Business planning 101

You spent many years learning about the human body, what makes it tick and how to help people feel better.

You spent many years learning about the human body, what makes it tick and how to help people feel better. You graduated. Then, suddenly, you are no longer just a doctor of chiropractic, you are also an entrepreneur – an accidental business owner. 

Whether you are a one-person operation, owner of a clinic or owner of a number of clinics, you have to learn how to be a businessperson. Not everyone is able to make that transition in a smooth manner.

One of the biggest mistakes common to the vast majority of businesses is not establishing a business plan from the start. However, it is never too late to set one in motion if you have not already done so. The business plan should address more than just location; it should speak to the strategy that will be employed to get the practice to a profitable position and beyond. Having enough capital does not mean you should discard the business plan. Rather, it should become your holy grail to success. 

Most businesses have to seek an injection of capital from a bank or equivalent creditor at some point. A business plan will be needed to secure this capital. If you are unsure of how to set up a business plan, key the words ‘business plan template’ into Google and you will have a choice of more than 44 million.

One of the simpler business plan templates discusses the premise to the business, outlining its mission statement and value proposition. Then it moves to the reason that the location chosen is suited to the business and how you are going to market your business, how you intend to expand and how you will become financially viable. At the end of the day, each business that succeeds will have to address the five key components to a corporate financial plan: cash flow management; risk management (insurance); tax planning; employee compensation and retention strategies; and succession planning.

Cash flow
Cash flow management is the first component because it is also the one that impacts all of the others – as the cliché goes, “money makes the world go around.” Despite this fact, very little energy is spent on devising a cash flow management plan. A good cash plan does not involve simply keeping the books to provide to the accountant or Revenue Canada. 

A good plan involves dissecting the incoming and outgoing funds – knowing your numbers. For incoming cash, it is very important to know how that dollar walked in the door. Did it come from a referral, a concerted marketing effort or did the person simply walk by and stop in? This information would give you an indication of where to target some of your marketing dollars. 

If a marketing campaign generated 30 per cent of your revenue that year and only cost two per cent of your expenses, that would be great. If, however, a marketing campaign that was responsible for 30 per cent of your expenses generated a two per cent rate of return, it would likely be one not to repeat.

By knowing your numbers, you are able to best target that which is profitable and eliminate that which is not. Moreover, if there is a sudden decrease or increase in business, knowing your numbers will allow you to zero in on the cause, and either change it or repeat it.

With that in mind, it behooves a chiropractor to ensure that the maximum amount of money is being generated for the lowest amount of expenditures. In her book Spent, Stephanie Holmes-Winton introduces a cash flow management structure that she applies to personal money management but can also be used corporately. The two types of cash flow that she uses are “working cash flow” (WCF) and “active cash flow” (ACF). 

The WCF are items you are likely to spend constantly month-to-month, such as rent or a mortgage payment, insurances, car payments. ACF deals with the more variable and emotional expenses such as food, clothing and gifts.

The relevance to the corporate world is that there are also two types of cash flow that are expended. If we continue with the nomenclature that Holmes-Winton used, then it would be reasonable to say that the WCF would include such items as clinic rent/mortgage, staff salaries and regular supplies. ACF in the corporate world would be such things as advertising, marketing, research and development.

Holmes-Winton has recommended using only 15 per cent of one’s net income for the ACF expenses every month, and that would be a reasonable limit to set for the corporate world as well. So, the first thing to do is to determine what your income, net of tax (not expenses), would be and then use that as the level to measure against for the 15 per cent limit. As an example, if the net after tax and before expenses is $100,000 it means you should limit your ACF to $15,000. The typical WCF is between 50 and 70 per cent of the net income, which means at the end of the day, each business should be able to have a buffer of between 15 and 35 per cent, after all expenses of both types of cash flow. It is this buffer that can accommodate for any slow periods, be they expected or unexpected.

Risk management
The next item that impacts a business’s cash flow is addressing the “what ifs.” This is the whole area of risk management as it pertains to the owners and key individuals in any firm. In the event of a disability, critical illness or death of a key person, the negative impact on a business can often lead to the dissolution of the business. The most cost effective method of providing the cash when it is required is through insurance, presuming that the individual or individuals are insurable. Further, in a partnership and in corporations there is a legal liability to provide for money when an event occurs. In reality, so many businesses today have not addressed and/or reviewed their liability – in other words, a huge unfunded liability is potentially in the offing.

Tax planning
Aside from a business plan, knowing your numbers, implementing a cash flow management structure and funding your legal liability, the other significant impact on your cash flow is your tax structure. Your business setup is important because it has a direct impact on the net after tax before expenses cash flow you will have to spend. There are three types of tax structures for a business: sole proprietor, partnership and incorporation.

For a sole proprietor, the money and expenses generated from the business are deemed to be personal income and fully in the hands of the individual owner. The partnership is the same in that the income flows through to the individuals in proportion to their share of the ownership. Finally, in an incorporated entity, there is a distinction between the company and the owner or owners, as each are deemed individual tax entities. The incorporated business has more options from a tax planning standpoint; however, the cost to establish and maintain a corporation is more than the cost of staying unincorporated – thought has to be given to that fact.

Another common mistake that negatively impacts a business’s cash flow is incorporating too early.  Most accountants will suggest that unless you are able to leave a significant amount of money annually in the corporation (typically in excess of $50,000), then incorporation has little to no benefit from a tax standpoint. With the recent changes to the tax laws, coupled with the requirement for chiropractors to incorporate as a professional services corporation, there are few, if any, other benefits to incorporating.

Compensation and retention
The area of compensation and retention strategies is the fourth area that any business and financial plan must address. There is a fine line between paying too much and paying too little. There is also a fixation on the monetary as opposed to the non-monetary compensation in this area. Likely the largest mistake that employers make in this area, especially small companies, is paying with after-tax dollars for items that should be paid with before-tax dollars, like medical and dental benefits. There are numerous strategies to address these costs, but often the employer simply reimburses the expense to the employee, and that, technically, requires it to be deemed salary. Employing such things as a group benefit plan or a private health services plan can change it from salary to a non-taxable and fully deductible expense.

Succession planning
The last area that has a significant impact on the cash flow of a business is succession planning. Too often, a business owner thinks that the business can simply be sold when they decide to retire or move to another career. This mistake can end up having drastic negative impacts on the current owner as well as the patients and the employees. Implementing a strategy long before the endgame occurs maximizes the value of the business. There are a number of options available to the business owner and all of them tend to deal with money and emotion, which is a potential nightmare. For this reason, I have often recommended that business owners involve more than just a lawyer to put their plan of action into place.

Given that each situation is unique, the only mistake to avoid is not addressing this area as soon as you start your business – have your escape route mapped out as soon as you enter and you will never get trapped.

The last mistake that is very common in businesses, when it comes to the success of the entity and the flow of money, is failure to revisit everything on a regular basis. Making a review of your business and corporate financial plan a part of your year-end will help you to stay on top.

Brian Shumak is president of Brian Shumak Financial Services, which specializes in financial planning for health-care practitioners and companies throughout Canada. He waives his initial consulting fee for all those who are current with their respective Colleges. Brian can be reached by email at
brian@brianshumak.com or by phone at 416-577-7505.