“Here’s another exclusive peek at the profit and loss statement from an actual chiropractor’s practice… we can’t tell you who she is, but we can show you how this doctor wanted to expand her practice and what she actually did!”
“As practice consultants, we never know what kind of problem we will encounter when the phone rings. One phone call last September is a typical example. The caller was a young female doctor — very aggravated, upset, and despondent. After we calmed her down, she explained her problem. She had just returned from a bank after being turned down for a loan to purchase a new office building. She felt like a failure, although she thought she was a successful practitioner and asked if we could help.
So, we asked her for some background information. She is a young, single female chiropractor who has been in practice for eight years and has a good credit rating. She has student loans of $950 a month, lives in a free-and-clear house that she inherited, drives a new sports car and has a net income from her practice of $35,000. She is leasing an office building for $900 a month, which she has beautifully decorated, furnished and equipped. She felt this office was too small for her and her two associates. The purchase price of the new office building is $250,000, which needs $35,000 in remodeling. The banker, after reviewing the doctor’s income tax forms and her profit and loss statement (P&L), told her in a condescending manner she did not earn sufficient income to pay the monthly payments on the new office building. However, we told her banks use formulas when lending. The bank knew the total price of the new building, with remodeling, would be approximately $285,000. Her offer was to put $15,000 down and have the bank finance the remaining. Obviously, the bank would not agree to less than 5% down when 30% is the norm on a commercial building. We explained a bank will only allow 25% of her after-tax income for making payments for principle, interest, taxes, insurance and maintenance on buildings.
The figures she supplied the bank obviously did not show enough after-tax income to make the payments of approximately $2,600 a month. She has a before-tax income of $35,000 a year. Taxes on this income would be $10,500. When this figure, plus the $11,400 per year in student loans, is subtracted from $35,000, this leaves her with only $13,100 in after-tax income. Out of this she has to pay living expenses and personal credit cards, which were to the max. Obviously, with this level of income she could not afford the mortgage payments on the proposed new building. We asked her to fax us a copy of her profit and loss statement; We would analyze it and get back to her within the week. Three days later we called her back. The first thing we said was, “Fire your accountant. We’ve found some serious problems with your P&L; your expenses are abnormally high in too many categories.” Our analysis went as follows.
She generated $300,000 a year in her practice with an overhead of 89% (Line V of the P&L). That’s very high. An eight-year-old practice should have an overhead of 50% or lower. We asked her about her advertising expenses (Line E). She enumerated the various ways in which she was advertising, how many new patients each category of advertising brought in and the total services rendered to these patients. Her return on investment (RO.I) was terrible, very close to non-existent. We then asked her about the category called, “Advertising, Other” (Line F).” She hemmed, she hawed, she said, “You know, extra advertising.” We said, “No, we don’t know. We’re your consultant; be honest and talk straight. What’s in that category?” She said it was for jewelry and home decorations she bought through her office.
When asked about travel and seminar expenses, (Line G) she said, “Attending seminars, combining seminars with vacations, etc.” This figure was way over the normal and a glaring red flag for the IRS. Her depreciation figure (Line H )– was very high. We asked her what she was depreciating. She was depreciating all kinds of unnecessary equipment she had purchased for her practice. We next asked her about professional fees (Line K) of $70,000. She said, “That’s salary for two associates at $35,000 a year each.” We asked her how many patients each associate was treating per week. Very few! Staff salaries (Line Q) was the next category that was too high. Obviously, she had too many staff members. Twenty-eight percent of her income was going towards salaries, when it only should be 14-16% maximum. Then we told her the good news. She had plenty of personal income to purchase the new building. Her financial package just wasn’t presented to the bank correctly. That’s one of the reasons she should replace her accountant. Her accountant reported, “Reportable Taxable Income” of $35,000 to the bank, which was accurate.”
What he should have reported was her, “Actual Net Income.” The $7,000 she claimed for the lease of her car (Line C) could be considered take-home income, even though it is written off as a corporate expense, which technically is correct. The category, “Advertising — Other,” (Line F) for $12,000, is actually take-home income. Her accountant was careless to have this category standing out like a sore thumb in the middle of a P&L (another reason to replace her accountant). There is no such thing as “Advertising – Other.” It’s another red flag that will draw the IRS’s attention. If she is audited, and she will be, because her travel and entertainment deductions are too high, they will find out what is in the category, “Advertising – Other.” Then they are going to deny these expenses as an office expense and she’ll pay 35% in corporate taxes. This income will then come to her personally as a dividend, which is after-tax income, and it will be taxed 31%, for a total of 66% taxes, not including the penalties and interest she will pay. Quite a big bite just because she was trying to cheat Uncle Sam out of a little bit of taxes.
Again, replace the accountant! Be aware, there are some accountants who don’t care whether or not the numbers shown on a doctor’s P&L or tax form will trigger an IRS audit because they will make more money defending a client from the IRS than just doing bookkeeping. The depreciation figure (Line H) of $21,000 is nothing but a bookkeeping entry. It’s not actually an expenditure. This figure also could be added to her take-home income. And, on Line M the $2,250 used to pay her life insurance, could also be claimed as take-home income. When you add all these figures her, “Actual Net Income” was $77,250. She now has high enough take-home income to borrow the money from the bank. All she needed was a good accountant or a consultant to explain to the bank the difference between “Reportable Taxable Income,” and “Actual Net Income.”
Reportable taxable income:
- Auto lease
- Advertising, other
- Depreciation
- Life insurance
- Actual net income
Then we advised her to lower her advertising expenses by reducing the size of her yellow page ad – it was a waste of money; downsized the ads she was running in the newspaper, saving her money and increasing their effectiveness; and stopped her radio and magazine advertising because they were ineffective.
These measures cut her advertising costs in half. We advised her to mortgage her house. She was going to fight on this issue but listened to our reasoning. We wanted her to refinance her house to pay off her student loans and her ridiculously high personal charge card accounts. By doing so the interest on the charge cards and student loans become tax deductible because interest on a home is tax deductible, and her monthly payments would be reduced 70%.
We then recommended she dismiss one associate. She didn’t have a practice big enough for two associates. She was hoping her associates would bring in additional income. We indicated that it’s her responsibility to build her practice and then fill up an associate with her overflow and not to count on someone else making money for her. She placed one of her associates with another C. We also proposed she reduce her staff. Her staff salaries (Line Q) were 22%. At the very most they should be 16%.
Her staff had lobbied her: they’re too busy, they couldn’t do all the work, they needed more help and so on. We consulted on the staff members to be eliminated, how to organize the remaining staff and submitted proper job descriptions. Next, we warned her to quit being a seminar junkie – quit taking seminars and tying them into vacations. The IRS will catch her and then she’ll pay 66% tax on the seminars the IRS will deny, as previously discussed. We recommended she only attend one practice management and post-graduate course per year. Additional seminars she doesn’t need – she is better to stay home and treat patients.
Then we instructed her to get rid of most of the equipment she had bought and leased. Most of it wasn’t being used. She had enough extra equipment to furnish another chiropractic office; get rid of any equipment not used 20 times a week. She did and the money she raised paid off her equipment leases. Then we showed her a “Before and After” profit and loss statement on her practice and how we had reduced her overhead from 89% to 54% and increased her net income from 11% to 45%. And, with the new more productive advertising attracting more new patients her overhead will drop below the 50% level where it should be. We also directed, “”Don’t purchase the new office.””
She didn’t need the additional space now that she eliminated one associate. She had a beautiful office with a very low lease rate. Her monthly lease payment was less than half the mortgage payment she’d be paying if she purchased the new office. Our advice was, “Stay where you are and save your money. You don’t need to make a move.” We forewarned her of the chiropractic disease: buy-buy-buy. Some people have to buy every toy, gadget, and gizmo out there. And this junk just gathers dust at the back of the office.
We advised her to cut up her charge cards and only carry a charge card when she goes to a seminar or convention so she can keep track of her expenses. Lastly we encouraged her to establish a firm goal that she must pay off her home mortgage before buying anything else. We told her how to pay off her mortgage in half the time by making double payments and thus only pay approximately 3% interest.
The Results
We reduced her office overhead, increased her net, decreased her taxes, lowered her personal monthly payments and took the stress off this doctor’s shoulders. And, we hope we were influential enough to stop her from making the same mistakes in the future.
Professional Success Unlimited, of Seminole, Florida is a consulting firm specializing is a multi-purpose chiropractic consulting firm with clients throughout the U.S. Peter G. Fernandez, DC, a 1961 graduate of Logan Chiropractic College, has served as president of Professional Success Unlimited since 1992, and has consulted in the opening of more than 1,500 chiropractic practices. He is married and the father of seven, including three chiropractors.
