By: Edward Leach, CFP®, MBA
In today's video, Certified Financial Planner™ Ed Leach delves into a crucial yet often overlooked aspect of financial planning for dental practice owners: cash reserves. Understanding and managing your cash reserves can significantly impact the stability and growth of your practice and your financial security. This video will answer critical questions about how much you should have in your practice and personal savings accounts, what types of accounts you should use, and how to choose the right banking relationship. Let's begin securing a solid financial foundation for your practice and personal life.
Welcome Back
Hey everyone, it's Ed Leach. Welcome to our video series on helping dental practice owners with their financial planning. What I want to talk to you about today, building off one of our prior videos on savings buckets, is cash reserves. This is one of the most often overlooked parts of anyone's financial plan because we frequently take it for granted as basic bank accounts.
Key Questions About Cash Reserves
There are three key questions I'm going to help you answer today:
How much should I have in my practice reserve accounts or savings accounts?
How much should I have in my personal savings accounts?
What type of accounts should I be using?
How Much Should You Have in Your Savings Account?
The first thing I want to talk about is how much you should have in your savings account.
Practice Reserve Accounts
For your practice, at least three months of operating expenses should be held in a reserve account. This is usually the minimum we recommend. Depending on your practice and its stage, it could be more. To calculate this, look over the last 12 months of your profit and loss statement, total your operating expenses (excluding any one-time or unusual purchases), and divide by 12 to get your average monthly cost. Multiply that by three to determine the minimum amount you should have in your reserve account.
Personal Savings Accounts
Similarly, you should set aside at least three months of household expenses in a reserve account for personal accounts. We often recommend having close to six months as a benchmark. Tailor this to your preference, but as a rule of thumb, three months for the practice and three to six months for personal accounts is usually recommended.
What Types of Accounts Should You Have?
The second thing I want to discuss is what types of accounts you should have. We're big fans of keeping it simple with two types of accounts: operating and reserves.
Operating Account
For your practice, this is traditionally a non-interest-bearing checking account, where money comes in from collections and goes out for bills, payroll, etc. Keep a reasonable floor of expenses to avoid overdraft issues.
Reserve Account
This should be a savings or high-yield interest-bearing account for emergency funds. Maximize your interest on these cash reserves by comparing current interest rates online.
For personal accounts, follow the same principles:
Operating Account: Your checking account for daily expenses and income.
Reserve Account: A high-yield savings account for your personal reserves. Many clients carry too much cash in non-interest-bearing checking accounts, missing out on interest opportunities and increasing fraud risk. Treat these accounts purely operationally.
Picking a Banking Relationship
The last part I want to discuss is picking a banking relationship. If you're a mature practice owner, this relationship is likely established, but for those starting out or reexamining their options, here are some tips:
Tips for Choosing a Bank
Familiarity with Dental Practices: Ensure the bank has experience with dental practices, especially their loan underwriting department, for future lending needs.
Convenience: Choose a local bank where you can easily speak to a banker if issues arise.
Fees: Confirm any fees associated with checking and savings accounts.
Interest Rates: Ensure competitive rates for interest-bearing accounts.
FDIC Insurance: Be aware of FDIC insurance limits. For business accounts, it's $250,000 across all accounts at a bank. Joint accounts offer up to $500,000 for personal accounts, and individual accounts provide $250,000 each.
Conclusion
In summary, we've discussed how much to keep in reserves for both practice and personal accounts, what types of accounts to use, and tips for selecting a banking relationship. For more information, visit our website at HighlandPlanning.com to set up a free initial consultation. If you're enjoying our videos, follow us for more content. Thanks for watching, and see you next time!
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.