We're revisiting this important episode about what we call BAM, an essential financial metric for dental practices. BAM stands for the Basic Amount of Money Needed to Operate the Practice, a monthly cash flow target that covers not only overhead and loan payments but also the doctor’s take-home, retirement contributions, and other foreseeable necessary expenses. The conversation explains why BAM is not the same as breakeven or net income and highlights common mistakes dentists make when evaluating practice finances.

We talk about the practical steps for calculating BAM, noting the importance of using both historical and projected figures. Listeners learn to account for staffing changes, equipment purchases, rent adjustments, loan payments, and anticipated growth. The episode also addresses how BAM serves as a basis for staff bonus systems and why it should be reviewed annually to remain accurate and fair. Other considerations include handling unique expenses like retirement plan changes, owning versus leasing property, and whether to include discretionary spending.

Key Topics Discussed:

• What BAM (Basic Amount of Money Needed) means for dental practices
• The difference between BAM, breakeven, and net income
• Why BAM is a monthly cash goal based on collections, not production
• How BAM factors into staff bonus systems
• Annual recalculation of BAM and handling large changes (“baby BAM”)
• Adjusting BAM for new hires, anticipated expenses, and growth projections
• The treatment of rent, including owner-occupied property
• Accounting for loan payments, including deferred or interest-only periods
• Whether to include retirement contributions and discretionary spending
• The effect of BAM calculation on practice planning and financial management

Welcome to Beyond Bite Wings, the business side of dentistry, brought to you by Edwards and Associates PC. Join us as we discuss how to build your dental practice, optimize your income, and plan for your future. This podcast is distributed with the understanding that Edwards and Associates PC is not rendering legal, accounting, or professional advice. Listeners should consult with their business advisors before acting on any of the information that is shared. At Edwards and Associates PC, our business Hello and welcome to another episode of Beyond Bitewings. In today's episode, we will be talking about BAM. Now, before you guys wonder what that is and if it's, you know, the name of the son of Barney Rubble from Flintstones.

That was Bam Bam.

Oh, that's true. Double of what we will be talking about. I wanted to let you guys know how important it is, and it's one of those things that a lot of people forget to look into before making certain considerations. So before we get started, Robert, how are you doing today?

I'm great, thank you.

And what do you think about today's episode?

You know, BAM is a metric. That every doctor needs, every dentist needs to know in his practice or about his practice. I don't know that it's a metric that they all focus on because they're more focused on production per hour or production per chair, or how's my hygiene department doing, or are we filing all the claims on time, how far out is my hygiene department booked, but BAM is something they need to know and understand so they can have a financial goal in the practice.

Okay, sounds good. And what is BAM?

Well, and that's the question, right? What is BAM? BAM is an acronym in its simplest sense, and it stands for Basic Amount of Money Needed to Operate the Practice. Now, that doesn't mean the same as breakeven, because BAM includes what the doctor needs or wants to take home. So BAM is a goal. BAM isn't what it takes to cover your overhead. It's what it takes to cover your overhead, make your debt payment, take home enough to pay your taxes, and live the lifestyle you want to and include enough profit that the practice is producing at the level where it should be. So all those things are included in BAM.

I see. So the BAM number, that metric, is for the practice?

It's for the practice.

I see. Okay. And there was also this other AKA that I've heard of BAM.

Well, the slang version of BAM is the bare-ass minimum.

Uh-huh.

BAM, bare-ass minimum amount of money that you need to collect in the practice to pay the bills, to pay the loan that you incurred to buy the practice, or loans that you're making payments on to expand or buy equipment, plus the doctor's take-home, again, to cover his taxes, fund retirement. So anything that the practice is paying for, It's a cash flow thing. BAM is a cash number. This is how much we have to collect in cash, not produce. Of course, you have to produce it before you can collect it, but this is a collection thing. This is how much money do we need to collect to live the lifestyle we want to, pay all the bills, reward the staff, and go on. And another thing, why is BAM so important? Well, it's important for all the reasons I've stated, but also It's important to the staff because it's usually the basis for a bonus system.

Ah, I see.

So if I tell you your BAM in your practice is $100,000, and then you go 3 or 4 months collecting $110,000, $120,000, $115,000, then what happens to that excess over BAM? And generally, that's what we use to calculate a bonus for the team.

I see. And this is a monthly number?

BAM is a monthly number. Yes, we calculate it once a year. We try not to change it more frequently than once a year. We don't want to be raising it all the time because every time you raise it, the team is going to think, well, they're just trying to avoid paying me a bonus by raising BAM every month. And so it's harder and harder for us to produce or collect more than that. So we only calculate it once a year.

Mm-hmm.

If it's been recalculated recently, then we may have to raise it Partway. And there's what we call a baby BAM.

Okay.

You know, if your BAM is too low or you don't know what BAM is and you've been collecting, let's say you've been paying a bonus based on $150,000 a month in collections and maybe your BAM should be $200,000. Well, that's a huge increase. So we wouldn't go there all in one month. We would probably implement a baby BAM for about 3 months and then go to real BAM probably in January.

I see, I see.

At the beginning of the new year.

I see. Okay. And you hit the nail with the word cash flow. So you're essentially saying that the bottom line number on the financial statements that these listeners have or our clients do, that is not it.

That is not it because that includes things, and this is difficult for non-accountants to understand, but a lot of times they look at that net income number and they're thinking, well, if that's the net income, where's the cash? Well, you know, that number is artificially reduced by things like depreciation on your equipment, amortization. If you bought a practice, there's going to be amortization of the goodwill in there. Okay, those are non-cash expenses, so you would actually add those back to net income. But then if you have a loan payment, well, that doesn't show up as an expense. Only the interest portion of that shows up as an expense in your financial statements if they're prepared traditionally as accountants do. But to take into account for BAM, basic amount of money I need to pay the bills in the practice, then you've got to include the whole loan payment. And so you've got to look at those things. You got to make those adjustments to get to what BAM is.

So BAM is not the same as net income.

I see. And that's just one factor that you're talking about. There's like numerous factors.

There's a lot of factors. Yeah.

Now, before we talk about those factors and on actually how to calculate that amount, remind me this. So the BAM number that will be calculated will be calculated using historical numbers. However, they will be for the current year.

That's true. If you're looking at financial statements to determine what BAM is, then you're going to determine what BAM was for the period covered by those financial statements, which is history. That's not what we want to know. What we want to know is how much do we have to collect next month, the month after that, and so on to cover our expenses. So if I've hired a new hygienist, let's say last month, And then when you're looking at my financial statements, you're not going to see any more than possibly one month's salary for that new employee. But knowing about the practice is important when you're calculating BAM because we have to include salaries for the people that are there today and salaries for the people that we expect to add in the near future because that's cash we need to collect to pay the bills.

Right.

So if you hire— let's say you bring in an associate. Okay, well, that's a great example because you don't just increase BAM by the amount you're going to be paying the associate. You've got to increase BAM by any chairside assistants you're going to hire to support the associate. And if you're hiring a new front desk person to support the new patient flow, you got to include that person's salary as well.

Right.

And then, you know, right now with the market being the way it is, if you are expecting to give people raises, If you're expecting to give people raises, depending on when you're going to give those, then you've got to include those in BAM as well. Because you want BAM to be enough money— again, I'm harping on this, but you need BAM to be enough money, collections, to cover expenses, to cover all the expenses paid by the practice. That includes the doctor's take-home and the taxes.

I see. So the current and the foreseeable expenses.

Yes.

Through the end of the year.

Yes.

So it's not just using historical numbers is what you're saying, that we need to project a few things and then be able to include that into this amount.

Absolutely. Yes. If you know that you're going to hire another hygienist next year, well, we'll include that in BAM next year. So we, you know, even though it hasn't happened yet, if you know you're going to equip another operatory, okay, we need to include an allowance for that for the payment on that equipment, even if you're not going to borrow the money for the equipment, we still have to include some allowance for you to recoup the money you're going to spend on that equipment. So that increases BAM.

Right, right, right, right, right. I see, I see. Speaking of projection, what if we're projecting some growth?

If we're projecting growth, then, I mean, that's normal. I don't think we have any practices that are projecting a shrinkage in patients. So I would include that growth In BAM. You know, all things being equal, if I was going to calculate BAM for a client and if we wanted to make an allowance for the growth, I would probably increase it by at least 4%. Now, that's before inflation took off this year, but historically we would say, you know, you're probably going to see at least a 4% increase in revenue next year, so we would increase BAM by 4%.

I see, I see. And what about rent? Especially if the lease is about to expire and the rate's gonna— if they're going to change it, most likely they will.

Well, and there's several things I can say about rent. Let's start, you know, on the front end. If you're just leasing a new space, maybe you just moved your practice and you've got a new lease. Even when you renegotiate some leases, sometimes you'll have a few free months up front. Okay, well, so do I include zero rent in BAM? That's not realistic. So what I'm gonna do is I'm gonna say after 2 or 3 months, what's my rent payment gonna be? That's the number I would put in BAM. And if your lease is expiring, or if your lease is going from, you know, year 5 to year 6, and you've got a 5% increase, use the new number to calculate your BAM. Otherwise, you're going to be short.

You're going to be— you know, if you use a number for BAM that's too low, and you're calculating bonuses on the collections in excess of BAM, then you're going to be paying bonuses when you can't even cover overhead.

Right. I see.

So you want BAM to be a realistic number, and you want it to be realistic. You know, I always tell our accountants, I say, when you're calculating BAM, once you're done, take a look at it, see if it's realistic. I mean, if it's just way out in left field somewhere, then go back to the drawing board and start over, because it's got to be realistic. If you throw out a number to the staff or to the doctor, and he tells the staff, okay, the accountant said BAM is $200,000 and we've been collecting $120,000, well, that's not realistic. They're going to throw up their hands and say, well, why should we even try? There's no way we're going to get there. So it's got to be a realistic number.

Makes sense. Makes sense. And then the other thing that you talked about was the loan payment component, right? I mean, you're right. When we were looking at the bottom line on the statement of revenue and expenses, that only accounts for the interest portion.

Sometimes. Because if we have clients that are Subchapter S corporations, even the interest isn't in there. But you have to include the loan payment in BAM. So if the interest is in the financial statement, then we actually subtract that out. And then add back the full loan payment.

I see.

Because cash flow, remember cash flow. How much is the loan payment? Well, maybe the loan payment's $6,800. The interest might be $1,300. Okay? Rather than add the difference, because that changes every month, rather than add the difference, we'll add back whatever the interest has been and then we'll subtract— or I'm doing it backwards. We'll adjust BAM To show the full loan payment.

Right. Right.

Right. Right.

Right. Now, here's a trick question for you.

Okay. This is good. I love this.

You know, there are certain lenders out there that will—

Oh, sorry. Out of time.

Oh, come on now. I think we could spare a few extra minutes. Now, there are some lenders out there that will sometimes do a special promotion that the first 14 months of the loan, there will be no loan payments.

Right.

Or just interest only.

Right.

And let's say you're in the first month, right? And you're trying to calculate the BAM, just looking at the first month's information. Now, you're projecting for the 12 months ahead of you. Would you include the loan payment, assuming that it's no loan payment for the first 14 months? Would you include that loan payment in your BAM calculation?

Not in that first year. Not if there's zero loan payment for 14 months. So anything over 12.

I see.

Because we're going to recalculate BAM on an annual basis. Okay, so BAM for this next 12 months is X. Doesn't include anything for the loan because there's no payment for 12 months or 14 months in your case.

I see.

Now, next year, even though there's no loan payment, hasn't been one for the last 12 months and there's not one for the next 2 months, that's 14 months, then I would add in whatever the payment's going to be after that to BAM because that's what it needs to be to cover all the overhead of the practice.

That makes perfect sense. Now, follow-up question to that. So would you say that in a situation like this, the client should maybe wait till year 2 to implement a bonus system?

Well, yes, at least year 2 in most cases. It depends on the growth of the practice. I mean, we've had clients that started a practice and collected $1 million the first year. God bless them. Wow. I say we've had clients that have done that. Yeah. Okay.

I can probably count those maybe not on one hand, maybe on 2 hands. So I would say that's unusual, but it does happen. Well, they can implement a bonus system right away once they get to that level. But for a GP, if they're collecting $300,000, $400,000, or $500,000 the first year, and the second year maybe $600,000, $650,000, and then maybe in the third year I would implement a bonus system.

I see, I see. That makes sense. And the other thing we haven't touched upon is Retirement plan. Let's say this client had just a SEP plan and we've been asked to calculate the BAM amount for them and they're about to enter 401.

Okay. That's a good point. If they're already funding a SEP, the amount they're funding to the SEP divided by 12 should be included in BAM. If they're switching from a SEP to a 401, I don't know that it would be an increase But I would still make that calculation. How much are we advising them to fund to retirement? Divide that by 12 and include that number in BAM, whether it's a SEP or a SIMPLE or a 401 or a profit-sharing plan or a cash balance plan, whatever type of plan it is, whatever the planned level of funding is for that year, divide by 12 and include that number in BAM.

Got it. And for our listeners or our clients that are out there, to be safe, would you say that they should take a more conservative approach to including the retirement amount into BAM? In other words, what I'm saying is maybe include the profit-sharing amount in there, cash balance amount in there, even if they're still not sure.

Well, it's kind of like financial planning. Okay, you've got to have goals. And if your goal is to fund X number of dollars to retirement, then that's what I would include in BAM. Now, if they're funding zero, And the goal is to fund $60,000 a year. Okay. Is that realistic going from $0 to $60,000 overnight? Boom. One second? No, that's not realistic. But I would say if they've shown in the past that they're funding a retirement plan and maybe each year they're increasing a little bit, they've gone from maybe $20,000 one year to $40,000 the next year, then is it realistic to go to $60,000 the following? Sure.

Yeah.

So you've got to look at the individual client situation to know how much to include in So that actually covers a lot of the forecasted numbers that we need to include in our BAM amount. What about some of the personal expenses that sometimes gets added?

Well, let's regress a minute. When we were talking about rent, I think we talked about free rent at the beginning of the lease. Well, what about a client that owns his own building? Okay, so we have kind of two extremes here. I've seen clients that own their own buildings and they don't pay themselves any rent. Maybe they have no debt on the building, so there's really not a mortgage payment, and they're thinking, okay, well, I don't need to pay rent. I own the building. Okay, that's not realistic. So I would include a normal rent amount in BAM.

I see.

Because that's rewarding the owner for the ownership of the building, and that's realistic. If you weren't the tenant, if your practice wasn't the tenant, you would be charging somebody rent.

That's true.

So let's get a number in there for BAM purposes, okay? Also, if you're not paying yourself any rent and you own the building, that's a disservice because you're probably overpaying your taxes because the building does generate some depreciation. And so there's a certain amount of rent you can pay without incurring any taxes.

Ah, I see.

And that'll actually lower your taxes on your practice. So this isn't about taxes, but it is. The other thing is the other extreme is where they own the building and maybe we've done a cost segregation study. And so they have a tremendous deduction in the first 3 or 4 years they own the building. And when I say tremendous, it's 6 figures. It's at least $100,000, maybe $200,000 or $300,000. So maybe they pay themselves way more than market rate of rent because it's going to save them a ton in taxes.

Mm-hmm.

So then that's not realistic to include all that in BAM either. So again, The only rent I would include in BAM would be a fair market rate.

I see.

The rest is really just manipulating for taxes.

That makes sense.

Now you ask— would you ask me about paying children?

Well, yeah. I mean, that along with some of the other adjustments or expenses that are not so much necessary for operations, but helps them.

Well, and again, remember BAM Mm-hmm. So if your goal in your practice is to make enough to fully fund your retirement plan and to pay yourself X number of dollars and also to pay your kids a salary, and by doing that, you're not lowering your income, you're just lowering the profits of the practice, again, for tax purposes, okay, then I wouldn't include that in BAM because that's not necessary. to cover the overhead of the practice, but it is a goal. So that's sort of discretionary. Do we include that or not?

I see.

And I've seen it done both ways.

Okay, so you actually made a very good point. So let's say, just for argument's sake, that the BAM amount calculated was $10,000 a month, right? And this client is trying to see before the year is over that I need to have at least this much money in my checking account. Now if there are other components of expenses that's actually coming out of the practice, as you said, Salary to the kids or charitable contributions. Charitable contributions.

Another example, that's not necessary, but it may be your goal to tithe a certain amount to your church, whatever your religion is. And if you need to generate enough cash to do that, then that's got to be part of BAM. But typically that's going to be part of your salary, the owner's salary.

I see. I see. So those numbers do not always have to corroborate.

No.

Okay, good, good, good. Awesome. So, you know, those were some great tips, Robert, and honestly, I also learned a few things here today.

Well, good.

Awesome.

Makes me happy.

And so I think we can wrap up our episode here today for BAM, but of course, as always, you know, if you guys have further questions or inquiries about BAM or anything else, feel free to reach us at [email protected]. We look forward to hearing from you.

Thanks. Thanks for the questions. Look forward to it.

Thanks for listening today. Be sure to subscribe to Beyond Bywings on your favorite podcast platform. For more information, you can follow us on Facebook, Twitter, and LinkedIn, or reach out to us on our website. You can also shoot us an email at [email protected].