“We only take distributions to pay off the credit card”
I’ve heard some version of that line in a lot of first conversations with practice owners.
One family I started working with recently had a small salary running through payroll, set years ago and never revisited. Beyond that, they took draws from the practice to cover the personal credit card balance.
That was the whole system.
On the podcast recently, CPA Eric Levenhagen described what happens without a process for paying yourself: you become a creditor in your own business, waiting for whatever happens to be left.
The bills still get paid. So what’s the problem?
Your spending starts deciding your pay.
You move money because the household needs it, without knowing what the practice can consistently afford to send home.
That makes it harder to decide what you can comfortably spend, how much to save, or whether you’re making progress.
The uncertainty cuts both ways. Some owners withdraw money the practice will need later. Others leave excess cash sitting in the business while household goals go unfunded.
What can the practice actually afford?
The bank balance alone can’t tell you.
There’s $180,000 in the account, but payroll’s next week, the lab bill is coming, debt payments and estimated taxes are around the corner. You’re relying on what Eric calls “mental earmarks” - trying to remember which dollars are already spoken for.
The profit and loss statement doesn’t give you the full answer either. Profit isn’t the same as available cash. Loan principal payments, for example, reduce your bank balance without reducing the profit shown on your P&L.
Start with current, accurate books, organized so you can understand where the practice earns and spends money. Without accurate, up-to-date bookkeeping that's formatted for an optometry practice, it's impossible to make great decisions. Then look ahead at cash coming in and payments going out.
The question you’re trying to answer: What can this practice reliably pay me while covering its own needs and planned investments?
Give your pay a process
Here's how I start the process with practice owners we serve:
1. Define what needs to stay in the practice.
Set a target cash reserve based on recurring cash needs and how much collections fluctuate. Include regular payroll, overhead, and debt payments. Separately account for upcoming commitments, such as equipment, hiring, and estimated taxes the practice will pay or fund.
When cash is above that, it's a vital sign saying it's time to use the cash productively. When it's under? Perhaps time to let it build.
2. Put your pay on a schedule.
Don't let the credit card dictate what your practice pays you.
Use a cash-flow projection to set a regular amount the business can support. Check that the plan holds up during slower collection months, too.
Work with your CPA and financial planner on the mix of payroll and distributions. If your practice is taxed as an S corporation, reasonable compensation for your work must be paid through payroll before non-wage distributions. Other business structures handle owner pay differently.
Then include additional draws above that as the practice can reasonably support.
3. Build the household around that number.
From that regular income, account for taxes, automate savings toward your goals, and decide what you can comfortably spend.
Keep recurring household commitments within that amount. Give additional distributions a purpose in advance, such as a home project, extra debt payments, or long-term investing.
Review the plan quarterly - or sooner if cash flow changes materially. After protecting your reserve and upcoming commitments, is there excess cash to distribute? Has cash flow improved enough to support higher regular pay?
This weekend, try writing down three numbers: your practice’s target cash reserve, your regular monthly take-home pay, and your household's monthly savings target.
If one is a guess, that’s where to start.
Eric and I discuss this process - and how he uses the Profit First framework to organize practice cash - in episode 168 of The Optometry Money Podcast. Listen using the link below 👇.
Want help turning practice cash flow into a household financial plan? Let's chat - Click here to schedule a conversation . This is one of the first things we work through with practice owners at OWA.
Have a great weekend!
Evon Mendrin, CFP®, CSLP®
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