By Ross Martin, Accountancy Director at Hive Business

A lot of practice owners of the baby boom era feel comfortable. They don’t have debt, they own the building and have no need to stretch the business. This seems to be a good state of affairs, and why not? Well, appearances can be deceiving. The problem is, and this appears to be a quirk of the dental industry, that many, many practice owners are subsidising their businesses. This means they are jumbling the business interests with their personal interests, and guess what, it damages both.

Let me explain. If you’re not paying yourself rent on a building you own, you are subsidising. If you’re not paying yourself as a fee earner and a shareholder, you are subsidising. If you are paying everyone first and only then, if there’s enough left at the end of the month, taking the £10k you’re used to, you’re probably subsidising. I’ve done the sums and this is happening a lot.

So why is it happening? Perhaps you’ve always had the mindset of taking £10k. When you can take it, perhaps it feels like everything is going well and the matter requires no further thought. The problem is, if you’re grossing £400k, you are underpaying yourself. If the associate is on 45%, then why not the principal? In this example the principal should be paid something in the order of £13k per month. The natural financial implication if this were to happen is that the practice wouldn’t be able to afford to pay the principal properly, which should ring alarm bells. If you are being paid as a shareholder and a fee earner you will quickly discover how the business is performing, which is never a bad thing. Incidentally, it’s a really good basis to have honest, and equal, conversations with associates if the practice underperforming overall.

Not sure if you are subsidising your business? All it takes to find out is a simple theoretical exercise to see where the money’s going. Benchmark against the industry. What you want to hone in on is profitability. Your practice might appear to be a very healthy business, but if it is not paying rent and it is getting your own services at a cut rate, how healthy is it? Could it survive in normal circumstances? If someone else bought it and ran it as a “normal” commercial interest, what would they have to change to make it viable?  Maybe your associates are being paid too much (if you ask me, no associate should be on more than 50% any longer). Maybe the staff utilisation isn’t quite as good as it should be. It could be any number of things because the chances are, if you’ve been subsidising the business, you have been feeding the problem.

So to summarise, there are two immediate problems with subsidising your business: one, it chokes off the scrutiny healthy businesses need to stay profitable and focused; two, you have been throwing your own money away. And there’s a third problem that’s connected to both of those: subsidising harms the long-term value of your shares. The good news is dental practices, as businesses go, are relatively easy to get a handle on. There aren’t loads of moving parts from a financial perspective – this is a problem that can be diagnosed and fixed very easily.

If any of this rings a bell, get in touch for an analysis day with Hive and we’ll help you stop subsidising your practice. Call us on 01872 300232 or email us at hello@hivebusiness.co.uk.