the bottom line.
Reese Harper: I agree and what I was trying to emphasize is something I should clarify. The margin will come down but sometimes the short term personal income for maybe a calendar year or six months, if you do it a little early before you have the new patient flow that you need, you could take a hit right?
Morgan Hamon: Yes, I agree 100%. Practices that I have seen have worked with where they bring on an associate a little bit early we will see both the profit margin will come down and the money to the owner will come down.
Reese Harper: Does that bother you?
Morgan Hamon: You know, it all depends on what the owners objectives are? If they want to work less days per week for work life balance. Then that’s fine. My role as the accountant, taking on that advisory roll with the managerial accounting, is to make sure they know what is going on. If that is their desire, then great, we will help monitor that. If we see things happening than I don’t want anything going on where the owner has no idea. That is why we watch those numbers and prepare those numbers throughout the year so that they can be proactive and know what is going on, but if an associate is brought on to early then that can cause a dip in profit margin and money to the owner. The other factor is this, nobody produces like the owner. If it is a brand new associate, right out of school, great attitude, right person, but they just won’t be as productive. They need to be groomed.
Reese Harper: It takes times!
Morgan Hamon: Right, a lot of our clients will take time grooming associates to get them up to the productivity levels.
Reese Harper: I think that is really insightful. You know to have a mindset, in my experience at least, you can’t achieve quite as much without an associate and the mindset is speeding more production across more providers. You need this in order to really grow a practice in a meaningful way, any service industry is going to be that way. My business, your business, a dental practical, I think sometimes because the single practice doctors that don’t have an associate yet they haven’t really thought about how they can earn more or the same by working less if I bring on that other provider. Sometimes it is just a question of, well I don’t want to take a hit! Sometimes it is possible if you are growing fast enough and you have got your marketing down to where you just have excess days that you can bring someone in to ramp up then maybe your income wouldn’t have to take a hit, but I think it is ok to let your income take a hit if it gets you to a higher quality practice. One where you have more providers and everyone is working a title bit less.
Morgan Hamon: Ya, and you are not booked out six weeks!
Reese Harper: Ya, exactly. It is just a hard thing for people be able to pull the trigger on sometimes.
Morgan Hamon: I will say that some of our higher earning clients, I think they have really cracked the code. They have very high quality of life, very comfortable income, they maximize their one location. Having the practice open six days a week in terms of a lot of the fix costs is the same as if it is open four days a week. So if you can have another doctor in their producing…
Reese Harper: It is interesting, I have seen that too. There is a big jump between one location, multiple providers, and super efficient high margin, and well marketed. Marketing dollars tend to be location specific in order to be effective. If you have five practices, it takes different events and referred sources to market each of those locations. I kind of feel like getting one location really, really efficient can be a great goal for most people and not being just one doctor but maybe a second and it does make a big difference but once you start jumping into that second, third, or four locations then you see a lot of inefficiency sometimes. The financial modeling totally breaks down and they are almost taking home the same amount as they were in one location. I see that at least. I’m like great, you have five practices and you are making less than the guy who has one!
Morgan Hamon: In some ways, it depends on the order. If we have it in our mind that to be a real player in our market we need to have multiple locations, that may be true, but if you do that right off of the bat I have really seen some doctors struggle. Say they go right to three offices, they have triple overhead, they are running between practices and quality of life is low. Then they might produce what a single office might produce, splitting their time, but they have three times the overhead. What I have seen work well and when I am visiting with a doctor and we are just looking to the future and what their goals are. If it is multiple practices, what I have seen work well is the model where you bring in your first associate to the office and we ring every dollar out of that office. You are open four days a week, go five, you are open five, let’s go to six. That way the associate is groomed under the owner’s guidance, they can keep control of that practice, minding the expenses, culture, and staff. Really turn that practice into a profitability powerhouse. Then when the schedule is full, there is no more leased space to go and get next door, there is no more operators to put in, now we can think about a second office. But when the owner steps out to establish that second office, they have a groomed, seasoned associates in their place so their first practice that produces the income that they count on is protected.
Reese Harper: Ya, man. I think we just said the same word at exactly the same time. Protected!
Morgan Hamon: Protect that!
Reese Harper: I think from a lot of this is from experience with the dentists, but a lot of it is experience from running our own businesses where we have made the same mistakes ok? For me, I can only speak for me, but I know that without having the support of a solid team and associates that help produce you just don’t have time to improve the quality of your service quite as much. If you are producing all day long and you have no time to interact with your front and back office and understand your marketing and determine how you are going to improve the new patient flow, then it is very difficult. You can’t have as high of a quality of practice. I feel like the sweet spot you have just laid out beautifully, but usually you don’t find people in that sweet spot without some coaching. They will either be resistant to spending money to additional overhead items like associates, marketing, or a better office manager. Or they are just entrepreneur, over zealous, three locations, none of them are profitable and they are spread super thin.
Morgan Hamon: It could be that there objectives change over time. Maybe they start out saying I want this one office by my house. I am going to work this amount, then they get it dialed in and if they have a real talent for managing that practice the longer you have it, and in some cases, the bigger it gets, the schedule is always full and the staff are really dialed in, it can get easier. If they find that, maybe they start thinking, maybe I do want that office on the other side of town!
Reese Harper: It is interesting. I do think that it is ok that your preferences might change over time. You become a little more tolerant of certain stress that you might not have been real early on, I know that when I go and speak at dental schools, it is like the number one stress of everyones life is their student loan. If I score or do a survey ten years in, that doesn’t even come up!
Morgan Hamon: Right!
Reese Harper: That is like, “what? student loan? Ya, it is there…I’m never paying that off.” No, I’m just kidding. But it is interesting to see how those pressures change. Let’s wrap up with a few thoughts, if you had to give some parting council about what you feel like is really important for them to remember what do you want your takeaways to be from our conversation today?
Morgan Hamon: One of the big dissatisfies that we get from clients that join us is the tax surprise. If they have experienced one of those they realize they don’t like it.
Reese Harper: By a tax surprise you mean, I get into the next year and my CPA tells me how much I owe and I had no idea.
Morgan Hamon: Right, it is April 10, you need to write a check for $60,000, nobody likes that.
Reese Harper: Would you say that that is, whose problem is that? Is that anyones problem?
Morgan Hamon: Well, it depends on how you have approached your accounting which brings us back to the beginning here with bookkeeping versus tax. Your taxes, it is a calculation at year end like we began with. You know, the tax bill is calculated that profit and we don’t know what that profit is until frankly, the year is over, because nobody has a crystal ball. Here we are in November, we have pretty good idea how 2016 is going to end, but we don’t know what December holds. We have to be looking forward at that. If somebody has experienced that and wants to avoid that you have to have books and you have to have strategic partners that are forward looking. When you mentioned whose problem is that, if they are with an accounting resource and that is how they do it, they will compile the books at the end of the year, they will do the tax return, they will take advantage of every tax benefit there is. But if the tax deposits throughout the year were not planned for properly and there is an amount due then it is the dentist’s problem and if that is the service that was engaged then that would be normal. Most people don’t enjoy that type of reactive planning. I would say to stay on top of the tax deposits throughout the year you are required to have a certain amount based on last years tax planning, or last years tax liability, so you want to make sure that you align with partners that will look forward to the current year to stay on track for those tax deposits. So hopefully, our objective for our clients is to be neutral at year end. In other words they are totally paid in on the lowest tax achievable by December 31. That would avoid that tax surprise. The other advice I would have is to review the numbers at least quarterly on the practice. My preference is monthly, that is what I do in my business, I like to know what is going on. You have to make good decisions and you have to know where you are and what if there is any issues there. If there is something that you want to change, we have to know that. We spend a lot of time talking about profit margin and break even and important facts in the practice you will only know that if you have current, correct accounting.
Reese Harper: Yes, and you spend the time sitting down and looking at it at least once a quarter!
Morgan Hamon: Yes, at least. To some extent some of these figures that we have talked about will not be listed on P&L, they have to be calculated. You want to make sure that you either know how to do that, find an online resource, or have some advisors that can help aggregate that data so that it is meaningful.
Reese Harper: I think that is great context. I guess independent of you, my opinion is and this is as objective and unbiased as it can be, as a financial advisor I do not have a dog in the hunt on the tax or book keeping world. If your books are unorganized, your financial advisor is not going to be able to add any value in a real meaningful way. Your financial planner right now is going to come to you and say, “how much can you save?” then you are going to tell him a random guess and he will take that money, and if he is a good advisor, he might do a decent job putting it in the right plan structure. But if he doesn’t really know or she doesn’t really know how much you have earned and what your tax bracket is, what your tax rates are, then the place they tell you to put the money will not be accurate and it is really hard if your financial advisor is not communicating with your CPA to even do good tax planning decisions. Most financial advisors operate completely on an island in the CPA on an island and then the bookkeeping is done differently than the taxes. I guess my recommendation is that the person that is giving you tax advice should be doing your books or have a really close relationship with the person that is so that the books and the taxes are managed well together, otherwise you just can’t do good planning.
Morgan Hamon: And you don’t want, in my opinion, you don’t want your tax planning to be once per year. That is when you are going to get told what the check is you have to write, or maybe there is a refund, but those conversations need to be taking place a few times during the year. For all of the same reasons you just mentioned for the financial planning.
Reese Harper: Morgan, it has been a pleasure man, thanks for flying in from Denver today. We got you on that long flight.
Morgan Hamon: I really appreciate it, I have enjoyed it.
Reese Harper: We will have to get you back to do some skiing in the spring! You heard it here on the Dentist Money Show, Morgan Hammond, HDA accounting, all of their information is on our site underneath our show notes. Thanks Morgan!
Morgan Hamon: Thank You.Taxes, Advisors