SCENARIO By all outward appearances, Dr. Roger Jones was a successful dentist.

He owned his office building, which he leased to the professional corporation housing his dental practice. Annual revenues from his practice of more than &750,000 provided him with a salary of $150,000. He and his family lived in a large home in a well regarded neighborhood. However, Dr. Jones recently received a registered letter from the IRS threatening to impound his business and sell its assets for failure to pay payroll taxes for the past six months for failure to pay payroll taxes for the past six months. Furthermore, the professional corporation has had difficulty paying its suppliers. The corporation owed one supplier more than $200,000 and had arranged to pay the interest but has missed even those payments. Similar difficulties have been experienced repeatedly for the past five years. In the past, Dr. Jones had solved similar problems by borrowing money on the equity in either his personal residence or his office building. Sufficiently equity existed in his office building to solve the IRS problem. A local bank offered a refinancing agreement that would pay the back taxes and the associated penalties and interests. This time, Dr. Jones was determined to get the root of his financial difficulties. His latest loan had exhausted his personal financial resources. His first action was to dismiss his receptionist-bookkeeper, reasoning that a significant part of the blame was hers for failing to properly manage the financial resources of the corporation. He then called Lawson, Johnson and Smith, a local CPA firm, and requested that a consultant determine the cause of his recurring financial difficulties. Jeanette Smith, a partner the CPA firm, spent a week of examining the record of practice and extensively interviewing Dr. Jones. She delivered the following reports:

Dr. Roger Jones 1091 West Apple Avenue Reno, Nevada Dear Dr. Jones: The cause of your current financial difficulties is the absence of proper planning and control. Currently, many spending decisions are made in haphazard and arbitrary manner. Affordability is seldom, if ever considered. Because of this the resources are often committed beyond the capabilities of practice. To meet this additional commitment, your bookkeeper has forced to postpone payments for essential operating expenses such as payroll, taxes, supplies, and labor laboratory services.

The following examples illustrate some of the decisions that have contributed to your financial troubles: 1. Salary increase. You have granted five percent increases each year whether or not the business could successfully absorb these increases. Also, your salary is ten percent higher than the dentist with comparable practices. 2. Cash withdrawals. For the past five years you have withdrawn approximately $1000 per month in cash. These withdrawals have been treated as loans from corporation to you, the president of the corporation. 3. Equipment Purchases. During the past five years, the corporation has acquired a van, a video recorder, a refrigerator, microwave and an in-house stereo system. Some items were purchased for cash and some are still being paid for an installment basis. None of them was essential to the mission of your corporation. this decisions, and others like them, have adversely both your personal financial status and that of your dental practice. The mortgage payments for your home and office buildings have increased by 50% over the past five years. Also the liabilities o the corporations have increased by 200% for the same period. To solve your financial problems, I recommended the installation of formal budgetary system. A comprehensive financial plan is needed s o that you know where you are going and what you are capable of doing. My firm would be pleased to assist you in assigning and implementing the recorded system for it to be successful you and your staff needed to be introduced to elementary principles of budgeting. We offer three two hours seminar on budgeting. The first will describe the basic philosophy of budgeting. The second, will teach you to prepare budgets and explore the use of budgets for planning, control, and performance evaluation, Sincerely, Jeanette Smith, CPA