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Dentists have few ways to control or manage inflation.
A major tool that dentists have to fight inflation is their ability to increase productivity and/or use money to buy tools that increase productivity/efficiencies. Dentists who upgrade and enhance their clinical skills may be able to bill more per hour. Dentists who buy tools such as apps, artificial intelligence or services that facilitate faster check-in time of patients, recalling patients or going paperless, thereby increasing efficiencies within their office, will be better able to cope with inflation and a tight labour market. More can be accomplished with less people, in essence substituting money/capital for labour.
The positive aspect of inflation is that it benefits those with capital, or access to money, to deploy/invest. Where dentists have accumulated savings, investments they wish to buy may now become cheaper. Why? To fight inflation, central banks must increase interest rates. When interest rates rise, investments become cheaper. Why? As the interest rate used to discount future cash flows from these investment rises, the present value of these cash flows (today’s price for the investments) falls. In other words, if interest rate is 10%, I am indifferent to having .91 cents today or $1 one year from now. If interest rate is 5%, I am indifferent to having .95 cents today or $1 one year from now. The logical question flowing from this thought process is: Will rising interest rates negatively affect dental practice valuations?
In the absence of rising demand for dental practice purchases, rising interest rates could negatively affect dental practice valuations. However, if the demand for dental practices, exacerbated by internationally trained dentists and dental investors, is vibrant and/or keeps rising, rising interest rates may not result in a drop in practice values. Bottom line: when deciding whether to buy a practice, ask yourself if purchasing the practice will put you in a better cash flow position than what you are currently doing. If it does, then consider buying. When selling, do not try to time the market. Sell when you are able to retire and when you wish to pursue other interests.
Truth, perspective, and context may help one appreciate today’s current environment. In August 1981, Canada’s inflation was 12.47%* versus in June 2022, 8.1%. In August 1981, Canada’s prime rate was 22.75%** versus July 2022, 4.7%. What can we learn from the past?
1. During COVID, an emergency fund served as a life raft; have available, ideally 6 months money to keep you afloat, but at least 3 months.
2. Spend less than you make – this always applies.
3. When you think things are at their worst, sometimes they can get worse; however, it never lasts forever, be it the good or bad times.
4. Invest/Bet on yourself especially when it comes to continuing education (CE); litmus test to consider is invest in a CE course/program if you can recover the cost of the program in 1 year or less. (i.e., CE courses are like tools of the trade; where you acquire new tools, put them to use to produce more cash flow/billings and/or reduce your costs.)
5. Love yourself – preserving you and your team’s health is an ongoing goal/value/lifestyle.
6. Invest in equipment, apps, artificial intelligence, or services if you can recover the cost in 1 year or less.
7. Use the tax rules to reduce the cost of your equipment, etc. (See next month’s article.)
8. Preserve cash, avoid bargains, and make practical decisions. Example: A dentist bought 3 years’ dental supplies because of the 10% discount; avoid this trap during uncertain times. Example 2: A dentist bought equipment costing $175k. It will take 8 years to recover this investment based on the additional billings arising from this equipment purchase; because much of the equipment is digital, it is likely that more technologically advanced equipment will be available for less (i.e., the rate of technological obsolesce is high).
9. When presented with challenges, tradeoffs are usually involved. In this case, how does one generate more cash, billings and/or reduce costs, consumption? What was once sacred, may be, after analyzing one’s needs, no longer essential. Which sacrifice is easiest to tolerate? Which sacrifice generates the biggest bang for the buck? Will spending money to buy Cone Beam Computerized Tomography (CBCT) generate a bigger bang for the buck than buying a scanning and milling unit?
10. In a tight labour market, consider teaching and connecting with the audience you wish to hire (teach at a college that trains assistants, hygienists, etc.). Advertising in non-English newspapers may help to reach an audience who may become a valuable team member.
With interest rates rising, real estate prices may normalize and dental buildings may be available to buy. Consider protecting your dental practice’s value, like how a crown protects a root canal, by buying and owning where you work/dental building. Locating a service provider who will not compete against you – including a medical doctor, physiotherapist, chiropractor, optometrist – to occupy the space you have now vacated, should be done.
Inflation has many negative connotations. Inflation also has a silver lining for those who have accumulated savings/investments, access to money, as well as those who wish to increase their productivity/efficiencies.
* Data Source: World Bank
** Data Source: Government of Canada Statistics
About the Author
David Chong Yen CPA, CA, CFP. This summary was prepared by DCY Professional Corporation Chartered Professional Accountants who have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca, basil@dcy.ca, eugene@dcy.ca, louise@dcy.ca. Visit our website at: www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
