November 27, 2024

Effective cash flow management is essential for the success of any dental practice. The 80-20 rule is a useful concept for illustrating cash flow planning.

Generally, about 80% of your monthly expenses occur on just 4 or 5 days each month. By understanding this pattern and strategically managing these concentrated expenses, you can improve your practice’s financial stability and master your cash flow.

The 80-20 Rule in Practice Expenses

Most dental practices face predictable expenses concentrated around a handful of the same days each month. These expenses typically include:

• Payroll pay dates each month.
• Office rent or office building payments.
• Credit card due dates.
• Practice and equipment loans.
• Lab bills.
• Dates owner may take personal draws for similar expenses that are paid personally.
  
  

With most of these large payments hitting on the same few days each month, the strain on cash flow can be intense. Without proper planning, this can lead to temporary cash shortages or unnecessary stress as you try to juggle various payments.

Payroll: Biweekly vs. Semimonthly

One of the largest and most regular expenses in any practice is payroll. Many practices use a biweekly payroll system, paying employees every two weeks. While this may seem straightforward, it has a notable drawback: twice a year, you’ll face a month with three payroll cycles instead of two. These months can cause significant cash flow disruptions, especially when other major expenses—like rent or credit card bills—are also due. The two months with a third payroll almost always seem to land on the worst timing of dates.

A more efficient approach is to switch to a semimonthly payroll system. In this model, employees are paid twice a month on the same days (such as the 1st and 15th, or 15th and 30th). Here’s how it helps:

• No Extra Payrolls in Any Month: Unlike biweekly payroll, semimonthly ensures there are only two payroll cycles per month, smoothing out your expenses and avoiding months with surprise third payrolls.
  
  
• Better Alignment with Other Expenses: Most other significant expenses, such as rent or loan payments, are due monthly or semimonthly. Switching to semimonthly payroll creates a more predictable cash flow cycle, aligning payroll with other significant costs.
  
  
• Improved Cash Flow Stability: With semimonthly payroll, cash outflows are more evenly distributed, making planning and allocating funds for all your practice expenses easier.

Switching to a semimonthly payroll system is a relatively easy adjustment that can benefit your practice’s cash flow management. It eliminates the volatility caused by biweekly payroll and makes financial planning much more predictable.

Adjusting Credit Card Payment Due Dates for Better Flow

Another way to smooth out cash flow is to adjust the due dates on your credit card bills. Since credit card payments are often significant and come due alongside other large expenses, they can add to cash flow strain. If your credit card bill is due during the same period as payroll or rent, you may experience a cash crunch.

Call your credit card companies and request to move your payment due date. Most credit card companies are flexible and willing to accommodate requests to shift due dates. By strategically adjusting your due dates to stagger payments more evenly across the month, you can reduce the pressure on any single day or week when expenses are high.

For example, if payroll and rent are both due around the 1st of the month, you can ask to move your credit card bill due date to the 15th or 20th. This simple adjustment can help distribute your expenses more evenly and reduce the risk of overdrawing accounts or missing payments.

You can also make more frequent credit card payments to maximize points/rewards and to manage the payment amount by the due date.

Building a Financial Buffer with a Money Market Account

In addition to managing your payroll and credit card due dates, it’s wise to build a financial buffer to safeguard your practice against cash flow fluctuations and what we call known-unknown costs, “contingency costs.”

One proactive strategy is regularly setting aside an amount (generally $5,000 - $10,000) each month in a money market account for contingency costs at the practice. This could be anything from self-escrowing your office property taxes, annual retirement plan contributions, or larger ticket items such as sensors or hand pieces. Ask your advisor what they recommend you keep in this account. This buffer serves as both a safety net and a way to earn interest on unused cash.

A money market account typically offers higher interest rates than a standard checking account. This means that while your cash reserve sits in the account, it earns interest, providing a small but valuable return on your savings. Money market accounts are liquid, meaning you can access your funds quickly for large expenses or emergencies. This makes them ideal for short-term savings.

Having a financial buffer allows you to confidently meet large expenses when they arise, such as property taxes and the inevitable unexpected repairs, without worrying about running low on funds.

How to Implement the Buffer Strategy

1. Identify Expense Peaks: Begin by mapping out the specific days of the month when your major expenses—such as payroll, rent, and loan payments—are due.

2. Automate Savings: Set up automatic monthly transfers from your practice’s operating account into a money market account. Ask your trusted advisor what they recommend you have as a buffer. This consistent habit will gradually build your buffer, which can be used to cover high-expense periods.

3. Reassess and Adjust: As your practice grows, revisit your financial plan and increase the amount you set aside to match the rising expenses.

By leveraging the 80-20 rule to understand when most of your practice’s expenses are concentrated, you can take proactive steps to improve cash flow. Switching to a semimonthly payroll system, adjusting credit card due dates, and building a financial buffer in a money market account can bring stability and predictability to your financial operations. These small but strategic adjustments will ensure that your practice remains financially healthy, allowing you to focus on providing excellent patient care.

Not sure where to start? Contact us today!