Tax Matters

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Volume 8, Number 2

ALIGN

YOUR

PRACTICE

Best Picture Nominee “Moneyball” and Dentists?

Dr. Gary Schultz Measures Benefits of Working with TMFD How to Increase Your Bottom Line in a Slow Growth Economy

WITH

YOUR

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May 2012

LIFE

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Editorial

Best Picture Nominee “Moneyball” and Dentists? eople love to be entertained. I guess that’s why we like watching movies so much. To celebrate the best that Hollywood has to offer each year, the Academy Awards dazzles and entertains us with their top nominations.

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What struck me most about the movie is how similar it is to investing, and specifically, how dentists invest using traditional ways when there is a proven and winning alternative strategy available to them.

One of the movies nominated for Best Picture this past year was Moneyball starring Brad Pitt and Jonas Hill. The premise behind Moneyball is that the collective wisdom of baseball managers, coaches, and scouts over the past century is subjective and often flawed. Traditional statistics used to gauge players abilities, such as stolen bases, runs batted in, and batting averages, are legacies of a 19th century view of the game. The movie argues that the Oakland A's' managers took advantage of more analytical gauges of player performance to field a team that could compete successfully against richer competitors in Major League Baseball.

For decades, investors have been led to believe that professional money managers on Wall Street & Bay Street have a certain level of expertise and insight beyond their peers that makes them capable of outperforming the markets. There are thousands of professional money managers claiming to be better than the next and the media talks about them all the time.

There are a couple of themes in this movie that resonated with me. The first is going against conventional wisdom. The second is the underlying economic need to stay ahead of the curve.

In 2008, the variety of investment choices was soaring. No one in the investment industry had the luxury of knowing in advance which choices were going to provide the best results, not the gurus on Bay Street, not the best pension managers.

I was intrigued by how the general manager went against conventional wisdom to create a winning baseball team. In spite of the challenges (such as a small budget for payroll) and pressure from his peers to use more traditional measures, he remained true to his convictions in creating success for his team. In addition, the manager felt compelled to explore a different approach to give him and his team a competitive advantage.

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In reality, the majority of money managers earn returns below the indexes after accounting for their fees. In general, only 10% of these managers were able to beat their respective benchmarks after five year. (Source SPIVA Funds Scorecard 2010)

Our team at TMFD decided to think differently. We were forced to look at everything and live up to our fiduciary responsibility of putting our client’s interests ahead of the traditional money managers.

Besides managers not outperforming, we were backed into a corner with higher costs of investing. We asked, “How are TAX MATTERS FOR DENTISTS

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Tax Advisors to the Dental Community

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ALIGN YOUR PRACTICE WITH YOUR LIFE

clients going to achieve their long term goals when traditional fund managers want to charge two, three or even four percent annual management fees?” We decided to look at all the academic evidence and to question everything.

emotions play a big part in distracting us from our investment strategy. Investments are a means to achieve your family’s goals and lifestyle objectives. Alignment of these goals with your practice is all the more important.

We had to find ways to achieve our clients’ long term goals with the greatest chance of success. We looked beyond traditional metrics, like the star status of a money manager or past performance. Instead, we relied on overlooked statistics, like a low management fee or turnover ratio to reduce taxes — numbers that were actually better indicators of an investor’s ability to beat the markets.

In this edition, we feature a case study with Dr. Schultz who looks back to measure the benefits of working with TMFD. Also, Sandie Baillargeon offers concrete suggestions for improving the bottom line in a slow growth economy.

What struck me most about the movie is how similar it is to investing, and specifically, how dentists invest using traditional ways when there is a proven and winning alternative strategy available to them.

Ultimately, we decided that index funds were a better solution. Index funds earned market-like returns in unspectacular ways but could be purchased at a fraction of the cost of traditional funds. We came to realize the problem with the old approach was that a manager’s stock picking and predictive ability was overvalued, and that the success of index funds was undervalued. Index funds consistently have amongst the lowest management fees in the investment industry, and results show they have proven to beat traditional money managers 9 times out of 10 in the last five years.

On a final note, we are very pleased to introduce the new look of our publication, Tax Matters For Dentists. This fresh new appearance reflects changes we made to our website last fall (www.ddstaxes.com). If you haven’t lately, please take some time to visit the website for past editions of our newsletter, testimonials and upcoming events.

For a second opinion or a comparison with your current situation please call Rose Rago in our office at 905-273-6605.

Mike Lakhani, B.Comm, F.C.C.A., C.G.A., CFP, RFP is President and CEO of Tax Matters For Dentists. Mike has over 25 years experience as a financial advisor working in the Mississauga area. Mike specializes in tax, estate and investment planning for the dental profession. You can contact him at 905-273-6605 or via email at mike@ddstaxes.com

In looking back we’re pleased with the changes, even though we started using index funds before most in our industry. Like the Oakland A’s managers, we’ve had to go against conventional wisdom to stay ahead of the curve.

Investments are typically one of the biggest components of a dentist’s total net worth, and it should get all the attention it deserves. It is our belief that all long-term evidence points to the upward direction of the global economy. As discussed in our book, Secrets of the Wealthy Dentist, we have to stay away from predictions and short-term thinking, and recognize that TAX MATTERS FOR DENTISTS

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Tax Advisors to the Dental Community

30% Off Exclusive Coupon Code: SPRING2012 One Use per Customer

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Offer Ends June 30, 2012

www.secretsofthewealthydentist.com

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Case Study

Dr. Gary Schultz Measures Benefits of Working with TMFD

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r. Gary Schultz manages a good practice in downtown Toronto with gross billings of just over $1 million per year. Dr. Schultz had been practicing dentistry well over 15 years and was concerned about a number of issues regarding the management of his finances. After attending one of our presentations with his peers at a study club, he approached our team at Tax Matters For Dentists six years ago looking for guidance and advice.

When Dr. Schultz came to see us, we prepared a comprehensive plan for him as a part of our normal process.

Dr. Schultz was married, with two children approaching age 18. There was a hygiene corporation (owned by Mrs. Schultz) which was originally set up as a management company, but Dr. Schultz was a sole proprietor, so his practice income did not flow through a Professional Corp.

Their net worth (which we use as a benchmark) at that time was $1.5 million which included the value of the practice, home and investments. The only ‘debt’ was $400,000 advanced from their hygiene company for recent home renovations and a car purchase. These funds had not yet been claimed as income, so there was a large tax bill pending on this shareholder loan.

Dr. Schultz’s main concerns were to: • • • • • 4

Improve his cash flow Pay less tax Pay off outstanding loans Plan for the education costs of his two children Review his investments

Our Tax Saver Plan analysis made the following recommendations that were implemented with the help of our team: • Established a Professional Corp. to draw only the income needed, with surplus retained in the company. Tax savings $18,000 per year.

• Re-financed outstanding shareholder loan, deferring taxes by $184,000.

• Reduced his accounting fees from $11,500 to $5,500 per year.

• Adult children were paid dividends to cover tuition and other education costs, saving $10,000 per year.

• Due to certain ‘zero-rated’ dental procedures, his company became an HST registrant in 2010 to recover HST paid on expenses, saving $3,000 per year.

• Established a Health Spending Account to allow corporate deduction of all medical expenses, saving $1,000 per year.

• Our analysis showed he had a high risk portfolio without enough diversification, high fees and no investment policy statement to monitor his portfolio. This volatile portfolio was re-invested in a broadly diversified portfolio using index type funds with lower fees. There was more allocation to bonds, less to stocks and none to alternative strategies held previously. In the time since the change, through the downturn of 2008-2009 and subsequent recovery, the new portfolio had maintained its principal value while the previous portfolio would still not have recovered 30% of its value, saving $125,000.

• The portfolio was rebalanced to allocate stocks outside the RRSP for more favourable tax treatment, and the interestearning investments into the RRSP, resulting in tax savings of $3,000 per year.

TAX MATTERS FOR DENTISTS

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Tax Advisors to the Dental Community

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Before Changes

ALIGN YOUR PRACTICE WITH YOUR LIFE

After Changes

Tax Reduction One-time/Annual

Cumulative

$ 18,000

$ 108,000

$ 184,000

$ 184,000

$ 6,000

$ 36,000

$ 10,000

$ 40,000

Hygiene Corp Only - inability to defer tax on sole proprietor

Added Professional Corp - reduced annual income tax

Shareholder Advance - $400K excess withdrawal from company

Repay Advance - borrow to repay and avoid tax

Previous Accounting Fees - average cost $11.5K per year

New Accounting Fees - average cost $5.5K per year

Wife as only n/v shareholder in Hygiene - inability to split income with children

Children added as n/v shareholders - allocate dividends of $25K per year each

Not HST Registered - unable to claim back all HST paid

HST Recovery - recover 100% of HST paid on certain expenses

$ 3,000

$ 6,000

Personal Medical Expenses - limited tax relief, after-tax dollars

Health Spending Account - expenses fully tax-deductible to corp

$ 1,000

$ 6,000

Risky Portfolio - 30% decline and higher fees

Investment Policy Statement - break-even return and lower fees

$ 125,000

$ 125,000

Inefficient Investment Allocation - interest in taxable accounts

Tax-efficient Investment Allocation - interest in tax-deferred accounts

$ 3,000

$ 18,000

Total Reduction

$ 523,000

Net Worth Before $ 1.5 million

Net Worth After $ 3.2 million

BENEFITS SUMMARY

In reflecting upon this situation, what really stood out was that Dr. Schultz did not have a coordinated strategy in place as each of his professionals (i.e. accountant, investment advisor, banker, insurance agent, etc.) were working in isolation of each other.

Dr. Schultz’s net worth grew from $1.5 million to $3.2 million, with over $523K attributed to personalized planning strategies from TMFD. Dr. Schultz came to see us recently wanting to measure the benefits and value of implementing the various strategies over the six years he had been working with our team. In reviewing the benefits of all recommendations, the cumulative reduction totaled $523,000. Dr. Schultz’s net worth grew from $1.5 million to $3.2 million, including the appreciation in home value and practice value. There were other intangibles that were recommended with our oversight, including the implementation of proper wills for estate planning.

TAX MATTERS FOR DENTISTS

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Tax Advisors to the Dental Community

Dr. Schultz greatly appreciated the benefits and value he received using various strategies implemented by our team.

These strategies saved him valuable time and money over the years. The importance of implementing a coordinated and integrated approach to managing one’s finances cannot be overstated. While professionals from multiple disciplines can provide excellent service and advice, the additional oversight from a trusted advisor incorporating full service for dental professionals can uncover additional opportunities.

For a second opinion or a review of your circumstances, please contact our office on 905-273-6605 for a complimentary initial meeting.

About the Author:

Chris Molloy, CFP, is Senior VP of Advisory Services at Tax Matters For Dentists. Chris has over 15 years of experience as a financial advisor working in the Mississauga area. Chris specializes in tax, estate and investment planning for the dental profession. You can contact him at 905-273-6605 or via email at chris@ddstaxes.com

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How To Increase Your Bottom Line in a Slow Growth Economy In a slow growth economy, many dentists found that although revenue targets did not perform as well as expected, they made more money. Running an efficient practice, especially during times of economic stress is one key way to create sustainable growth in your income Here are ten simple strategies to help your practice run efficiently

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Establish an operating budget based on metrics for practice efficiency. Every member of your dental team plays an integral role in keeping your budget in line and is accountable for the results.

Set S.M.A.R.T. goals to reach the benchmarks for an efficient practice. SMART goals are Specific, Measurable, Attainable, Relevant and Time bound.

For example, if your goal is to increase revenue and control expenses, be specific, for example, increase billings by 10% of the previous monthly production. The goal needs to be attainable. If the goal is too much of a stretch, it can demotivate your staff which will have a long term negative effect on growth. Make the goal relevant so that your staff know exactly what activities that they need to do to reach the goal.

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Appointment schedule control is the key component of a successful practice. When the schedule falls apart, all available staff members should be working to try to fill the schedule and do whatever it takes to make the schedule full and productive.

There is no room for complacency or prejudgments in this process. Effective communication skills are necessary to schedule the appointments in such a way that the patients understand the value and importance of keeping them..

Your team must be fully committed to the process.

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An efficient practice should run at 20-25% staff costs If staff costs are higher it could be because you have too many employees or openings in the schedule. If you have too many openings in your hygiene schedule, then you should decrease the number of hygiene hours that you have open. On average, you should be able to employ 1 full time hygienist per thousand active patients based on 250 working days per year and 1.5 to 2 patient visits per year.

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Dental sundry supplies. An efficiently run practice should run at 5% or less of monthly billings. The problem with this metric is there is often confusion about the proper allocation of sundries and confusion about what sundries are. Inventory control is an important part of this process as well as setting a monthly budget using a relevant metric, i.e. a dollar figure based on the previous month's billings or collections.

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Hygiene billings. Each hygienist should be billing at a minimum of $150.00 per booked hour. Hygienists need to provide appropriate and patient specific care and bill for what they do. One way of doing this is to stop calling hygiene treatment "cleaning". A cleaning can wait, it's not important. It is also advisable to stop calling hygiene patients clients and refer to them as patients. A 'client' goes to a spa to have a massage - a patient รงomes to your office to have dental services.

TAX MATTERS FOR DENTISTS

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Tax Advisors to the Dental Community

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70% Overhead Expenses

50% Overhead Expenses

Expenses

Expenses

Net Pretax Income

Net Pretax Income

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Lab costs should run at 10% or higher. If they are less, it may indicate that you are performing the bread and butter ser vices but fewer high end services like crowns, bridges, implants, etc. Treatment plans need to be followed through with and a skilled Treatment Coordinator will help to facilitate the treatment and increase the productivity of the practice.

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Repairs and Maintenance. If you are spending more than 1-2% of your monthly production on repairing and maintaining dental equipment, it is time to start capital planning. Speak to your accountant about the advantages of leasing vs. purchasing.

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Accounts Receivable - There should be no accounts that are outstanding for 90 days. All bank managers consider 90 day accounts to be uncollectable. If your patients have received dental services and have not paid you in 3 months, there is no intention of paying you..

Even insurance driven practices that accept assignment, reimbursement will be received within two weeks. In most cases, insurance companies will reimburse the patient regardless of what your assignment policy is. It doesn't matter how much you bill; only how much you collect.

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Consistency in communication is critical to your success. Using the right words can be powerful.

Go beyond patient education to motivating patients to follow through with treatment. Stop recommending treatment and start prescribing treatment. That is why your patients come to your office and what they expect you to do.

Increasing the efficiencies of your practice will improve the health of your bottom line and provide you with long term sustainable growth during challenging economic times. Efficiency is doing things right - effectiveness is doing the right things!

For more information about the essential appointment scheduling communication skills, email me at sandie@dentalofficeconsulting.com and we will send you a free copy of our policy. Please put in the subject line, “RE: Article in Tax Matters For Dentists.”

About the Author:

Sandie Baillargeon is a leading authority on how to increase the effectiveness of medical and dental business systems. Ms. Baillargeon is author of two text books, Dental Office Administration and The Canadian Dental Office Administrator, published by ITP Nelson Canada. Sandie is the owner and operator of Dental Office Consulting Services, which specializes in dental business planning, staff development, consulting and continuing education seminars. Visit her website at www.dentalofficeconsulting.com or contact her directly at (905) 336-7624.

Material in this newsletter is for educational purposes only. It is distributed with the understanding that neither the authors nor the publisher are rendering legal, accounting, tax, investment, or other professional services by publishing this book. These publications are not a substitute for the advice of your financial advisor, or any of your other advisors, personal or professional. Certain employees of Tax Matters For Dentists maintain a relationship with Assante Financial Management Ltd. ("Assante") through which they sell mutual funds and bonds. The relationship that they have with Assante does not include tax preparation services for which Tax Matters For Dentists is solely responsible for. Tax Matters For Dentists is not associated in any way with Assante, and Assante has no responsibility for the services offered by Tax Matters For Dentists.

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Tax Advisors to the Dental Community

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