10 FINANCIAL BEST PRACTICES FOR DENTISTS

Barr, Anderson & Roberts, PSCCPAs and Business Advisors

Matthew S. Smith, CPA, CFE 2335 Sterlington Rd, Ste 100Lexington, KY 40517Email msmith@barcpa.com Phone (Direct) 859-977-2403Fax 859-268-6165

Today’s objectives To share a few financial best practices that we encounter

with our clients. To help you realize your practice is a business. You can

be a great dentist, but still struggle financially if you don’t run the business well.

To have a fun, relaxing evening.

Please ask questions at any time throughout the presentation!

#1 – Accurate recordkeeping

All other best practices depend on this. Without accurate data, informed decisions cannot be made. For the purposes of this presentation, we are referring to

accounting/financial data, but this definitely also applies to clinical and PM data too.

Suggested procedures: Utilize a practice management/billing/scheduling software to track critical patient

data Utilize an accounting software (such as QuickBooks Online) to track every dollar

coming in and going out of the practice. Such software is also capable of maintaining your check register and generating financial reports for you to review and monitor the financial performance of your practice.

Ensure the individuals (yourselves included) have adequate training to properly use the software and that assistance is available at all times for questions

Things to avoid: Using the “how much $ is in the bank account” bill payment system – can cost

thousands in late payment fees and/or overdraft fees Using the “once a year” bookkeeping/tracking system – can cost thousands in

misclassified or missed transactions

#2 – Monitoring & Reviewing Key Performance Indicators (KPI) and Important Financial Reports Create goals. Measuring actual performance against these goals on a reoccurring

basis. Just a few things to measure:

Total production Total patient visits New patient visits

Key Financial Reports Balance Sheet – This report is used to show the practice’s assets (bank accounts,

equipment, and furniture for example), debts/liabilities (equipment loans, lines of credit, and payroll or retirement deferrals for example), and equity (cumulative profits of the practice + owner contributions – owner distributions) on a given date in time. Useful to see the financial stability and health of the practice when compared to prior years.

Income Statement/Profit & Loss – This report is used to show the income (patient fees) and expenses (facility costs, staffing costs, dental labs/supplies, etc.) of the practice over a given time period. Useful to see where the money goes and can be compared to budget, prior periods, or benchmarked to industry averages.

Practice Analysis Benchmark your practice fees against your peers Reveals shortcomings in actual results vs. your standard of care Identifies potential revenue increases based on actual data

#3 – keeping the practice separate from the personal

The practice’s bank account should not be treated as an extension of the owner’s personal account. This causes recordkeeping and cash flow issues which makes accurate recordkeeping and decision-making very difficult.

For most dentists, the practice is a separate legal entity, which gives certain liability & credit protection. If things are not kept separate, you run the risk of losing this protection.

#4 – Implement & utilize a retirement plan

There are numerous retirement plan options available for dentists, such as: SEP SIMPLE IRA 401(k) 401(k) with Profit Sharing Plan

Each plan type has its own positives and negatives compared to the alternatives. The sooner you start, the more you will have at retirement and the easier it will be to make it a part of

your routine. Traditional plan options allow you to get a tax deduction for your contributions. They are a great way

for you to pay yourself now without paying taxes on the payments. Keep in mind that the funds are taxable when withdrawn/distributed during retirement. For example, if your practice had net income of $150,000 and you did no retirement contribution, you would pay taxes on $150,000. If you did a retirement plan contribution of $10,000, you would only pay taxes on $140,000.

Roth alternatives do not give you a current tax deduction, but withdrawals at retirement are tax free (including earnings).

#5 - budgeting

Creating a monthly, quarterly, or (at the very least) annual budget is a useful step towards planning for future changes to the practice.

Think of the budget as a plan or a map or a strategy. How many of you have heard of the saying “you don’t plan to fail, you fail to plan”?

Without having a framework for anticipated/goal results, how do you know how to judge actual performance?

You should have an operational budget that also factors in changes to cash other than just profit and loss items. These would include: Anticipated fixed asset purchases Additional loan borrowings Loan principal repayments Owner contributions and distributions

#6 – tracking new patient referral sources

We frequently are asked about any sure-fire marketing methods for dentists. The fact is that different consumers are motivated to contact you by different methods.

“Not really” is the answer we get when we ask many dentists “Do you know how the 23 new patients last month were referred to your practice?”

If you are not happy with your # of new patients per month, you should be doing some type of marketing to get to your desired #.

Train your staff to ask all new patients about how they ended up at your practice and have your new patient forms have a spot for this same question.

Without knowing where they are coming from, how do you know which marketing methods are working?

Some of the more common methods include informing existing patients that you are looking for more great patients just like them, advertising in print and online publications, radio, TV commercials, website & social media, billboards, yellow pages, and direct mailings.

#7 – keeping debt in check & maintaining adequate operating funds

Debt is viewed as a bad thing on the personal side of finances. However, for businesses, it can be (and frequently must be) used as a tool for growth.

In the current market, dentists are being able to borrow at historically low rates. This includes loans for small equipment, major equipment, practice acquisitions, renovations, and building acquisitions.

Being aware of all the aspects of potential lending offers is critical to avoid an ever increasing debt load. Some aspects to consider: Is there a pre-payment penalty? Are the terms of the loan longer than the estimated useful life of the assets being

acquired? A shorter term frequently means a lower rate and overall lower total cash outlay, so it

is frequently the best practice to choose the shortest term that your practice’s cash flow allows.

A good rule of thumb on operating cash is to keep 1 to 2 months of overhead expenses in the account at all times.

#8 utilizing beneficial tax deductions, credits, and other planning options

Frequently hear about Section 179 and Bonus Depreciation to save taxes but there are two things to consider first: Do you need it? Tax aspects of a purchase should not be the sole factor when

making a purchase. Don’t buy things for the deduction. Plan for cash flow – Depreciation is a tax deduction without cash outflow. Paying

off debt is cash outflow without a tax deduction. Accelerating the tax deduction early may leave little expense for future years. This could lead to increased taxable income in future years with little cash left to pay the taxes after making the loan payments. Trying to time the depreciation deduction with the terms of the loan makes for a smoother cash flow and tax liability.

Here are several other tax related aspects that most successful practices are utilizing: Employer sponsored retirement plans – see #4 Fringe benefits such as health/dental/vision insurance & health savings accounts Utilizing business overhead disability insurance Small Employers Health Insurance Credit Accountable expense reimbursement plans

#9 – utilizing staff and advisors appropriately

Does the NASCAR driver do it all? Of course not and neither should you. The driver depends on a team to stay aware of how things are going so he/she can better manage the car and race. On the other extreme, the driver is not driving the car blindfolded relying 100% on the input of others. You are the one at the wheel.

Your time provides the most value to the practice when you are doing dental work. Not when you are ordering dental supplies, not when you are reconciling your checkbook, not when you are calling an insurance company to correct a denied claim, and not when you are spending time scheduling a follow-up visit.

You should surround yourself with employees and professionals who focus on their most valuable tasks which should revolve around helping the practice run smoothly.

#10 – focusing primarily on growth, not cost cutting

Which sounds more beneficial, growing or cutting? Successful dental practices tend to focus more on how they can

grow their top line to increase the bottom line and not on how they can cut costs.

Many practice expenses are fixed (rent for example). This means extra production drops past this line straight to the bottom where it counts.

Example showing 5% patient fees increase vs. 5% cost reduction of a $1,000,000 collection practice with $700,000 overhead 5% collections increase = $1,050,000 - $700,000 = $350,000 net income 5% cost reduction = $1,000,00 - $665,000 = $335,000 net income

Questions/comments

Thank you for your attention.

Jelly Bean Jar Question - Who is your most valuable patient?

Please fill out your information sheets if you would like additional information about any of these 10 items or anything else.

Contact Information:Matthew S. Smith, CPA, CFEmsmith@barcpa.com 859-977-2403