Most of us are familiar with small business studies which state things like:
80% of small businesses fail within the first 5 years
80% of small businesses that survive after 5 years will be operating deposit to deposit. As a result, one bad month may result in a severe cash flow problem,
Over half of all small business owners are overpaying their income taxes
What’s troubling to me is if you look at this all together. Do the math. About 95% of small businesses in the United States are struggling with finances at any given time.
These issues are relevant to all types of companies. It doesn’t matter if you’re a sole proprietorship or a corporation. A private practice optometrist or any other type of business owner. The truth is it doesn’t have to be this way. There are simple things you can do to ensure you’re one of the 5% of private practice owners who don’t face these issues.
1. Automate your profits.
Take your profit first. A simple strategy is to set up a separate savings account. Transfer at least 1% of all collections into that account before you pay any other bills. Trust me, if your practice can run on $1,000 it can run on $990. And if you stay disciplined you can increase that percentage over time. Consider breakeven at 10% profit. Work up to 15% if you want to fund your growth.
2. Protect yourself from unnecessary taxes.
Don’t misread that. I’m not saying that all taxes are unnecessary. I am saying that many optometrists overpay their taxes by not taking full advantage of the tax law. You may like your tax professional as a person. But stop and ask yourself, “when is the last time my CPA came to me with an idea to save me money?” If the answer is never or rarely, it may be time to find someone who specializes in small business tax strategy.
3. Know your personal number.
I see a lot of financial forecasts using industry data or a benchmark study. Those numbers can be arbitrary and not helpful. Owner’s compensation is often first to get cut when the business runs into cash flow trouble. If the practice struggles for years, the owner never gets paid what they deserve. And it’s one common cause of burnout among private practice professionals. Start with the personal income number that you want to achieve. This will help you reverse-engineer a meaningful revenue forecast. And it will serve you better.
4. Know your numbers beyond the financials.
Financial statements are a useful tool for measuring business performance. But you also need to be aware of other metrics to provide insight into how well your practice is performing. Your practice should have a KPI (metrics) dashboard. Important metrics include clinical vs. optical revenue, number of completed exams, capture rate, debt to income ratio, and accounts receivable aging.
5. Be persistent.
Manage the business side of your practice regularly. This is not something that will ever end for as long as you own the practice. Never stop working on maintaining and improving these metrics. They are the vital signs and lifeblood of your practice. Follow these five simple steps and you can experience success in your practice. Avoid being one of 95% of small business owners who are struggling and not achieving their personal financial goals.
If you liked this post, check out our Independent Optometrist’s Guide To Financial Freedom.
Eric Levenhagen, CPA CTS is the only financial consultant who helps private practice optometrists improve the financial health of their practice with a simple, proven process called Financial Harmony which will reduce their taxes and increase their after-tax profits by at least $10,000 in the first year, guaranteed.