How Much Cash Should be in Your Practice?

As a practice owner, you get paid last. If you have any cash left over after meeting the payroll and paying your bills, only then can you consider taking a paycheck yourself. But how much should you pay yourself and how much cash should be in your practice?

I typically suggest that a practice keep one month of cash in the bank as a minimum. What this means is that you should have enough cash at the low point of each month to fund two staff payrolls and to pay the bills for the next month.

However, you need to adjust this standard based on your own comfort level. If you need a little extra in the bank in order to feel comfortable, then that is fine. Just be careful about keeping too little cash- you don’t want to be caught short if productivity unexpectedly falls off or if you experience collections delays. These and other unforeseen events can keep you awake at night if you don’t have enough of cash to weather the storm.

Additionally, consider future capital expenditures required to keep the practice running at peak efficiency and profitability. While you may choose to finance these purchases with your bank, it never hurts to have the option of self-financing, especially in an environment where interest rates are due to increase.

Finally, I often get the question of when is it okay to pay yourself a dividend instead of a payroll check. The IRS requires that your pay yourself a “reasonable” salary, which means that you need to pay yourself an amount equal to what you would receive for your services if you were not the boss. What is reasonable is certainly a judgment call, but a salary roughly
equivalent to 35% of your annual production should meet the standard.

After paying yourself a reasonable salary, you can consider dividends payments for additional payments while keeping a generous amount of cash in the practice for unexpected or emergency costs. Finding a balance between how much to pay yourself and how much cash to keep in your practice isn’t difficult, but it always makes sense to clear this with your tax advisor before proceeding.

If you have questions or concerns about your practice cash flow or how best to pay yourself from the practice, contact me today for a consultation.