By: Edward J. Leach, CFP®, MBA
In this comprehensive guide, Ed Leach from Highland Financial Advisors extends his expertise to dental practice owners, outlining essential strategies for optimizing financial health. As a seasoned partner and wealth adviser, Ed emphasizes the significance of understanding and evaluating various financial aspects crucial for professional practices and personal wealth management. From analyzing financial reports to assessing net worth and diversifying assets, this guide offers invaluable insights tailored to the unique needs of dental entrepreneurs. Join us as we delve into fundamental principles aimed at empowering dental professionals to navigate their financial journey with confidence and foresight.
Introduction
Hey everybody, it's Ed Leach from Highland Financial Advisors. I'm a partner and wealth adviser here to talk to you today about financial planning for dental practice owners. If you'd like to subscribe and get more of our content, just press that button below, and you'll be notified whenever we launch any new videos.
Understanding Financial Health
So, what I'm here to talk to you today and really help you understand is how to measure your financial health, and there's really three key areas to understand in that.
Analyzing Financial Situation
The first is: what documents or reports should I be looking at to analyze and say, "Hey, how am I doing? Is my financial situation healthy? Am I off track? Is there anything that needs to be fixed?"
Importance of Net Worth Report
The second thing is really digging in into one of the most important reports, your net worth report, and analyzing: hey, how should I be looking at this? What is a net worth report, and why is it important to me?
Evaluating Investments and Assets
And the third piece of that is drilling out to the assets part. If you look at all of your investments, your assets, your bank accounts, and your dental practice, what are the most important things and measurables that you should be looking at?
Measuring Financial Health
So, the first thing that I want to talk to you about today is how to measure your Financial Health, not only just for your practice but also for your personal wealth. There are really two key documents that we really help, what we like to call our "entreprofessionals," because as a reminder, you're a business owner because you own your practice, you are a medical professional, and that you are a dentist, and thirdly you are, odds are, the CEO or CFO of your wealth.
Reviewing Profit and Loss Statement
There are three really big responsibilities, and the way that we help our entreprofessionals manage their wealth is twofold. One is sitting with them on a quarterly basis with their dental practice CPA and going through two key documents: your profit and loss statement, which is a summary of all of your revenues or collections, all of your expenses, and showing you what your net profit is at the end of the today, how you're being rewarded for the investment in time and money that you've made in this practice.**
Analyzing Balance Sheet
Two is also your balance sheet, which is that after you line up all of your assets and all of your liabilities for the practice, you have your net equity. So we help our practice owners really sit in those quarterly meetings with their CPA, but on the personal side, when you step away from the practice, you should be going through that same exercise like we do with our entreprofessionals, reviewing their personal cash flow statement, looking at their income expenses, and showing what they're being able to take home and save for the long term, which we'll talk more about in a follow-up video.
Understanding Net Worth
So, the second thing that I want to talk to you about today is really drilling into your personal net worth statement, and when you look at your net worth statement, it's really a math formula.
Calculating Net Worth
The first part is you're going to add up all of your assets, everything you own. The second is you're going to add up all your liabilities, everything that you owe somebody. You're going to take your assets minus any liabilities, and you're going to arrive at your net worth.
Analyzing Assets
It's a really simple calculation and something you should be able to do on your own, but the way that we really help our entreprofessionals analyze their net worth is drilling deep into the assets portion of their net worth and looking at their investments and their holdings in one or two ways is whether they're liquid or illiquid.
Understanding Liquidity
Liquid would mean anything like a bank account, a savings account, an investment brokerage account of ETF stocks or bonds, something that you could readily liquidate in a very short period of time, one or two days, to satisfy any type of cash need to cover an expense, make an investment to do something. The illiquid part of your net worth is usually made up of your home, any investment real estate, maybe the building that your practice is in if you own it, the value of your practice, which almost everyone forgets to include as a part of your net worth, and potentially depending on your age or where you're at in life, your retirement accounts because yes, they might be invested in stocks and bonds but odds are you don't want to draw on those accounts to put out any short-term fires in terms of expenses.
Importance of Asset Classification
Why that bucketing of your illiquid assets and your liquid assets are really important is because liquidity provides you flexibility is that you never have to tap into debt. Think if everything was concentrated all of your wealth in one illiquid asset like your home or your practice. The only way for you to get money out of that is to take out debt, to take out a line of credit, which for the most part of the 2010s was really easy when interest rates were very low, but like anything, nothing good lasts forever if interest rates ever went up in the future where they are in let's say 2023 odds are it's a very different decision in trying to take out debt on any liquid asset so it's something that you want to measure because you want to have a net worth and a pool of assets that could weather you through any type of economic situation.
Concentration of Wealth
The third point that I want to talk to you about today is how to think of your assets when you analyze your net worth is really well talked about illiquidity and liquid assets in our prior point, but now we're going to talk about your concentration of wealth.
Risks of Concentrated Wealth
There's really two situations that we come across with our entreprofessionals. One risk of concentrated wealth is usually all of the resources early on and the startup of their practice have all been shoveled into the value of the practice. They also usually find they need a place to live. It's also invested into the value of your home two of those things are liquid assets and often times any free cash flow is either to enjoy some part of your lifestyle or make investments in either your home your practice or potentially gifting putting kids through college all of the many areas that you feel drawn from to spend your money. So when we look at a client's net worth we want to make sure that one they're not concentrated in any individual company like your dental practice or any individual asset like real estate, meaning I have a portfolio of five rental properties my own home and my rental practice but I don't have anything in savings or I don't have anything set up in my retirement accounts because what happens is if I could really boil this down to two areas.
If you have a concentrated net worth in anything you usually have less flexibility less ability to take on opportunities and it usually results in having more stress because all of the financial future that you've saved is concentrated in one or few assets what we help our entrepreneurial really develop is a diversified net worth it allows them to take on opportunities as they see them if you have ample liquidity and flexibility and cash reserve and savings you can hop on those goals or objectives as they come up and three it usually creates less stress because you feel more in control of your financial situation and you can weather any type of economic downturn something like a pandemic shutting down your practice having that flexibility is really important and it's a powerful tool in creating wealth for your future.
Summary
So to summarize what we talked about today is really three things.
1. Measuring Financial Health
The first is how to measure your financial health and the importance of having regular meetings with your adviser and your dental practice CPA to review your profit and loss and your balance sheet for your practice, but also how important it is to sit with us and what we do with our entrepreneur professionals is looking at your cash flow statement and your net worth.
2. Importance of Liquidity
The second thing that we talked about was the importance of having liquidity and measuring how much liquidity you have in the assets portion of your net worth. Liquidity is flexibility. There's a saying that cash is King. Well, liquidity is really flexibility and allows you to hop on opportunities.
3. Diversification of Net Worth
The third thing that we talked about was the difference and the advantages of having a diversified net worth versus a concentrated net worth; meaning are all of my assets concentrated in one or two areas of my life versus having them diversified across many different accounts, many different types of investments with many different liquidity profiles.
Conclusion
Thank you for listening today. I appreciate your time. If you'd like to learn more, don't forget to hit the subscribe button to get notified when we launch new videos. If you'd like to learn more about what we do, how we help our dental practice owners, and what we like to call entrepreneurs, head over to our website, which is linked below, and schedule a 15-minute free initial consultation phone call. We'll talk to you soon and take care.