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Dental Bookkeeping: Finding Meaning in Numbers for Exponential Profit

If you knew how to read numbers in your financial statement, you can learn to improve your profitability and there are no limits to the business success of your dental practice.

While it is smart to ask help from financial advisors with dental bookkeeping specialization, it doesn’t hurt to be fully aware of your cash inflow and outflow, and identify where you receive the highest cash inflow. If you try, just try to make sense of the flow of your dollars coming through your practice, then you have better chances of advancing your game in the business competition.

Understand this: many dental clinics experience slow business growth mostly because dentists are less excited about looking at a pile of paperwork full of incomprehensible numbers. But knowing where your highest profit is coming from can help you strengthen the areas in your business that bring more profitable revenue.

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Source: www.levingroup.com
The 7th annual Practice Research Report published four years ago by Dental Economics Magazine suggests that profit among a broad cross-section of general dentists in the US is at a disappointing performance rate of +1.56%. And there are three identified root factors:
  1. Dentists fail to collect fees, recording overdue collections at a rate of only 91.3%, which is expected to be at 99%. This figure is down by 3.1 points from last years rate at 94.4%. Dr. Roger P. Levin explains that this is the lowest reported rate in seven long years, which represents $36,581 revenue losses when compared to average practice production. The report also notes an observation that 13% of the accounts receivable are older than 90 days.
  2. Payments collected at the time of service is at a low rate of 62.7% vs 65% rate at its peak.
  3. Overhead cost climbed to 61.2% for which the target should only be 59% for general practitioners, according to Levin Group.

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Fast forward to 2016, the Levin Group reports “stagnant production” in dental clinics. There is little to be optimistic about in terms of reported revenue for dentists that records only 0.8% average increase in production. We can insist that no matter how small, it is still a positive increase but the fact remains: many dentists are growing their revenue too slow and business remains lethargic.

If you want to get your game ahead of the sluggish flock, read on.

In the most recent survey report, we shed better light to the problem of sluggish growth among dental clinics. The Levin Group found that most dentists are unfamiliar with dental practice finances and over a quarter of practicing dentists are “not at all, slightly, or somewhat” familiar with their financial data.

There is no better way to grow your dental practice than to know your numbers.

You are running a small business and you should keep yourself aware of the financial metrics that will help you make better business decisions and improve your business financial performance.

"As a practice owner, you've got to make it your business to know your numbers. Otherwise, you're steering a ship with a blindfold on," -Roger P. Levin, DDS, founder and CEO of Levin Group


Understanding financial management beyond gross revenue

There is no argument that financial management is a critical aspect in running a small business, not only to survive but to thrive. Are you thriving in your dental practice? Or, are you just surviving?

"You have the power to grow your practice,” says Dr. Levin.

Pay attention to your financial statements beyond gross revenues. For most dentists, their knowledge related to their business financial information is limited to the annual and monthly gross revenues, which may at some point include overhead costs and nothing else.

What most dentists fail to recognize is the opportunity to increase profitability that is all in the financial statement. You can make better business decisions for revenue growth and improve your profitability by looking at your production and collection.

In your financial statement, locate the sections for accounts receivable and collections. How much revenue are you missing out by failing to collect? You should realize that while you may believe your clinic is collecting approximately 98% up to 99% of all accounts due, your financial data may tell you otherwise that you could be failing to collect some 8% of the total money owed to you, which accounts for revenue losses.

Keep in mind that dental practice is unlike credit card companies that charges interest rates on overdue payments. And if you are like most dental clinics, we can assume that you have no proper collection policy in place.

What could a dentist like you possibly do to improve financial performance and grow your business?

There are two important things: 1) setting-up a proper financial management system that will help you control your finances, and 2) embracing modern technology through efficient bookkeeping system.

You can control your cash outflow based on the cash inflow you see in your financial statement. And this financial information is crucial to making business decisions such as upgrading your practice with advanced technological equipment and other related investments.

A peek into the anatomy of dental practice financial statement

It is ideal to learn all about your financial statement and dissect its whole anatomy with a full understanding of the bookkeeping method you should apply in the recording of your revenue and expenses. But, you should leave such complicated tasks to professional financial advisors. When you have complex financial concerns you must address, do not think twice to call a trusted financial advisor with small business bookkeeping knowledge.

In this section, what we will discuss only covers categories that matter to improving profit in your dental clinic such as:
  • How much are you spending on salaries?
  • How much profit are you bringing in, and
  • Which sections show the highest contributions?
And there are two important reports you should get comfortable reading:
  1. The balance sheet or the statement of assets, liabilities and capital
  2. The profit and loss statement
Why is the balance sheet important?
Well, this statement gives you the static view of your general assets, which are items you own; and liabilities, which are items you owe to third parties such as vendors or banks, and others. This statement helps you make business decisions in the future such as selling your assets from the inventory, or adjusting your due dates for accounts payable.
Why is profit and loss statement important?
The profit and loss statement helps you track your business performance in terms of profitable growth. You can determine the amount of your revenue versus your expenses. Your revenue should always be sufficient to cover your expenses. Otherwise, your business could be in deep financial trouble. Bottom line is that it provides you with important financial insights into your future business performance and helps you determine what changes you may need to apply so that you may achieve your business milestones.
More importantly, the balance sheet and the profit and loss statements are the two financial documents that can give you the basic financial information to help you determine your most important key performance indicators.

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Identifying profitable key performance indicators

When you begin to acquaint yourself with the financial statements and start to understand the sections where you can get important information, it becomes easy to identify your most profitable key performance indicators.

But it is convenient to know how to get started on finding meaning in the numbers.

Step 1. Look at the salary cost in your financial statement. Determine whether your clinic is overstaffed or understaffed. Are you overpaying your employees? Keep in mind that your people are the lifeblood of your service and if you ever feel the need to make adjustments to your salary costs, at least make sure that you work around the target goal of 25% of your net production, and that any changes will not adversely impact your service.

Step 2. Look at your expenses. Are you overspending on dental supplies? Your financial statement should be able to tell you a trend in pricing fluctuations over the years and you should always keep an eye on your operational cash inflow to analyze whether your collections can sufficiently cover your expenses keeping your clinic from cash flow dry out that can cause your operations to cease. The recommended guideline is to keep your costs on dental supplies at 5% of the net production. Also, analyze your costs on dental lab fees. Keep your goal at 6% of the net production and you can adjust this figure higher with an increase in work on customized services such as crowns.

Step 3. Analyze your investments. Are you getting profitable returns on your investments? And how much? You can easily overlook small investments such as on advertising, but if they are costs that should make a return, you should be able to measure that. Consider limiting your investment to 10% of the revenue and track your returns with quantifiable metric to determine effectiveness.

Final thoughts on growing dental clinic profitability

Growing your dental practice rests on your enthusiasm to do more with what you already have. Look at your assets and maximize its value before it turns into a liability as value begins to decrease.

In dental practice, the most common mismanaged assets, according to the Levin Group include:
  • Inactive patients. There are hundreds of them that dental clinics miss out to follow-up.
  • Disengaged overdue patients. Scheduling overdue patients can be a pain, but with a little patience, it could turn into a profitable opportunity for dental clinics.
  • Unfinished treatments. Many patients do not finish treatments. But what is your clinic doing with patients who did not finish their treatment? Here is a chance to win them back with promotional tactics.
  • Missed contacts. It's a missed opportunity to ignore contacting patients after their first dental appointment. Contact them.

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If you can maximize the use of your financial statement that will help you achieve greater heights in terms of your business performance, the best investment you can spend on is on hiring a good and trusted a professional financial advisor who understands industry specific standards and guidelines.

Get an financial advisor who understands dental bookkeeping and can efficiently prepare the standard dental chart of accounts. That’s because financial statement for dental practice is prepared quite differently requiring the expertise of a dental financial advisor.

We help you plan, forecast and analyze your financial data
so you can get on top of your finances today to grow your
small business big tomorrow.

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