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4 Common Financial Mistakes Made by Orthodontists by Judson Crawford

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Categories: Financial Planning and Investments; Practice Management, HR and Accounting;
4 Common Financial Mistakes Made by Orthodontists 

Opportunities to get the most out of your business, even after the pandemic

by Judson Crawford

The road to financial freedom is paved with good intentions—especially for orthodontists. Generous, determined, creative, fun-loving and growth-minded, this specialty of dental professionals carries the same spirit for growing their dental practices to reach their personal financial goals.

Although I’m not an orthodontist myself, I know this all too well. For more than 16 years, I’ve been able to guide dozens of Cain Watters & Associates’ 500-plus orthodontic clients along their journey to reach their long- and-short term financial goals. I’ve had a front-row seat of the life cycle of an orthodontic practice owner, from overcoming dental school debt and buying a second or third location to transitioning into retirement.

And although I don’t want this getting out, my orthodontic clients are typically some of my favorites. They have the best personalities, work hard and are always ready to conquer the next big challenge. All of these are great qualities—but when it comes to finances, this can sometimes be troublesome.

To be effective in meeting their personal financial goals, orthodontists need to be successful in their businesses. Which usually is not a problem for most practices … but then 2020 happened.

Dealing with last year’s hurdles and unknowns is the perfect example of how business owners might take their minds off long-term goals because they’re distracted by day-to-day demands.

For example, many orthodontists returned from shutdown to busier-than-ever practices, government stimulus opportunities and new state safety mandates. At times like that, it’s easy to take your eyes off things you were doing before, such as staff management, accurate accounting and retirement planning.

Practices could always be running more efficiently, just like there’s always room for improvement in a personal financial plan. Based on these observations and more, I’ve selected the top four mistakes I see my orthodontists making. They are a hybrid of personal and practice, because the health of the personal plan relies heavily on the health of the business.


1. Not raising fees

Nobody likes to raise fees, and many owners believe that higher prices could become a barrier to entry. Fees should be assessed annually, and sometimes increases must be made, especially with 2020’s cost increases on things like personal protective equipment. Additionally, ask yourself these questions:

Are you charging enough for Invisalign or other aligner cases? It’s unlikely a patient will pay the full difference between the cost of aligners and brackets, but you should charge a premium for the aligner cases. We typically see a premium of $100 and $200 for an aligner case.

Are you undercharging for either Phase 1 or Phase 2 to get people in the door? Remember, a combined Phase 1 and 2 needs to be more expensive, because it’s more work, and should be at least 125–140% of the full case fee. According to Cain Watters’ latest Orthodontic Practice Comparison Report, our clients’ average Phase 1 is $3,136, Phase 2 at $5,088 with a combined fee of $8,224. The average full case fee is $5,910.

Do you know how much you’re writing off each year? Orthodontists are typically very involved in their communities through schools, churches and charities. They know a lot of people, which can sometimes lead to doctors discounting fees at a high level. Adjustments can be within 8–10% on average, but when you pass 10%, you need to question if you’re writing off too much in discounts. Consider writing out a plan of discounts in advance, quantify the number of free cases and set a standard discount percentage for your selected group, rather than make it a free-for-all.


2. Overpaying staff

Orthodontists traditionally have great relationships with their staff, resulting in low turnover. Although this is good, when long-term staff have been given 3–5% raises annually, this can lead to staff wages above national and regional averages. (Cain Watters’ latest report also features average orthodontic practice pay rates by position. The report is available to download for free at cainwatters.com/ ortho so you can see how you compare.)

Staff salaries can be a practice’s largest overhead expense and need to be around only 17–19% of collections to remain healthy. If you find yourself over this percentage, it’s time to regain balance.

Look to see what other practices in your geographic region are paying and see how you measure up. Hourly rates can also vary significantly based on if you are in a rural, suburban or urban area. It is important to give raises to underpaid individuals, but for those who are within the average range, keep them there by giving only cost-of-living increases on an annual basis.

Production-based bonuses are a great way to reward based on performance. This way you can offer incentives based on growth and profitability, rather than a blanket hourly increase.

If you have staff members who are overpaid, unwinding this is one of the hardest things to do. No staff member will volunteer to take a cut and turnover may be needed to regain control.


3. Overlooking tax efficiencies

As successful small business owners, most orthodontists are high-income earners, which positions them in highest tax brackets. Although most are already incorporating some of the larger tax benefits of ownership, they may be missing out on some of the smaller strategies that can really add up to significant savings.
  • Orthodontists may typically only attribute business travel expenses to continued education events, or when the expense has the potential for other travel as well, like an annual corporate meeting or event. Also consider writing off some auto expenses. Although you cannot write off your daily commute to the office, consider other milage like visits to referring doctors, study club meetings or drives to the bank or to pick up supplies. If there is a business reason, you should be running travel and auto through the business.

  • Meals and entertainment is another area that has potential for savings. For 2021 and 2022, business meals are 100% deductible, instead of only 50%. Entertainment expenses, like a sporting event or tickets to a show, are still nondeductible. Make sure you keep all itemized receipts for any business meals.

  • If you have children, consider employing and paying them out of the practice. During the pandemic, I had clients whose children were working in the office and helping take patient temperatures or shuttling patients out of cars. Children can also help around the office by marketing within their sports or school club or even modeling. Paying children moves money from your high tax bracket to the child’s bracket.
The bottom line is that there are more deductions out there than just your cell phone and internet. Moving expenses from your personal accounts to the business, when justified, can add up and save you a lot in taxes. Working with a CPA familiar with both the dental and small business tax landscape can make a big difference.


4. Missing retirement savings opportunities

Leveraging your business as a vehicle for retirement savings is an extension of being tax-efficient. As high-income earners, orthodontic practice owners have the ability to deduct $57,000 for the doctor into a 401(k) plan—$63,500 if over 50. If the spouse is working in the practice, there is the potential for another $19,500 (or $26,000 if over 50). With the ability to get $76,500–$89,500 annually into a 401(k) at a 37% tax rate, that saves the doctor a significant $28,000–$33,000 each year.

Orthodontists who are already maximizing their 401(k)s yet still have excess should consider looking into a defined benefit or cash balance plan. Because orthodontic practices have efficient staffing structures, this available option offers $50,000–$200,000 in additional tax-deferred savings.

There is a common misconception that it would cost too much to run your own 401(k), cash balance or defined benefit plan. I disagree and suggest searching out a different pension company if you are in this situation.

Business ownership, management and personal finance isn’t easy, especially after a year like 2020. There were many unknowns thrown at orthodontists, making it easy for them to take their eyes off the fundamentals of their financial plans. The good news is that there is so much potential for orthodontic practice owners. With the help of an advisor, orthodontists can look forward to reclaiming efficiencies and new strategies to make this year the best yet.

Disclaimer:
Cain Watters & Associates is a registered investment advisor. Cain Watters conducts business only in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets. Past performance is not an indicator of future results.


Author Bio
Judson Crawford Judson Crawford is a certified public accountant and investment advisor representative. Crawford is a partner and financial planner at Cain Watters & Associates, where he focuses on the orthodontics specialty and spearheads a team of financial planners with whom he shares his insights and subject matter expertise. In addition to his role as a CPA, he is the executive board member responsible for CWA’s marketing and communications department and the co-host of the Accumulating Wealth Podcast, a production focused on guiding dental practice owners along their journey to reach their personal and practice goals.

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