There are two sides to the earnings question. First, what did you do to prepare for the possibility that your income levels might not last forever and, second, how can you take steps to get your income back to their original level-and higher?
Many of us live in areas where inclement weather can wreak havoc with our lives and our homes. If we live on the shore, we have storm shutters and an evacuation plan. If we live in the Northeast, we probably own snow shovels, have a plowing service and tickets to Florida in the winter months. If we live in the Midwest, we probably have a storm cellar and listen to the early tornado warning systems. In other words, we know it’s smart to be prepared for contingencies. We take pride in being the ones who are prepared and wonder how anyone could let themselves be caught short. But, just a minute-how many of you have taken the same steps to protect your lifestyles in the event of a downturn in income?
It can happen to anyone and does regularly. Suddenly, you notice collections are down and there don’t seem to be as many patients in the waiting room. Your expenses seem higher as a percentage of earnings and those credit card payments feel very uncomfortable. Perhaps your children are in college and you feel the pressure of making sure they stay there. The rent on your building is due, the malpractice premiums seem unmanageable.
No one likes to feel uncomfortable and being in a financial squeeze is very unpleasant. If you’re not there yet, let’s talk about some ways you can batten down the hatches and be prepared for trouble. If you’re already in the hole, we’ll give you some tips on how to stop digging.
To get out of a hole, you have to first stop digging.
1. Get in control of your spending.
We don’t call it a budget, that’s too much like a diet. As we all know, both words cause binges. We call it your spending plan. That’s right, your plan for spending. It means that you need to get a handle on where your money goes on a regular basis.
Each member of your family who pays bills or is in charge of expenditures should carry a small notebook for a month or two and jot down every dollar spent. Look at your checkbook, too, to analyze where the money is going. You probably know a great deal about your big expenses-both personal and professional, such as your mortgage, utilities, auto payments, office rent, salaries, equipment, etc. However, you may have no idea what is being spent on discretionary areas such as food, entertainment, clothing, “walking around” money, and so forth. This is where you have the chance to change unconscious spending into conscious choices.
You can allocate your resources in only so many ways. Make sure they’re ones you choose, not just fall into. Talk about these choices with your family. Plan out big expenditures so your vacation doesn’t run up your credit cards. Build into your spending plan the pleasures you and your family want and need. This isn’t an exercise in deprivation, it’s about choices.
Even if your income is down, by understanding where your money goes, you can decide where it is best used and you can make sure you get the things you really want. One technique that works is to budget annual bills on a monthly basis. That means that you set aside enough each month to pay 1/12 of the bill you expect at the end of the year. Small payments are always easier to handle than large ones.
2. Pay down your debt..
You don’t need it and there are no legitimate tax reasons for it. If you’re making payments on a mortgage, you may have the opportunity to write off a portion of the interest payment but you are still out of pocket the balance of the interest and principal.
Pay off your credit cards, your store cards, any tax liabilities, and eliminate your home mortgage. The only time this doesn’t make sense is if you are going to move out of your house within the next 3-4 years. Use a schedule to pay off the debt. Pay off high interest debt first. Then, add the payment on this debt to the debt with the next highest interest rate.
Continue until all of your debt is retired. Usually, this will leave your personal residence mortgage until the last as this usually has the lowest interest rate. Keep in mind that paying off debt is like making investments that are earning 16% -21%, a good financial decision in any market. You may wish to open and maintain a line of credit at a reasonable interest rate in the event you find yourself in serious trouble. Don’t run up your credit cards for short term money needs because you’ll just end up deeper in the hole with significant payments. A line of credit could be as simple as a home equity loan.
3. Control your expenses and monitor your revenue.
Controlling your expenses and monitoring your revenue is easier if you are automated. Your practice should have an automated system such as Quicken so that you can quickly and easily track expenses and, with the help of your accountant, identify over time sudden drastic changes or trends. There are various systems that will help you track telephone calls as well.
Regarding expenses such as advertising, newsletters, flyers, magazines, etc. don’t utilize these venues unless you are going to commit substantial sums of money to a campaign over a long period of time. If you are mailing, track your percentage of responses and revenue generated. The typical 1/2 – 1% response for direct mail may not produce enough revenue to warrant the expense of the mailings. More effective is personal contact. Salary decisions are more difficult. Some doctors are “staff heavy.” It’s important to analyze what services you need and hire only as many people as absolutely necessary. You may consider outsourcing some of your practice activities or employee leasing.
If you find yourself in financial difficulties, it is not the time to look for a partner or associate doctor. Those kinds of changes to your practice take longer and cost more money than you would expect, and should only be attempted when the practice is running smoothly and profitably with excess cash flow.
The same goes for a part-time job not related to your practice. Your first strategy should be to devote all your time, energy, and resources to building the practice. Only when all else fails should you consider more drastic measures. Any activity that takes your eye off the ball is probably going to be detrimental to your practice.
4. Reduce taxes.
Ask your accountant to help examine your situation again. You might put your spouse to work in your practice, hire your children (you’re going to give them money anyway, why not get some work out of them in the process!), reallocate money in taxable accounts like Certificates of Deposit and checking accounts to tax-free or tax-deferred accounts such as municipal bonds or tax deferred annuities. Meet with your CPA on a quarterly basis-not just once a year-to make sure you’re taking every possible step to maximize income and minimize taxes. Don’t withhold more than you need to. That’s making an interest-free loan to the government. Have your accountant calculate your tax liability each quarter and pay that amount so you don’t withhold too much or too little. If your cash flow permits and your debts are paid off, consider maximizing the contribution to, or opening a retirement plan. The new simple plans which permit your employees to contribute to the plan may be just the ticket for you to get a tax deduction and save for retirement on a cost effective basis. These plans became effective January 1, 1997.
Look closely at your investments, too. You might have growth and income funds that produce taxable distributions when what you really want are growth funds that emphasize capital gains, not dividend or interest income. Work with your financial advisor to develop an appropriate asset allocation, taking into consideration your goals, time frame, anticipated rate of return, and tax considerations. Review this quarterly, as well, to monitor your progress. Keep in mind, that your money needs to be working as hard as you are-at all times.
5. Create a contingency fund.
Many of us find that we don’t keep enough liquid capital on hand to meet day-to-day emergencies so we either disrupt an investment program or run up credit cards when an emergency occurs. We recommend to all our clients that they maintain an amount equal to no less than 3 months’ personal expenses and one month’s practice expenses in a tax-exempt money market with check-writing privileges for unexpected contingencies. This will also help you cover expenses if you have a sudden decline in income. It buys you the time you need to determine what the problem is and how you’re going to solve it.
6. Reduce insurance premiums both personally and professionally.
If you have done everything on the list up to this point, you are in a position to reduce some of your insurance premiums by reviewing your deductibles. By increasing the deductible on your health, auto, and malpractice insurance, you will reduce your expenses. With a contingency plan in place, you can extend the elimination period on your disability insurance to 90 or 180 days and, perhaps, the elimination period on your business overhead insurance, which will reduce the premium.
With debt eliminated and a savings plan in place, you may be able to own less life insurance. If you purchased cash value life insurance, you may find that the time has come that the cash value will support the life insurance policy without you paying any additional premiums. Ask your agent to have the calculations prepared for you. Eliminating premiums without canceling the policies will keep your family protected while improving cash flow.
Don’t drop any policies without carefully examining the consequences first! You don’t want a temporary set-back in income becoming a permanent set-back for your family.
7. Share your concerns with your spouse and your children.
People are always more comfortable when they feel they understand a problem and can pull together to solve it. Sometimes a frank discussion or a family meeting is a critical part of the solution. Get your children on your side so they understand the problem. You might be surprised by the innovative ideas they come up with to help and you’ll help them learn the techniques they will need as adults to cope with their own financial difficulties. A little dose of reality is never a bad thing.
While there are no “normal” levels of spending in either your practice or your personal life, you can identify excesses. You can tell you’re in trouble when you find yourself borrowing to pay the debt service on other loans or when the basic bills such as utilities, mortgages, etc. aren’t being paid on time.
Make sure your priorities are in the right place. Some doctors cling to amenities like a country club membership while they are unable to pay their tuition bills or finance expensive and unnecessary parties instead of paying their tax bills. These are sure signs of disaster.
You may find yourself in the position of having to sell off personal property or equipment. Keep in mind that you should not sell anything that contributes to you making money so personal luxuries or unnecessary frills are the first to go.
8. Take a close look at what you’ve been doing in your practice.
Is there anything that you’ve done in the past that was successful that you’re not doing any more? Here are some quick tips that might help get your income back to normal:
Don’t share your problems with your patients. Be positive, warm, and caring.
Do get your staff on your side! So many doctors treat their staff like an annoying burden. Think of them, instead, as your all-star team. If an employee doesn’t fit into the team spirit and isn’t willing to help bring in more patients or doesn’t have a cheerful, helpful attitude, find someone new. This is your team-you get to pick the players. Make sure you pick the best you can, and don’t keep the losers!
Look for new areas of practice or develop a specific niche market.
Try not to get discouraged. When you were new in practice, you were probably innovative and energetic. Do whatever you need to do to get back in touch with those feelings.
Be decisive. Once you’ve developed a plan of attack, go about it vigorously. Everyone responds well to a decisive, forward thinking leader. You believe in what you do-show it.
Be innovative! Get an e-mail address or a web site. It’s the wave of the future, so catch it.
9. Finally, stay upbeat and positive.
If you take each of the steps outlined above, you will weather this storm and be even better prepared for the next one. If you’re not experiencing any income problems now, get prepared so you don’t have to worry about it. You’ll want to take each of these steps before you retire anyway.
If you’re having trouble now, stop digging! Take your situation firmly in hand and do what you need to do to reduce expenses and minimize taxes. Focus on what caused the problem and what you can do to fix it. Involve your family and your staff who can support your efforts-after all, it affects them, too.
You can handle this! You’re a professional and you have a great deal to offer your patients. Don’t panic, think your tactics through, be decisive, and take action. Good luck!
Kelly Auslander, CFP, President, of American Financial Advisors, Inc., graduated from Vassar College in 1971 and received her MS degree from the State University of New York. She is a Certified Financial Planner, the co-founder and past President of the Mid Hudson Chapter of the International Association for Financial Planning. She was a 1986 honoree for the YWCA Salute to Women in Business and Industry and served on the YWCA Board of Directors as Treasurer and Vice President. Ms. Auslander co-founded All Women in Business, Ltd. in 1982 and was named Woman of the Year by that organization in 1984.
American Financial Advisors is an independent financial and estate planning firm with offices in New York, Massachusetts, Maryland and Florida. Please contact the author at 1-800-872-9195 ext. 11.