InSight

Cash Flow: 6 Successes For Your Dental Practice (2/2)

Financial Planning Dentist

Continued from Cash Flow: 6 Successes For Your Dental Practice (1/2)

A cornerstone of any business is having a mastery over your revenue and cash flow. Lucky for our dentist clients, they have a fantastic capacity for inflow, but disproportionately high outflows from expenses and taxes. Analyzing your accounts receivable and operating activities is an intrinsic part of our income analysis process. The best leading indicator for the success of your practice and of your financial plan.

Bring forward revenue

There are several lending and credit schemes that will allow dentists to bring forward revenue instead of waiting for insurance and clients to pay. These can be a fantastic value add for your clients by helping them flatten out the payments and keep on your treatment plan. These lending and payment systems keep you from being the bank and put the money into your practice faster with little interruption or time on your part. 

We don’t recommend any single group for offering these services, but find that dentists that enable their clients to have access to a trusted partner are able to keep their patients on track and stabilize inflow to their practice. 

Diversify your inflows

Cash flow dentist income revenueEven by having all of the above and doing everything you can to normalize the revenue of your practice, hiccups can still occur that are outside of your control. Changes to insurance coverages, business partners, and economics have always caused displacement of cash flow for dentists. Clients that have a good understanding of both their practice and non-practice cash flow are capable of weathering these changes. 

Clients who have worked through the P.E.A.K Process® know exactly what their cash flow health looks like for both the practice and their personal assets and how much risk is associated with getting income from a single source. Most people don’t have the luxury of determining their own income like dentists we work with. So knowing exactly the source and vitality of profit from several diversified sources becomes helpful for practices that may be working through tight cash flow from expansion, contraction or transition. 

Work with a dental financial advisor to analyze and provide action items to improve your cash flow 

You have to be preemptive when it comes to monitoring your cash flow. Dentists often prefer to delegate cash management to one of the employees at their practice so they can have more time to care for their patients. This may however not be an effective way to manage or maintain a steady cash flow. Having a good understanding of your cash flow, its relationship to your practices financial health, and how dependent you are personally on the steadiness of that flow will make a measurable difference in the trajectory of your financial plan.

Clients that use the P.E.A.K Process® CFP®’s at InSight understand your cash flow habits and provide a better understanding of the in’s and out’s of your practice. Dental financial advisors analyze, estimate, and help you predict your income over time. We find ways to better maximize your efforts, and discuss ways to better utilize that knowledge in your financial plan. This intimacy will help you plan on how to preempt any shortfall. Or, to broaden your current capacity to generate revenue into long term and diversified vehicles for cash flow generation. 

Our CFP’s analyze your cash management habits but suggest ways to improve your cash flow and also find tax reduction strategies. We find opportunities you may not know about.  Invest in yourself and your practice, and we will help guide you through what you don’t know you should know to get you closer to financial freedom.

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Kevin Taylor

What is the CIMA® Designation?

Mandatory vs. Voluntary designations? Several of the designations involved in our industry are often associated with being a mark of distinction. Series exams, for example, are often cited as a way clients will understand the legitimacy of their advisor. And while there are differences in the varied series designations they’re all more accurately described as mandatory designations. These exams allow people to carry out certain sales activities and securities actions in compliance with state and federal laws.  Voluntary designations, by contrast, show an advanced understanding and often years of study into specific technical, strategic, and legal strategies that arise in an investor’s journey. These financial commitments often reflect an advisor’s commitment to their craft, and several of the designations have education and experience requirements that amount to years of study and difficult examination to attain. Some of these designations year in and year out have failure rates in the 35-50% range. Meaning that even after years of independent and classroom study that over a third of those in pursuit will still fail the final examination requirement. There is a marked distinction between advisors who maintain an advanced designation and those who carry securities or insurance licenses. There will be a notable quality that should be apparent in their ethical, technical, and experiential expertise. What is involved in the CIMA® Education? There are only three universities that offer the core education platform for achieving a CIMA® designation. They all are required to maintain the highest ethical and educational standards to keep their standing with the Investment and Wealth Management Institute. The U.S. schools that currently offer the required education for this designation are as follows: The University of Chicago Booth School of Business The Wharton School, University of Pennsylvania Yale School of Management, Yale University The curriculum for the CIMA® designation covers five core areas of technical and experiential disciplines. The program’s core topics and content are designed to be congruent with client expectations of the roles of an investment manager or financial advisor. The current make-up for the CIMA® designation requires applicants to understand and pass the examination on the following five topic areas: 1. Fundamentals This area covers the statistics and methods of investment analysis, applied finance and economics, and the working of global capital markets. The fundamentals of a company’s balance sheet, economic conditions, and the marketplace give investors a baseline case for evaluating a company’s cost of capital, risk and interest rate exposure, and the general health of a company.  2. Investments Knowledge of the variable upside, risk, and performance expectations of the different vehicles is key to portfolio construction and investment advice. The proper use of Equity, Fixed Income, Alternative Investments, Options/Futures, and Real Assets can help an investor achieve a wide range of outcomes, mitigate risk, and better understand the route they want to follow.  3. Portfolio Theory and Behavioral Finance The behavior of different investments is the first level of mastery, the advanced understanding covered in a CIMA® designation also understands the interplay between these vehicles and how usage of several correlated and uncorrelated assets can constrain risk and drive excess returns. Portfolio theory and different behavioral models in finance theory can help CIMA® advisors better match a prospect or client with a risk profile that will accommodate their expectations. Different investment philosophies and styles coupled with the right tools and strategies help clients gain the comfort of aligning their expectations with reality and help them avoid the mistakes of fear and poor judgment. 4. Risk and Return Price discovery and the attributes of risk are an important part of the investment process. Different nuances in risk and performance measurement and attribution help CIMA® advisors uncover the right trends inside of a fund’s performance to both isolate and mitigate the unwanted risks and capture the desired exposures over long arcs of time.  5. Portfolio Construction and Consulting Process The difference in how a CIMA® practice runs will be felt in several different ways. The Investments & Wealth Institute Code of Professional Responsibility and Ethics governs a large portion of the interactions CIMA® advisors have with their clients. This allows clients and prospects to have elevated expectations for the fiduciary and ethical touchpoints in their relationship. Client discovery, the drafting of an investment policy, and portfolio construction become great examples of how the engagement with clients looks and feels different for the investor. How an advisor documents a manager search or selection of a portfolio will help clients find a better fit and avoid the feeling of a ‘lazy portfolio assignment.’ The goal of advanced designations is to bridge the satisfaction gap The divorce between client expectations and the relationship they have with an investment advisor is never more apparent than when asked “what do they own and why do they own it?”. Far too many investors own funds they don’t understand, and strategies they are prescribed that may fit in compliance terms, but clients cannot relate to. This creates a void where clients expect to have an understanding and comfortability with their investment decisions, but these expectations are not met by the advisor or insurance agent that they have done business with. This void creates a vacuum that is inevitably filled with fees, fear, greed, and poor decision-making. The structure prescribed in the CIMA® designation is focused on bridging that gap and further connecting the designee with the client and their goals.   

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tax planning
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Kevin Taylor

Year-End Tax Planning Under the Biden Administration

A lack of political clarity means not knowing whether Democrats can push their legislative agenda faster. If Democrats gain control of the US Senate, Republicans won’t have the control to force legislation gridlock. Therefore, without this crucial information year end planning just got much more difficult as the decision to who has control of the Senate is likely not coming until January 5th, 2021. Currently, Republicans are likely to keep control of the Senate; however, if Democrats seize the two seats in Georgia, then a 50/50 split would mean VP Kamala Harris gets the deciding vote which means Democrats control the Senate.  The question is to act now before years end and push a lot of income to 2020 or hold off and risk having to pay almost twice as much in taxes if the tax code legislation gets passed. Under the Biden administration, the current proposal has ordinary income tax rates for those making $400,000 a year or more increasing substantially and long term capital gains tax rate equal to ordinary income tax rates when in excess of 1 million. For those earners earning just over $400,000 the tax hit will be a tough pill to swallow. The tax on long term capital gains would be at ordinary income tax rates to the extent gains are in excess of >$1mm of income (including non-capital gain income).   One strategy is doing a Roth Conversion (or a Back Door Roth). In short, taking money out of your IRA and converting it to your Roth so you pay taxes now for the long term play of those assets growing tax free). Unfortunately, since the Republicans passed the Tax Cuts and Jobs Act this decision is now irrevocable. Previously, you used to be able to do a conversion, wait to see if tax law changed, and if it did where it wasn’t beneficial to have done the conversion then you could recharacterize it and pretend you never did it. Now that conversion becomes irrevocable making the decision a more calculated one.  In 2020, the highest capital gains tax rate is 20%. In 2021, the Biden administration has proposed an increase to 39.6%. This increase has a huge impact on whether or not you take gains now and harvest some of your profits as you could potentially decrease your rate by almost half depending on your tax rate. Now these changes will probably not go into effect until 2022, understanding future tax implications will be key as you head into possibly the last year in the next 4 of low tax rates.  Furthermore, as if the situation isn’t already complicated, the Biden administration proposed eliminating the step-up in basis of capital assets at death. For those looking to pass highly appreciated assets to loved ones so they can capitalize on the step up in cost basis which used to be a great strategy, would now force their beneficiaries to pay all taxes on appreciated assets at death which could push them into the highest bracket. A potential increase in taxes in 2021 means accelerating income and deferring deductions when they’re more valuable in 2021. However, if you’re already itemizing deductions then you may benefit from claiming your deductions this year as the new Biden administration proposal would cap itemized deductions benefit at 28%. It may be beneficial to defer for all income earners any deduction that won’t be counted in 2020 into 2021 if there is a chance the rules change. So for example, if you had a $100 of income at the 37% rate then you’d only get a 28% deduction moving forward.  The Qualified Business Income (QBI) under the Biden Proposal could potentially vanish as well. So for small to midsize businesses that aren’t specified service trade companies this will have a substantial impact on their tax liability. The current QBI is a 20% deduction on income <$400,000 and without that decrease income business owners could face a large jump in their tax rate. This now increases the potential benefit to accelerate business income into 2020.  Another change could come from SALT legislation. What will happen to the $10,000 SALT next year? This year, 2020, most likely nothing is going to change. But next year, if you’ve already reached your 10k limit on SALT then paying them today has zero benefit; however, pushing your estimated tax payments or deferring your property tax till Jan 1, 2021 at least gives you a chance to benefit.  Looking ahead, there could potentially be a large shift in how we use retirement vehicles. The current plans clearly benefit high income earners by making large contributions to IRAs/401ks and reducing their income tax liability dollar for dollar while lower income earners benefit from contributing to Roth IRAs at currently low tax rates and letting that money grow tax-free. However, with the proposal now, the lower your income the more it makes sense to use a Traditional IRA, and the higher the income, the Roth is more likely to give you a better tax break.  The higher your marginal rate is over ~26% the more it makes sense to use a Roth as the new legislation is a flat tax credit for everyone. So if you’re in the 37% tax bracket, there is a negative delta of 11%, so using a Roth is more beneficial. If let’s say you’re in the 10% tax bracket, you’re getting a credit of 26% giving you a positive delta of 16% which then could be used to do a conversion (Roth Conversion) of $16,000 as the credit would pay for your tax bill.  Other changes include: Expanded Child Tax Credit $3,600 for children <6 $3,000 for children 6-16 Expanded Child and Dependent Care credit $8,000 for a single child $16,000 for two or more children First Time Homebuyer Credit $15,000 Advanceable and refundable New Caregiver Credit $5,000 No 1031 exchanges for taxpayers with income > $400,000 (inclusive or exclusive of capital gain income is unknown). For those fortunate enough to have

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