Turns out you can understand where your dental practice stands by a quick read of dental practice financial statements.

Knowing and reading your financial statements gives you a basis for planning, merging, acquiring new providers, new practices, and do not forget that it keeps you in the 30% of businesses who do not suffer from fraud.

Financial statements often seem like a mystery, they  don’t have to be.

It is true, financial statements can be confusing since CPAs typically build them for tax purposes to minimize your tax liability and use with Schedule Cs or 1120 forms. And they use a whole new set of nomenclature.

To run a company you will need financial statements for operational purposes. The biggest difference is that for business operations, financial statements need to be reviewed and published by the 15th of each month for the previous month. And, they include cash flow statement, which are preferrably organized around operations and non operational costs like loan payments and distributions. Operational financial statement may include expenses the IRS disallows at any particular time.

Financial statements consist of 3 primary statements:

PROFIT and LOSS statement: Shows the Revenue referred to as Sales, Net Production or Net Collection. It goes by many names.

It is the gross amount money you collected or will collect for a period of time in exchange for services (and goods) provided to patients. This number is the top line.

You then subtractthe cost of sales (COGS), and subtract all the operational expenses to give the first level of Profit, called EBITA (earnings AKA profit before insurance, taxes and amortization of assets).  Profit is the bottom line.

There are often other items subtracted off the first level Profit or EBITA like other income and expenses and taxes and insurance. The resulting number is referred to as “The bottom Line” or Profit. Yes, confusing the same word for different levels in the statement.

This statement is often referred to as the P&L for short.

Revenue:   Net Collections, Net Production, Sales.  This is the money exchanged for services and goods provided to patients less any refunds or adjustments, insurance discounts.

COGS:  Cost of Goods Sold.  These are the costs of doing business. They are a direct percent of each sale.  Like cost to the practice of each Orabrush sold.

Gross margin:  Revenue Less all COGS. Simple calculated value.  Revenue – GOGS = Gross Margin.

Expenses:  These are all the operational expenses:  Payroll, Marketing and Advertising, Lab, Clinical supplies, Office Supplies, Rent, Maintenance, Utilities, Travel, Meetings.

EBITA:  Gross Margin – Expenses = Profit (or EBITA).

Profit:   EBITA – Insurance – Taxes – Amortization = Final bottom line Profit.

Each line in a P&L can be made a percent of Net Sales or Net Collection. These percents are then compared to industry averages to give a picture of how the company compares to others. Trends based on 3 months, 6 months and 12 months then provide a vector of where the company appears to be going if extrapolated out over time.

ATD:  Ask the Dentist are items that the bookkeeper does not know how to categorize. This is homework for the owner and GM to resolve. It is their job to resolve these quickly which “trains” good bookkeepers to learn for future reference.

BALANCE SHEET:  Shows the financial stability of a company through it’s Assets, short term and long term Liabilities, and Equity.  It can should your Net Worth.

The balance sheet lists the following items.

Short term assets:  Cash (checking acounts and savings, petty cash, convertibles), Accounts Receivables;

Long term assets (investments, stock, property, machines, equipment, vehicles, buildings)

Short term liabiilities:   Loans less than 12 months, Accounts payables.

Long term liabilities:  Long term Loans, Debts, Accrued payments for other business deals.

Equity:   The value being created by operations like Retained Earnings, increase in asset value of building, investment dividends;  or added to the company like cash injections from loans or owner contributions. These can also be negative if there are losses, cash is withdrawn.

Cash Flow Statement:  This combines the P&L and Balance Sheets to give a beginning of period and end of period cash position which ideally matches your bank account. Often people confuse P&L with Cash Flow statements. They are very different.

The structure of a Cash Flow statement can differ widely. We often do simple cash flow statements to run our households. However, they all follow variations of these principles.

BEGIN Cash: This is the cash in the bank accounts at the beginning of the period for the cash flow statement.

ADD:  Cash inflows (Profits, loans, AP, Collections on AR, Contributions, Dividends)

LESS:  Cash outflows (Loan servicing, AR additions if accrual basis on P&L, loans to owners, staff, dividends, withdrawals)

END Cash:  This should balance with the bank account statements. There are often timing issues that complicate the balancing. Good bookkeepers and CPAs can easily navigate these.

Cash flow projections are also excellent tools to use to project weeks or months to see where you could be at that time.

These statements are easily run and exported out of QuickBooks, Xero and other accounting packages. Statements follows the Garbage in Garbage out rule. The better, the more accurate, the more timely the bookkeeping the better the reports are.

It is imperative for the owners to review the financial statements and note any questions or anomalies immediately. Innocent mistakes can happen. A review of financials by the owner or their CFO is a standard GAAP rule that all accountants and bookkeepers are trained in and expect if not surprised if you do it. It guards against mistakes and fraud. It is prudent and it is the job of the owner to review them.

There are metrics or KPIs we use to see how the business is running. These metrics are derived from the Financial Statements and the Practice Management software to give a complete picture of what’s happening in the business. There are many more than listed here. It all depends on the goals and vision of company to give direction to which metrics guage movement towards or away of the vision and goals.

  • Profit %
  • Payroll % (and subsequent departments as %)
  • Marketing%
  • Lab%
  • Clinical supplies %
  • RER (Recare Effectiveness Rate)
  • Fees as percent of local standards
  • Aged AR % compared to what’s expected.
  • Net Collection to Net Production.
  • Patient lifetime value.

So, the job of the owner is know, understand these statements, read them and review them to insure their business is well run and financials are in order.

In reality it would take 30-40 minutes or less once a month if all’s well to review and talk it over with your CFO  and business coach. If it’s not well, then it becomes a “must” to address and resolve quickly.

Questions?

Want an analysis of your P&L and metrics?

Give me a call 503-753-9971

We do this as a complimentary service and give you the report.  

You can contact me at PhilBride@FortuneMgmt.com

Schedule a time to talk today. 

 

You are welcome to reach out to us anytime. We are happy to help you.

 

Phil Bride, Managing Director, Fortune Management SW WA / OR