One of the basic financial planning tools is the emergency fund. Having some savings in the bank can make or break your practice in case of an emergency. For an individual, emergencies take the form of urgent car repairs, hospital bills or losing a job. Business owners have similar risks and a few different ones as well.
What Does Unexpected Mean?
The definition of emergency will change for different practice owners. A stable and prosperous clinic may get along just fine if two staff members unexpectedly quit. The same event may constitute an emergency for a single practitioner. Some events like a fire or earthquake are catastrophic for any dental clinic. An emergency fund can help tide you over until things go back to normal.
What Should Be the Size of Your Fund?
Financial experts recommend anything from 3 to 6 months of the salary as a rule of thumb for individuals. But these rules are not sufficient for dental practices. The amount that works for your practice may be insufficient for someone else. Practice owners should think about their specific risks to estimate the amount they need.
The answers to some of the questions below can help you come up with a number:
- What are your insurance limits? How much time do you have until insurance payments come through?
- Do you have any risks that are not covered by insurance?
- How long can you practice survive if you cannot work? Do you have partners who can take on your patients for a few days?
- What would it cost to arrange temporary cover for staff members who quit or have emergencies of their own?
- Would you be able to replace an expensive piece of equipment if it fails unexpectedly?
There is no upper limit on how much you can save in an emergency fund. Some practice owners feel better if they have saved more than they should. Others may prefer to have the minimum amount and invest the remaining elsewhere. You can also consult your accountant or financial advisor to estimate the size of the fund.
How Should You Start?
Most dentists don’t have an emergency fund at all and it can be daunting to start at zero. For some practice owners, coming up with the number can actually be disheartening. Suppose your advisor tells you to have six months of revenue in the bank. That number may be $50,000 or $100,000! Where should you even begin?
If you’re feeling overwhelmed, the best thing you can do is to make a start – however small it might be. Can you afford to put 10% of your monthly profits in the bank? What about 5%? The actual number is not as important as starting the process.
Once you get into the practice of setting aside a certain sum each month, you can gradually increase the percentage. Some practice owners set up automatic transfers to a savings account so they don’t have to think about it. You can continue the transfers even after you reach the goal.
Your emergency fund should be easily accessible when something unexpected comes up. Some people like to stash their funds in multiple places as a backup. For example, you may keep 20% of the fund in your office for immediate access. You can keep some at home and put the rest in the bank.
Whether your practice makes $100,000 or $1 million doesn’t make any difference if you don’t have cash in an emergency. Always remember that any number is better than zero!