(Why As a Business Owner) You Must Pay Yourself First

I remember a coach telling me (as a practice owner and before I joined the dark-art of coaching) that most practice owners pay their bills at the end of the month and then pay themselves (some or all of) whatever is left. Doing this is like playing the lottery, in that some months they will win and some months there’s no money left. What a way to live and how resentful they must will feel when their significant contribution to their business sometimes gets rewarded with a payment and sometimes doesn’t .

For two years or so after setting up my second squat practice I didn’t pay myself. During the annual meeting with my bank manager in year three, I told him (rather smugly) that I had yet to pay myself. Instead of congratulating me on my frugality, he looked at me aghast and asked if my dental practice was some sort of hobby? What he really meant was, get serious Simon and pay yourself first.

Ironically, we’re the only folk who believe that we should be last in line for the money, or that we should pay ourselves less than we are worth. And so the first important reason why you should pay yourself first is that when you do, you will stop resenting your business and start feeling valued for your contribution and even start feeling successful!

My bank manager persuaded me then that it was time to do things differently and it’s time that all of you who pay yourselves what’s left in the till start properly valuing your contribution.

To illustrate a better way of doing things, let me introduce you to Jim the practice owner. Here’s what happens to him when he takes a holiday.

Jim is the sole-owner of a small to medium sized private dental practice. He works with a full time associate and a full time hygienist. The financials look like this:

  • Jim usually grosses £25k/month
  • His Associate usually grosses £20k/month
  • His Hygienist usually grosses £10k/month
  • Total gross: £55k/month

Practice Costs:

  • Overhead: £25k/month
  • Lab: 10% of gross = £5.5k/month
  • Materials: 7% of gross = £3.85k/month
  • Associate: 45% after lab = £8.1k/month
  • Total Costs = £42.45k/month
  • Net Profit = £12.55k/month.

Last month, Jim went on holiday for two weeks and therefore his gross dropped by half to £12.5 k. This meant that at the end of the month, he has just £500 left in the till with which to pay himself…

For this reason, Jim hates going on holiday, he doesn’t do it very often and his wife (understandably) resents the business and the fact that Jim feels tired, stressed and grumpy a lot of the time. (His wife regularly points this out.) Oh yes and Jim compensates for not being able to pay himself in a holiday month, by either dipping into his tax savings or his ISA. And that doesn’t make him feel any better either!

Here’s a better way of doing things:

Consider this. If you were to pay someone to do your job (as a practice owner, clinician and investor in your business) how much salary would they expect? The same as you pay yourself? Or (more likely) more perhaps? And how would this employee react to being told that cash was a bit tight this month and you wouldn’t be able to pay them? As practice owner, clinician and investor, you are likely to be the most valuable and committed person in the building and therefore it is vitally important that you get paid (enough) every month and on time! (No exceptions!)

The way to do this is to pay yourself a salary. Set up a standing order that pays you your net earnings every month. That is, your drawings net of tax. You will also need to set up standing orders to save for your income tax (and if you are a limited company your corporation tax). You will need your accountant to give you an accurate estimate of your tax liabilities for the next 12 months and I suggest you direct your tax savings to an account which is not easy or quick to get at!

So, let’s borrow Jim’s example again. On average, his practice turnover is £55k/month for 10 months of the year (not 12 months, because of clinician holidays) and it makes a profit of £125k. (You can arrive at these figures for your own practice by creating an annual financial forecast/cash flow forecast). In order to do this accurately, you will need last year’s data on gross fees and costs and the coming year’s holiday dates for your clinicians. It’s essential to get into the habit of asking your associates and hygienists for their holiday dates before the beginning of the year. They may push back on being this organised, but you need to know! If they change their holidays, you can change the forecast! Jim’s accountant forecasts his tax bill for the coming year at £45k. So Jim has £80k he can draw from the practice. Jim will set up two standing orders for the year, one for £6,500/month for his drawings and one for £4,000/month for his tax.

If at the end of the year, Jim’s practice is ahead of his forecast and there are profits left in the account, Jim will have the luxury of deciding whether to buy that new scanner he has his eye on, or to take his wife on a bucket-list holiday!

There are many benefits to paying yourself first including these:

  • Peace of mind: you know that your personal bank account receives your salary on the same day of every month without fail.
  • If your practice can’t afford your salary in a month, you dip into your practice’s working capital (cash in the bank or an overdraft), not your savings.
  • If you have the relevant key performance indicators in place (ask me if you need help with these) and you know, in real time, your practice gross is down on forecast this month, you are more likely to do something quickly to rescue the practice gross, because your salary will be paid automatically, rather than accepting a lower pay cheque at the end of the month.
  • Your practice will feel more like a proper, grown-up business, rather than a life-style business, that may or may not pay you as the owner.
  • You can take a holiday without coming back to an empty bank account!

If you would like some help with your practice, contact me for a chat.

Best wishes,
m. 07770 430576
e.  simon@nowbreathe.co.uk

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