In this episode of Beyond Bitewings, hosts Robert and Ash discuss the essential financial concept of BAM, or the Basic Amount of Money needed to operate a dental practice. This isn't just another metric like production per hour; BAM is crucial for ensuring that a practice is financially healthy and meeting all its obligations. Unlike a simple break-even point, BAM includes not only overhead costs but also salaries, loan repayments, and even the financial goals of the practice owner, such as retirement contributions. The episode emphasizes how understanding and setting an accurate BAM figure can also play a role in establishing a fair bonus system for practice staff, aligning financial goals across the team.

Robert and Ash explore the components that make up the BAM, including considerations for future expenses such as new hires, potential rent increases, and loan payments. They also discuss the importance of setting realistic and achievable financial goals, which take into account both historical financial data and future projections. The conversation highlights that calculating BAM annually is a best practice to accommodate changes like market growth and inflation. Lastly, they touch on personal financial goals—like charitable contributions or income for family members—and whether they should be factored into BAM calculations.

Key Topics Discussed:

• Definition and importance of BAM (Basic Amount of Money)
• The difference between BAM and break-even
• BAM's significance in establishing staff bonuses
• Considerations for calculating BAM, including future expenses
• Ensuring BAM is realistic and achievable
• Impact of loan payments, rent, and retirement contributions on BAM
• Personal financial goals in BAM calculations
• Annual recalculation and projection adjustments for BAM

Welcome to Beyond by Wings, the business side of dentistry, brought to you by Edwards and Associates, P. C. 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 is the business of dentistry. For help or more information, visit our website at eandassociates.com. 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. You know, 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 need 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, you know, production per hour or production per chair or how's my hygiene department doing or, you know, 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 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 Mhmm. 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 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, you know, there was also this other, a k a that I've heard of BAM.

Well, in 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 doctors 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. Now 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, you know, 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.

I see.

So if I tell you your BAM and your practice is a hundred thousand dollars, and then you go three or four months collecting a hundred and 10, a hundred and 20, a hundred and 15,000, 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. We we yes. We calculate it once a year. We try not to change it more frequently than once a year. We don't wanna be raising it all the time because every time you raise it, the the team is gonna think, well, they're just trying to avoid paying me a bonus, you know, 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.

Mhmm.

If it's been recalculated recently, then we may have to raise it partway. And there's what we call a baby BAM. Okay. 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 a hundred and 50,000 a month in collections, and maybe your BAM should be 200. 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 three 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 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 nonaccountants 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 gonna 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 gotta include the whole loan payment. And so you've gotta look at those things. You gotta make those adjustments to get through 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. Yeah. There's, like, numerous factors.

Yeah. There's 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 gonna determine what BAM was for the period covered by those financial statements, which is history. That's not what we what we wanna know. What we wanna 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 gonna see any more than possibly one month 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. Let me

just 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 gonna be paying the associate. You gotta increase BAM by any chairside assistant you're gonna hire to support the associate. And if you're hiring a new front desk person to to support the new patient flow, you don't gotta 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 gonna give those, then that you gotta 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 gonna 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 gonna equip another operatory, okay, we need to include an allowance for that for the payment on that equipment. Even if you're not gonna borrow the money for the equipment, we still have to include some allowance for you to recoup the money you're gonna 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 gonna calculate BAM for a 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 gonna 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 are several things I can say about rent. Let's start, you know, on the on the front end. If you're just leasing a new space, maybe you just moved your practice and you're you've got a new lease. Even in when you renegotiate some leases, sometimes you'll have a few free months upfront. 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 two or three 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 five to year six and you've got a a 5% increase, use the new number to calculate your BAM. Otherwise, you're gonna be short. You're gonna be you know, if you use a a number for BAM that's too low and you're calculating bonuses on the collections in excess of BAM, then you're gonna be paying bonuses when you can't even cover overhead.

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 said, 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 gotta be realistic. If 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 a 20. Well, that's not realistic. They're gonna throw up their hands and say, well, why should we even try? There's no way we're gonna get there. So it's gotta be a realistic 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're 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 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 a loan payment is 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 we'll 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

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 first fourteen 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 twelve months ahead of you. Would you include the loan payment, assuming that it's no loan payment for first fourteen months? Would you include that loan payment in your BAM calculation?

Not in that first year. Not if there's zero loan payment for fourteen months. So so anything over twelve.

I see.

Because we're gonna recalculate BAM on an annual basis. Mhmm. Okay? So BAM for this next twelve months is x. Uh-huh. Doesn't include anything for the loan because there's no payment for twelve months or fourteen months in your case.

I see.

Now next year, even though there's no loan payment, hasn't been one for the last twelve months and there's not one for the next two months, that's fourteen 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 two to implement a bonus system?

Well, yes. At least year two in most cases. It depends on the growth of the practice. I mean, we've had clients that started a practice and collected a million dollars the first year. God bless them. Yeah. Wow. You know? I say we've had clients that have done that.

Yeah. Okay. I can probably count those maybe not on one hand, maybe on two hands. So I I would say that's that's unusual, but it does happen. Well, they can implement a bonus system right away, you know, once once they get to that level. But for a a a a GP, if they're collecting three,

four,

or 500,000 the first year, and the second year, maybe six, six fifty, and then maybe in the third year, I would implement a bonus system.

I see. I see. That makes sense. And the other thing, you know, we haven't touched upon is retirement plan. Okay. Let's say this client had just a set plan, and we've been asked to calculate the BAM amount for them, and they're about to enter four zero one k.

Okay. It's a good point. If they're already funding a SEP Mhmm. 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 four zero one k, I don't know that it'll be an increase, but I would still make that calculation. How much are we advising them to to fund to retirement? Divide that by 12 and include that number in BAM, whether it's a SEP or a SIMPLE or a four zero one k 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 it's kinda like financial planning. Okay. You gotta have goals.

Mhmm.

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 zero to 60 and and, you know, overnight? Boom. One second. Mhmm. No. That's not realistic. But I would say if they're 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 1 year to 40,000 the next year, then is it realistic to go to 60 the following? Sure. Yeah.

So you gotta look at the individual client situation to know how much to, include in in BAM. 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 Uh-huh. I think we talked about free rent at the beginning of the lease. Well, what about a client that owns his own building? Uh-huh. Okay. So we have kinda two extremes here. I I've seen clients that own their own buildings, and they don't pay themselves any rent. Mhmm.

Maybe they've 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 Mhmm.

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.

But 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 three or four years they own the building. And when I say tremendous, it's 6 figures. It's at least a hundred thousand, maybe 2 or $300,000. So maybe they pay themselves way more than market rate of rent because it's gonna save them a ton in taxes.

Mhmm.

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 would you ask me about paying children?

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

Well and, again, remember, BAM is a goal. Mhmm. 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.

You know? And I've seen it done both ways.

Okay. So you actually made a very good point. So let's say, you know, just for argument's sake, that the BAM amount calculated was $10,000 a month. Right? And this client is trying to see, you know, 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, you know, salary to the kids or, you know Charitable contributions.

Charitable contributions. Example. That's not necessary. Mhmm. But it may be your goal to tithe a certain amount to your church, whatever your religion is. Uh-huh. Okay? And if you need to generate enough cash to do that, then that's gonna be part of BAM. But, typically, that's gonna 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 @infoateandassociates.com.

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 by Wings 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 info@eandassociates.com.