By Adam Cmejla,
President of Integrated Planning & Wealth Management, LLC
Feb. 3, 2016
MAKE A PROFIT SHARING CONTRIBUTION EACH QUARTER. The end of the previous year, into the beginning of the next year, is typically when most TPA’s (third-party administrators) for 401k’s will ask you whether you’re making a profit sharing contribution to your plan. Plan to contribute quarterly.
BUDGET FOR YEAR. Plan for major practice expenditures for the rest of the year, such as any changes or additions to payroll, and any needed capital investments like new instrumentation.
PROTECT YOUR PAYCHECK WITH DISABILITY INSURANCE. Revisit and ensure that you’re adequately protecting your paycheck with the right amount and right kind of disability insurance.
EVALUATE YOUR DEBT. If you have unsecured, floating rate (adjustable rate) loans in your practice, make sure you understand the terms of those notes.
PLAN FOR STAFF PAYROLL CHANGES. Calculate whether possible increases in pay for high-performing staff members, or “performance-based” pay schedules, would be possible and a good idea.
The early part of any new calendar year is always a time for reflection and evaluation of what occurred in the previous year, and also a time to focus energies and efforts on the goals ahead in the coming year. While most practice owners are taking time to evaluate the various areas of their practice, it’s also a great time to revisit certain areas of their personal and professional financial lives.
Are you making a profit sharing contribution?
If you have implemented a 401(k) profit sharing plan in your practice, the beginning of the year is typically when most TPA’s (third-party administrators) will ask you whether you’re making a profit sharing contribution to your plan. Keep in mind that profit sharing contributions are not the same as your employer match that may be part of your plan.
Right now a lot of the conversations we’re having with our OD (and DDS) clients include doing a review of 2015 numbers and determining (by Feb. 15 at the latest) whether we will be making profit sharing contributions based off of their tax projections, net income and other expenses taken in 2015.
In order to determine whether to make a profit sharing contribution, you must first show a profit in your practice. The amount of the profit, and how you choose to receive it as the business owner, can have a significant tax impact, both now and later.
Because profit sharing contributions are made on a pre-tax basis, there are tax savings that can be realized in the year that you make those contributions. Conversely, if you choose to “receive” those profits as flow-through income on your personal tax return, you will only see a fraction of those dollars due to federal, and possibly, state income taxes.
As an example, if we look at an optometrist in a 33 percent tax bracket in a state with a 5 percent state tax, the OD will only see about $0.62 of every dollar that is not deferred into the profit sharing plan.
Budget for the Year
This sounds like a basic one, but it’s one that is very important to the financial health of a practice. After all, you can’t improve what you don’t measure in business, and what gets measured gets done. Taking a hard look at where you spent your money in the practice during 2015 and comparing it to your projected budget gives you the ammunition to make possible changes, ultimately helping profitability numbers in your practice.
Protect Your Paycheck
Once your previous year’s books have been closed out and you have an understanding of what your personal income was (both W-2 wages and net business income), this is a good time to revisit and ensure that you’re adequately protecting your paycheck with the right amount and right kind of disability insurance. Some key aspects of a good disability policy (in order of importance) for an optometrist is that it (a) protects their own occupation as an optometrist, (b) it includes a provision for partial disability, and (c) it has an inflation rider so benefits increase on a yearly basis in the event of a disability. There are other considerations, but these are a few of the important ones to consider.
Evaluate Your Debt
With the Federal Reserve raising the target interest rate for the first time since 2006, the trickle down effect of that monetary policy decision can impact your personal and professional finances. If you have unsecured, floating rate (adjustable rate) loans in your practice, make sure you understand the terms of those notes. Most lenders have a maximum increase on both a yearly and overall basis, but it’s important to understand that, should your lender increase your interest rate, you’ll see a slightly higher monthly payment.
Consider this an opportunity to re-evaluate your cash flow and determine whether you will (a) get aggressive and pay off some of your debt or (b) refinance/renegotiate with your lenders to find more favorable terms.
Evaluate Staff Pay
While you may have a different calendar schedule for reviewing team members’ pay, the beginning of the year can often be a time to revisit that conversation and discuss possible increases in pay for high-performing staff members, or to discuss “performance-based” pay schedules. Human resources and payroll is often the most expensive line item on a practice’s profit/loss, but having high staff turnover and an inconsistent patient experience can have an even higher cost. Don’t be afraid to pay good team members well. Look at your team as an investment, not an expense.
While there are many financial areas to consider, these five are some of the top-of-mind areas to look at as you turn the corner on yet another year in practice. While going through your goal-setting exercises, remember that it’s equally important to focus on your personal financial goals and ensure that the actions that you’re taking in your practice are helping you stay in alignment with your personal goals and intentions.
Adam Cmejla, CFP®, CMFC®, is a Certified Financial Plannertm and president of Integrated Planning & Wealth Management, LLC, a financial planning and investment management firm that works with optometrists.For more information: Contact Adam at 317-853-6777 or firstname.lastname@example.org.