So you want to be a practice owner someday: Building and managing your cash flow

Editor’s note: This is the sixth article in a summer series of New Dentist Now blog posts on practice ownership from Wells Fargo Practice Finance, the practice lender endorsed by ADA Business Resources. To read other articles from the series, click here.

Your dental practice is a valuable and beneficial investment that can be an important resource for generating cash flow. Simply defined, cash flow is the difference between your monthly revenue and monthly expenses. This is the figure that determines your net income, or the amount you will earn from running your business. Here are a number of ways to build and manage your monthly cash flow from Wells Fargo Practice Finance, the practice lender endorsed by ADA Business Resources.

Manage your financing term

The financing term, meaning the time over which your debt is payable, for your dental practice purchase or start-up may be more important than you imagined. A dental practice is a cash flow based business, and choosing financing that supports your cash flow can be critical to creating a sound financial future.

Most lenders or banks provide a maximum loan term of seven years, which may in fact allow enough cash flow to pay expenses and income while paying off your debt in a shorter period of time. However, if you could have a term that was almost 50 percent longer, such as a 10-year term, you would have a substantial increase in your monthly cash flow. For example, when you borrow $300,000, the difference between a seven-year note and a 10-year note is approximately $1,200 per month. If you opt for the 10-year term, the added savings to your annual cash flow would be approximately $14,400 per year! And, all of the interest you pay on the note can be used as a line item expense and written off against the revenue of the practice, along with the depreciation of the principal amount.*

Consolidate your debt

If you have existing debt that’s over five years old, another option for creating cash flow is a debt consolidation loan. By taking advantage of lower interest rates, you can lower your monthly loan payment and redirect your savings towards your dental practice. However, it would be wise to move quickly on this option as interest rates are poised to rise.

To qualify for debt consolidation financing, you will need to maintain an excellent personal credit profile and be able to demonstrate that your cash flow can support and meet a lender’s minimum standards for the level of financing for which you are applying.

Expand practice capabilities

On its face this may seem counterintuitive: How does taking on new debt to expand your practice help generate additional cash flow?  The key is to structure your expansion so it pays for your debt.

Adding square footage as well as new dental services generates both higher fees and increased patient flow.  While you may need to consider bringing in an associate to help manage increased patient flow, more overall production for your practice ultimately means greater cash flow. And if you are able to add specialty services while expanding your practice, you have doubled your opportunity to improve your income. The debt you incur to expand your practice can usually be paid for by the increased traffic flow and level of services – particularly if combined with a Section 179 tax deduction.*

Reinvest with a practice equity loan

If you have owned your practice for three or more years, you have equity that you can use to generate cash flow and reinvest in your business. Whether you need to purchase equipment, fund a partnership transition, or pay for education, tapping into your equity may give you the cash flow you need to work towards growing your business or securing your future. Some lenders offer practice equity loans up to $500,000 depending on the value of your practice, with terms up to 10 years.

*Consult your tax advisor and/or accountant for a statement of tax and accounting rules applicable to your particular situation and for all other tax and accounting advice.