Ask a CPA: What’s the right amount of liquidity?
The answer is both business and personal
In a recent episode of The Dentalpreneur Podcast, host Dr. Mark Costes took the opportunity to bounce a slew of money related questions off of episode guest and CWA Partner Judson Crawford. In the episode they tackled student loans, life insurance, 529s, asset depreciation and one topic Judson says his clients bring up all the time—the right amount of liquidity.
Having cash on hand in case of emergencies is important. In fact, having liquidity in your portfolio is part of a well-planned, diversified investment approach—but how much is enough? And when is it too much?
When we sit down with clients, one of the first things we will look at is, from the personal side, the length of the wait period on the person’s disability insurance. Many people, should they become disabled, have a 90-day wait period before disability takes effect. For that fact, we usually advise clients to have at least 90 days of cash set aside in a money market fund that can be accessed at any time as an “emergency fund.”
On the practice side the amount is less definitive, mainly because each client has a different level of comfort with risk at different points in their career. A healthy range would be somewhere between 1.5- 2 times one month’s expenses in the business account. This amount would be something to use to pay things like staff salaries, supplies, rent—essentially, what you must keep paying in order to keep your practice running.
This amount, in addition to the probable one month outstanding in accounts receivable, is going to give owners at least three months in the practice before exhausting funds.
If you can meet those minimums and start to accumulate overage, it is a good idea to create a plan to allocate those amounts to things like have extra savings, pay down debt or other personal goals.
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