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Can Just 2% Really Matter?

Think back to the day that you graduated from dental school.  If someone had told you that there was a very simple plan to insure that when you got ready to retire, say 35 years later, there would be $3.4 million dollars sitting in an account waiting for you, would you have believed them or would you have thought that they were crazy?  Definitely crazy, right?

We hear from a considerable number of doctors that are approaching, or at least beginning to consider, retirement.  The vast majority of these doctors have nowhere near $3.4 million dollars set aside for their retirement.  In fact, many of them have less than $100,000 saved and are counting on the sale of their practice to fund their retirement.  The truth is, this rarely happens.  The practice just isn’t worth what they believed it would be worth.  And even if it is worth a lot, finding a buyer who can get financing is very tough these days.

I suppose that this will be more applicable to younger doctors than to the more mature, more seasoned veterans.  But I want to give these younger doctors something to think about, something that will virtually eliminate any future worries about being able to retire.  Are you ready?  Here it is: Don’t settle for collecting less than 100% of your net production.  That’s it.  Simple, right?  Yet over the past 20 years of consulting with hundreds of practices all over the country, it still amazes me that doctors are willing to be content if the practice collects say, 98%.  After all, how big a difference could that uncollected 2% really make?  It just couldn’t be that much, could it?

Just take a look at the accompanying chart before you make your final decision and dismiss this as a complete waste of time.  The first column simply represents years in practice.  The second column begins with a figure of $360,000 that represents the first years’ collections (a very conservative $30,000 per month average for the first year).  The third column represents 2% of $360,000 ($7,200).  Remember, this would be the 2% that is not collected.

Now follow that third column all the way to the bottom and check the number: $1,951,375.  That’s almost $2 million dollars.  Dollars forever lost.  Gone.  Hard to believe isn’t it?

Now take a look at column 4.  This represents the interest you would likely earn on this 2% if it actually had been collected and invested at a very modest 5% annual return.  The interest will grow through the years to an additional $1,463,691.  It’s the old “magic of compounding interest” hard at work.

Add the principal and interest together and you get $3,415,066.  There is your $3.4 million dollars that I promised in the first paragraph.  Believe it now?

There are a couple of other interesting points that I’d like to make about this chart.  First, column number one indicates an annual growth rate of only 10%.  I really believe that this is too low a number.  And yet, if that actually came to pass the practice that started out in year one at $360,000 would have grown to over $9 million per year.  Do you know how many $9 million dollar dental practices there are in the U.S?  I don’t know the exact number but I can assure you that there are not very many.  Why is it that practices can’t continue growing at even a very modest 10% every year over the life of the practice?  Does that sound unreasonable or overly difficult?  Maybe we’ll delve into that in another article.  Secondly, we can’t ignore the fact that many offices routinely collect less than the 98% figure we’re using in the example.  We frequently see offices collecting an average of 94 to 95%.  I’ll let you do the math on how much that might add up to over the course of a career.

The bottom line here, no matter where you are in the life of your practice, is to never settle for collecting less than 100% of the office net production (production after all write-offs and adjustments).  Collect it all, and then exercise a little discipline and don’t spend every cent of it.  Save that 2%.  Invest it conservatively (remember that these figures are based on just a 5% average return) and watch it grow.  If you do, you will definitely be in great shape financially when the times comes to put down the handpiece and ride away into the sunset.

Years Collected 2% Interest

1 360000 7200 360
2 396000 7920 774
3 435600 8712 1248
4 479160 9583 1790
5 527076 10542 2406
6 579784 11596 3107
7 637762 12755 3900
8 701538 14031 4796
9 771692 15434 5808
10 848861 16977 6947
11 933747 18675 8228
12 1027122 20542 9667
13 1129834 22597 11280
14 1242818 24856 13086
15 1367099 27342 15108
16 1503809 30076 17367
17 1654190 33084 19890
18 1819609 36392 22704
19 2001570 40031 25841
20 2201727 44035 29334
21 2421900 48438 33223
22 2664090 53282 37548
23 2930499 58610 42356
24 3223549 64471 47697
25 3545904 70918 53628
26 3900494 78010 60210
27 4290544 85811 67511
28 4719598 94392 75606
29 5191558 103831 84578
30 5710713 114214 94518
31 6281785 125636 105525
32 6909963 138199 117712
33 7600960 152019 131198
34 8361056 167221 146119
35 9197161 183943 162622
97568773 1951375 1463691 TOTAL: $3,415,066