We are excited to talk about dental practice accounting in today’s episode! It’s not just about bookkeeping and balance sheets. Instead, we are diving into questions you should be asking your accountant and what you can look for in order to ensure you’re doing your due diligence as a practice owner. The items on your accounting checklist are important because they impact more than just taxes. They can impact your growth, profitability and effectiveness as a leader.
While dental school is a great place to learn about practicing dentistry and treating patients, unfortunately, there is a lack of emphasis and education placed on the accounting and business strategy involved in owning a dental practice. Maintaining a minimal understanding of accounting has the likelihood of setting you up for difficulties down the road. So, even if you don’t adore the accounting side of your dental practice, you really do need a solid understanding in order to effectively lead.
If you really despise it, we suggest you bring in someone else to focus on and manage those tasks. No matter what, someone should be dedicated to accounting and have a solid understanding of it, so you can get high level reports and stay informed. Your business has a better chance of success when you know how your practice is functioning and can make strategic decisions.
What we cover in this episode:
- 04:13 – Why do I, as a dental practice owner, need to think about accounting?
- 07:29 – Bookkeeping in your dental practice
- 12:52 – Balance sheet review for dental practice owner
- 16:22 – Profit and loss statement review for dental practice owner
- 18:43 – Cash flow
- 21:26 – Build a team of advisors
Why do I, as a dental practice owner, need to think about accounting?
A dental practice is a business.
Although you may not have received training specific to business ownership when you were in dental school, your practice is a business. As the business owner, you are responsible for ensuring your business is run properly. This does not mean getting a business degree. It means dedicating enough time to learning what matters and putting the right people in place to keep you informed on the various business functions as you move toward your goals.
You need complete and accurate financial statements in order to make decisions.
Running your business properly includes making wise decisions about hiring staff, purchasing equipment, and so much more. In order to determine if you can afford to hire staff, make purchases, etc., you need to consult your financials. If your financials aren’t accurate and complete, you won’t have the necessary information to make wise decisions.
Tip! Start off on the right foot by getting accurate and complete information into your financial system. When it comes time to make a decision, obtain reports showing your financial information. Then, review the reports. If you don’t understand what they are telling you, obtain a trusted advisor or CPA to help.
Tax preparation and proactive tax planning
No one wants to be surprised with a huge tax bill out of the blue. For this reason, it is best to avoid waiting until March or April to find out how much you owe in taxes. Instead, throughout the year you can participate in proactive tax planning. Proactive tax planning allows you to have a sense of where your net income is throughout the year and, in turn, you will have a better idea of what to expect with your tax bill.
Tax planning also comes into play when you want to buy new equipment. You may need new equipment and it will be beneficial to the practice, but there will also be a tax perspective you’ll want to take into consideration. Whether you are taking care of your accounting, or someone else is, you want to know the correct steps are being taken to get complete and accurate financial statements.
Bookkeeping in your dental practice
In order to properly manage and lead your practice, you need reliable data on which to base your decisions. In order to get reliable data, you need complete and accurate financial statements. Complete and accurate financial statements won’t be available without adequate bookkeeping.
To start, you should have bank accounts and credit cards set up specifically for your business, which should be in the practice name. It’s also likely you will have checking accounts and savings accounts. For all of these business accounts, each transaction will need to be recorded to accurately represent what is happening in your practice. Many financial systems have features that automatically synchronize with banks and credit cards. If you are using a financial system that offers this, the auto sync process will reduce the amount of time spent on data entry, especially in dental practices.
Deposits and reconciliation
Deposits can happen quite often for a dental practice. For this reason, we recommend recording your deposits weekly and reconciling them on a weekly basis. If possible, depositing into your bank accounts on a monthly basis should be avoided because it’s easier to keep track of deposits when they are taking place regularly. Making deposits weekly gives you the opportunity to easily address issues.
Even though you reconcile your deposits every week, when it comes to the end of the month you want to reconcile all bank accounts and credit card accounts. Reconciling accounts means you take all business account statements, review them independently of what is listed in your financial system, and make sure the information in your financial system matches the information on your statements. There may be some minor differences with timing of deposits or when charges were processed on the credit card, but overall they should match, and include everything with no duplication.
If your accounts aren’t reconciled each month, you won’t know if your financial data is accurate. If you have dental practice loans, they should also be reconciled monthly. Every time you make a principal payment, that should be reducing your balance and then the interest expense should be recorded. If the balance of the loan is not on your balance sheet, it should be.
Any student loans held by you personally are typically not recorded in your business financials, because your balance sheet will only list items that relate to the operations of your dental practice. Depending on the cash flow, net income, and set up of your business, you may be able to take some additional payroll or distributions to use to pay your student loan off but the student loan itself would not typically be recorded on your business dental practice financials.
Tip! Ask your bookkeeper or CPA if your bank accounts, credit card accounts, and loan balances are being reconciled monthly. If the answer is no, find out why and determine if monthly reconciliation is necessary.
Tip! Recent EIDL Loan requirements request your cost of goods sold. Typically, in a dental practice the cost refers to the cost of services sold, not truly cost of goods sold. In accounting, the terms ‘cost of goods’ and ‘costs of services sold’ can be used interchangeably. Check your booking to ensure the correct cost is shown and is consistent. Also check out our write up, How to Calculate Cost of Goods Sold for Your Dental Office.
Review and discuss your chart of accounts
Your chart of accounts is the list of all the categories of revenue and expenses that are going to be on your financial statements. Common expense accounts on dental practice statements are dental supplies, doctors’ payroll, staff payroll, rent, continuing education costs, advertising, and marketing.
The chart of accounts should include anything associated with your business that you want to track, review, and ask questions about. This information should be listed under separate categories within your financial statements and Profit and Loss statement. If you don’t understand a category, you should ask your dental accountant or CPA because they can update your chart of accounts to add clarity. Having these categories listed in a way that’s useful to you, the business owner, gives you the ability to look at trends, percentages, and benchmarks.
Balance sheet review for your dental practice
Your balance sheet keeps track of your assets (what you own), liabilities (what you owe), and equity. Basically, any contributions or distributions in or out of the company are tracked on the balance sheet. To reiterate again what we’ve been talking about, anything related to your dental practice has to be recorded on the balance sheet and it should be reviewed monthly.
If you don’t see items like your business loan or newly purchased equipment on your balance sheet, start asking questions. If you purchase a pricey piece of equipment and don’t see it recorded, you need to know why. Was it accidentally recorded as an expense when you should really be capitalizing on it because it’s a large purchase?
Tip! When reviewing financial statements, start with your balance sheet. This shouldn’t take you very long. You may really want to jump straight to the Profit and Loss statement, but try to avoid the urge. You need to understand your balance sheet so you can ensure things are being recorded properly because an inaccurate balance sheet means an inaccurate profit and loss statement.
Tip! On the balance sheet, large equipment you own should be listed under fixed assets.
Tip! If there is a negative balance, don’t panic. This happens from time to time. If you think your accounts payable amount is high, it’s ok. Take a few minutes and ask the right questions:
- Is this correct?
- Is something in the wrong category?
- Why are these numbers negative?
- Why is this amount so high?
Profit and loss statement review for your dental practice
Sometimes the profit and loss statement may also be referred to as the P&L statement or income statement. Whatever you choose to call it, this statement keeps track of revenue. In the dental industry, this is typically reflected by looking at production and expenses. Overall, it answers the question “is this business profitable?” which is why many business owners want to skip their review of the balance sheet and jump straight to the P&L statement.
Everyone wants to know their net income, what is leftover after all expenses are paid. The P&L statement, when accurate, shows you if you have a net loss or gain. Depending on that, you can address what improvements need to be made moving forward, what needs to be discussed in order to change the trajectory, review each month to identify trends, see where production is going up or down, determine if the right amount of money is being spent on dental supplies, etc.
Long story short, you can obtain a ton of information from your P&L statement. For example, information from your P&L statement can be used in comparison with your goals. If you set a net income percentage goal at ten percent, you saw last month you were at three percent, and this month you got to five percent, you can see you are trending in the right direction.
Tip! Review your P&L statement month to month trends to see if you are meeting your goals but also to see where you stand compared to the industry. This information is extremely valuable.
Cash flow, the money coming in and going out, is another important component of accounting for your dental practice. Managing cash flow properly is essential to the successful operation of your dental practice accounting process. Being knowledgeable about your cash flow can give you peace of mind, even if you are struggling with this aspect of your practice. Knowing where you stand allows you to have options. Problems with cash flow management can arise because it can be difficult to manage the timing of what is coming in versus what is flowing out.
Your business should be cash flow solid in order to pay your necessary expenses like payroll, dental supplies, lab fees, insurance, rent, and more. If you aren’t sure what cash flow is going to look like over the next few months, we recommend putting together some cash flow projections to help you get a sense of cash flow issues you may run into later on in the year. The ability to make payroll is a necessity, so if you need to do a little work on projections to make sure that is going to happen, do it.
Tip! We offer a free Cash Flow Template in our show notes for episode #23: 5 Ways to Manage Cash Flow Issues. Download your free copy to get a handle on this yourself.
Tip! Reach out to your CPA to create cash flow projections. Trust us, they want to do what they can to get your cash flow in a healthy place.
It’s important to note that cash flow is different than profit. What you see at the end of the month in your P&L statement is not necessarily the amount of money you have in the bank. That’s a misconception.
For example, if your P&L statement at the mid-year point says you’ve made $100,000 in net income over the first half of the year, your cash in the bank does not necessarily reflect $100,000. It may very well be the case that the cash in your bank account totals $25,000. The P&L income and the cash in the bank are different.
Your P&L statement doesn’t reflect certain items that are coming out of your cash, like loan payments. A loan payment is not an expense to the business, but will be reflected on the balance sheet because it reduces your cash in the bank. It doesn’t reduce your net income. For more information on this specific topic, check out episode #21: Understand the Difference Between Cash Flow & Profit.
Build a team of advisors
You can try managing all your financial information yourself. It is possible, but becomes difficult as you build your practice and strive to give your patients the highest level of care. We recommend finding experts because it will ultimately save you time. Your time is better spent managing your dental practice, seeing patients, and working on patient treatment plans.
When searching for professionals, you should look for a dental focused CPA who is responsive and talks with you often. They should update you regularly on your financials and walk you through them. Even though you may not want to go through your balance sheet, you want a CPA who will strongly encourage review of your financial statements. It is beneficial to have a CPA or virtual CFO who will look at your P&L statement with you, talk through your net income and help with cash flow, if needed.
Dental focused Virtual CFOs
Virtual CFOs with experience working with dental practices are already familiar with your industry, and can share a roadmap for success because they’ve likely already helped other practices with similar issues. A tax professional who can help you with tax planning can help you save the right amount for your end of year tax bill, help you pay the proper amount of payroll taxes throughout the year, and look at ways to minimize the tax liability you are going to owe.
Obtaining a healthcare banker is something you may want to consider, as well. If you’re just starting out and need to purchase a practice or get a loan to start your own practice, you will likely need financing. At some point, you might want to refinance a loan or establish a line of credit. A good healthcare banker can answer your questions and help you get set up. Bankers are great, but finding a healthcare focused banker will benefit you because they are already familiar with your industry and potential needs.
Although you didn’t go to business school, you are a business owner, and we want to ensure you have the necessary tools to understand how to manage your business. Today we discussed the importance of having a good balance sheet that’s complete and accurate, which in turn leads to a complete and accurate P&L statement. We talked about how your cash flow may look different from what’s listed on your P&L statement.
The main takeaway here is to avoid stress! Sometimes the financial part of business just isn’t in your wheelhouse, or it’s something you’d rather not spend your time and effort on and want to outsource. If this rings true, then find advisors who can help. Finding the right advisors will allow you to build a relationship, help your business, and make your life easier so that you can spend time on your practice.
Looking for CEU?
We are excited to share an opportunity for you to earn one CEU credit. View the on-demand webcast on Dental Economics, called 3 Ways to Lead a Profitable Practice While Working Fewer Hours. You can find this through the Dental Economics website or visiting www.pjscpas.com/dental-CPA. This course is free and available immediately. Don’t forget to register!