From the Desk of Shawna Aho, CEO of Greater Houston’s STAC Bizness Solutions

Owning and managing a successful dental practice requires a skillful balance of clinical expertise, operations management, leadership and financial acumen. Among these responsibilities, one aspect that often gets overlooked is how the practice owner compensates themselves. As an owner, you don’t need to be restricted to a set salary, do you? You can simply draw money out of the business whenever you need it, right?

Wrong.

Paying yourself a regular salary isn’t just a matter of convenience; it’s a strategic financial move that’s critical for the long-term stability and success of the practice. By establishing a consistent salary, dental practice owners can better manage their personal finances, create stability in their income, streamline tax obligations, and ultimately foster a healthier financial state for both their practice and personal life.

In this post, I’m going to provide you with 7 specific reasons it’s important to pay yourself a regular salary, and then address one of the most common questions I receive from practice owners, “How much should I pay myself?”

7 Reasons It Makes Financial Sense to Pay Yourself a Regular Salary

1. It’s what you’re used to.

When you first started working for someone else, you couldn’t ask the boss for more money whenever you ran out. All you could do was hold out until the next time you got paid. And having a regular income also made it easier to budget for your income and expenses, manage your money, and save up for a mortgage or investment.  Although you’re now running the show, it’s still important to exercise good financial discipline.

So why change now?

2. Much of the money in your practice’s bank account is already spoken for

It’s easy to think all the money sitting in your practice’s bank account is yours. After all, it’s your practice, isn’t it?

But that money actually belongs to the dental practice—not you personally—and is needed to cover things such as:

• Salaries and wages
• Insurance
• Equipment and Supplies
• Rent and Utilities
• Future tax payments

It doesn’t matter how profitable your practice is. If the money isn’t there to pay the bills when they’re due, your practice is at risk of becoming insolvent (i.e. you have more commitments and bills to pay than cash or available funding to pay them with).

Having sufficient cash flow is vital for any business. And it’s far easier to manage cash flow when you have predictable expenses you can plan around, including your salary.

3. You need money to grow

A growing practice is a cash-hungry practice. As it grows you may need to move to a larger office or invest in new staff or technology to grow your capacity. Even if you can keep a lid on your fixed expenses, your practice may require an increase in variable inputs such as materials.

And all this ties up cash.

So whatever your growth plans, you’ll need enough money in reserve to fund them. And that’s on top of the money you need to keep the practice running at its current level.

As you can see, knowing exactly what cash is flowing in and out of your practice, and saving as much of your profits as you can to build up your cash reserves, is important for a growing business.

But if you keep ‘raiding the till’ whenever you’re personally short of cash, you’ll never know how much cash you have in reserve, or when you have enough funds to initiate the next stage in your growth plans.

4. You won’t be risking ‘lifestyle creep’

The lifestyle we lead is largely dictated by the amount of money we have readily available. So if your practice does particularly well one month and the bank balance is up, you might be tempted to draw a little extra money and spend it on dinner at a fancy restaurant, a weekend away with the family, a new ‘toy’ or some other indulgence.

Don’t get me wrong.  Having the flexibility to reward yourself is one of the best things about owning your own practice. It’s okay to spend money in these ways if it’s a bonus for achieving a certain result or milestone in your business. But these bonuses should still be within the planned and documented salary and remuneration package the business pays you.

If you’re not disciplined in this area, it doesn’t take long for these indulgences to become part of what you consider a ‘normal’ part of your lifestyle, and so you start drawing extra cash on a regular basis.

And that’s not good for the health of your practice.

By living off a regular salary (and nothing more) instead, you’ll learn to live happily within your means, which is a key to building your long-term wealth. 

5. You’re more likely to fly under the taxman’s radar

Governments’ tax departments are used to people being paid a regular salary. It’s generally how things work. And by giving yourself a regular salary, you’ll be seen as just another salary earner and be more likely to fly under the radar.

If, on the other hand, you start drawing large amounts from your practice at irregular intervals, you may raise a few eyebrows with the governments’ tax auditors. And that’s never a good thing.

6. You could be creating a tax liability for your business

When wage and salary earners are paid, the employer must withhold and set aside a portion of their pay as tax, which is periodically paid to the government on the employees’ behalf.

When you, the practice owner, withdraw money from your business, it’s not ‘free money’ (i.e. tax-free). These amounts, depending on your business structure, need to be properly accounted for as:

• wages/salaries
• draws or a loan from the business
• dividends (a portion of your profit).

Your actions here could be building up a potential debt that will need to be paid at some point. And that debt could lead to severe cash flow problems down the road, especially when it comes time to sell your practice.

You’re much better off accounting for, setting aside and paying taxes as they fall due. It will not only help your practice, but also the quality of your sleep. 

7. You’ll more easily qualify for mortgages and other loans from the banks

When it comes to assessing a person’s ability to service a potential loan, banks much prefer consistently earning wage and salary earners to sporadically earning self-employed business owners.

The bank wants to know you can comfortably service the loan each month, and by paying yourself a regular salary you’ll have the paystubs and bank statements to show a steady cash flow history.

So the sooner you set this up in your practice, the better.

A successful practice is a great way to create and accumulate wealth. But don’t disadvantage yourself by presenting a poor case to the banks when applying for a mortgage or other type of loan.

The big question…How much should you pay yourself?

As you can see, there are many good reasons to pay yourself a regular salary instead of continually raiding the till. The question is, how much should you pay yourself?

That’s a question we can help you answer.

Obviously, you need to pay yourself enough money to cover your basic living and lifestyle requirements. The last thing you want is to be stressing about your personal finances, especially when you’re trying to make business decisions.

But it’s not a good idea to pay yourself too much in salary—even if the business can easily afford the cash flow. Depending on your business structure, there are probably more tax-effective ways to receive income from your business, such as dividends.

Every business and person’s situation is different in this regard, so it’s important to get one-on-one advice in this area. Don’t view this article as personal advice to you—it’s not. We’re simply opening your eyes to the many benefits of paying yourself a consistent salary as a practice owner.

To work out the right amount to pay yourself regularly, you’ll need to consider things such as:

• What your practice’s cash flow can comfortably pay you on a regular basis
• What you feel you’re worth (e.g. if you were employed by someone else)
• What will let you achieve your personal and family wealth creation goals, such as paying off your mortgage and building your investment portfolio
• Tax considerations so you pay yourself the optimum amount to meet your needs without needlessly paying too much personal income tax
• The practice’s projected profitability for the financial year. (Your shareholding percentage and dividend policy on withdrawing profits or retaining and reinvesting profits in the business will determine your projected profit dividend.)

As you can see, it makes sense to get professional advice on calculating your salary as a dental practice owner. We’ll help you work it out by taking into account your current business and personal situation. We’ll also set up payroll systems to automatically create and distribute the necessary tax-related paperwork each pay period.

You enjoy being your own boss.

Now it’s time to also enjoy being your own employee.

Hope this helps! Until next time…

Shawna

For a Limited Time, Get Our Free Guide: 7 Key Financial Practices That Separate Thriving, Growing Practices From The Rest.