4 steps to putting your profits to work
By Mary Scoviak
Setting up a profit reinvestment plan is a business basic. Your practice may generate enough money to pay your salary, but reinvesting part of your profits is vital to helping your business grow, whether it’s to expand your services and standard of care or to create value for retirement and selling your business. Gary Glassman, CPA, Burzenski & Company, P.C., East Haven, Conn., shares his insights on how to reinvest for the best return.
1 Determine how much to reinvest. The amount will differ based on the practice’s circumstances and goals. “I believe all practices should reinvest a minimum of 10% of their profits back into the practice before paying the owner’s salary”more depending on the business’s long- and short-term business plan,” says Glassman.
2 Save before you spend. The first priority should be having enough cash on hand to cover a business downturn or shortfall. That way you know you can pay your bills even when things slow down due to the seasonal nature of the veterinary business.
“Our rule of thumb is that one-doctor hospitals should have a minimum cash balance of approximately $40,000 at all times; a two-doctor practice approximately $60,000, a three-doctor practice approximately $80,000 and so on,” he says. “If you are not near these balances, the only way to build to them is to reinvest profits back into the practice.”
3 Define your best options for optimal return in your reinvested profits. For example, a good rule of thumb is to spend 1% to 2% of your yearly gross revenue on capital equipment, Glassman says. Some other areas to consider include:
- New facility requirements
- Team salaries
“Weigh your reinvestment needs against your long- and short-term business plans,” he says. “Ask yourself about when you might expand your facility, how much that will cost and what new equipment you will buy year to year. How much additional inventory will you need to carry to fund the hospital’s growth in sales? What does next year’s hiring plan look like and how much will that cost?”
4 Allocate a portion of reinvested profits to create and maintain a savings plan. “Obtaining the cash to achieve these goals all in one year is probably not realistic, so practices need to set aside some of the profit reinvestment to develop a regimented savings plan,” says Glassman. Discuss your reinvestment and general business plans with your financial advisor to create a program that is customized to your specific practice goals.
What If a Practice Isn’t So Profitable? If your bottom line isn’t super healthy, should you forget about reinvestment plans? “That would be a mistake,” says CPA Gary Glassman. “Treat the reinvestment as an expense of the practice that is not available for owner consumption. This will lay out a realistic look at what the owner may take as pay.”