How to Give Your Practice a Raise in a Tight Economy

Copyright (c) 2009 Aisha Jones Scheffel

You may be asking...why you should reinvest your profits back into your practice? For simplicity sake, suppose you make profit of $1,000 in February. Here are some scenerios: you could take the full $1,000 from the business and go buy a small LCD TV screen for your bathroom. Yes, you would enjoy not missing a second of American Idol or the NBA playoffs due to unfortunate bathroom breaks, but what would happen if you reinvested 50% or $500 of the profits?

Here's an example:
You take the $500 and reinvest in marketing, which yields an additional customer resulting in an additional $1,000 in profits per month. In this simple example, in three months you would be making 4 times as much money!

How do you determine what you are reinvesting?

On your financial statements, let's look at your statement of cash flows. It's in the financing activities section. You will most likely see something labeled an "Owner's Draw" or a "Dividends" line item. That is the amount you have paid yourself.

To determine your reinvest rate, calculate the following: Net income - Dividends (or owner's draw) divided by net income Example: Net income = $1,000 Owner's Draw = $500 Reinvestment rate = ($1,000 - $500) divided by $1,000 = $500 divided by $1,000 = 50%

What are World Class Companies Reinvesting?

We all want to operate a world-class company. Given this, let's see how you compare to the top name brands in the world:

Google = doesn't pay out any dividends, all money is reinvested
Starbucks = doesn't pay out any dividends, all money is reinvested
Nordstrom = 81% of profits are reinvested
Whole Foods = 39% of profits are reinvested
Apple = doesn't pay out any dividends, all money is reinvested
Disney = 85% of profits reinvested
American Express = 81% of profits reinvested

Here are some ideas to make reinvestment into your practice automatic:

Pay yourself and employees salaries or wages, everything else goes into the business.

Set a distribution policy. For example, let's say 25% of profits are paid out to the owner. Have your bookkeeper or accountant make sure that they only pay only the 25%.

You want to put the reinvestment money towards the activities that are going to give you the biggest bang for your buck. Here are some examples: marketing, advertising, a new salesperson, an assistant, facility improvements, training in new skills, or a computer system and software to improve productivity. To get your practice to grow, maybe it's time you increase what you are paying your practice. Don't you think it deserves a raise?