Profit First & Parkinson’s Law

H+P Advisors is the proud home of Profit First for Dentists. As we outlined in last week’s blog, The Basics of Profit First for Dentists, Profit First is a cash-flow management system that is easy to implement in your practice. It’s not a magic formula. It simply puts a spin on the already existing accounting formula, SALES – EXPENSES = PROFIT.

With Profit First, SALES – PROFIT = EXPENSES.

As you begin your journey to maximum profitability with Profit First, you will be introduced to Parkinson’s Law. What is Parkinson’s Law and why is it important? Cyril Northcote Parkinson was a British author and historian in the 1950s. Parkinson originally applied his law to time stating, “The amount of time which one has to perform a task is the amount of time it will take to complete the task.”  Think about it, if you give yourself three hours to complete a certain task, chances are it will end up taking the full three hours to complete. Sound familiar?

How does this apply to your dental practice? Put simply, the Law states that, “The demand upon a resource will expand to match the supply of the resource.” And the resource we’re talking about is cash. Demand is spending. Supply is your bank account balance. Money comes in (yay). Money goes out (boo). Usually, all of this is happening in one “bucket” which is your main practice checking account.

The first step to changing this trend is to have multiple smaller “buckets”, let’s call them “plates”, to start limiting your demand on available cash. This may sound simple enough, however, it’s going to require you to change your habits and your mindset about money. This is not always easy and it may be uncomfortable. Stick with it. You can do this.

Step 1: Open Your Bank Accounts

You will need to open the following accounts:

  • Income (Checking)
  • Operating Expenses (Checking)
  • Taxes (Savings)
  • Owner’s Pay (Checking)
  • Profit (Savings)

These are your smaller plates for allocating income. Opening multiple accounts is not as difficult as in years past.  You should be able to get this done rather easily. We recommend your tax and profit accounts be held at other banks besides your day-to-day checking. It is more difficult to access those accounts at another institution, and will likely keep you from impulsively dipping into your savings. We’re working with human nature, remember? Make it easier on yourself and reap the rewards of a healthy, profitable dental practice.

Step 2: Let the cash flow

You will have your income in your main checking account.  Limit direct vendor payments from this account. The team at H+P Advisors will work with you to determine your Target Allocation Percentages (TAPs).  These amounts are critical as you will be determining what percentage of income is allocated to each smaller account.  Again, please speak to your Dental CPA to set your allocation percentages. This is extremely important, especially concerning operating expenses and tax savings.

Step 3: Enjoy the ride

You’ve set your accounts. You’ve got your TAPs established and money is flowing as it comes in. You’re depositing money in Owner’s Pay and Profit accounts regularly. Expenses are covered and being paid twice per month (10 & 25).  Your practice is getting healthier with each passing month. You are a master of your own destiny!  How does that feel?

Are you ready to turn your practice into a money-making machine? Are you ready to stop worrying and enjoy less stress and less tax? Chat with us today! We’re available 24/7 to help you.