Effective Financial Management of Your Dental Practice, Part 1

Part 1 of 2

All dental practices share some common financial characteristics. The productivity of you and your team drives your profitability. Your people, your space and your clinical expenses will all be major expenditure items regardless of the size of your practice. How you measure and manage these characteristics can make the difference between having a decent practice and enjoying a fantastic practice.

You can’t manage your financials effectively unless you know exactly how much you’re managing. This two-part post is all about analyzing your business’s financial information so you have the knowledge you need to better manage your practice. I’ll point out some all-too-common actions that yield very little real, timely information, and then I’ll offer suggestions for assessments that will work in your favor.

Let’s start with what not to do.

Management by Checkbook Balance

“How much cash do I have in the bank?”

You have either witnessed this or been guilty of it yourself: judging the performance of your practice based on a snapshot when your bank account balance was really high, really low or somewhere in the middle. Your practice probably generates plenty of cash to pay your vendors, your employees and yourself. However, even if it does, viewing the results (positive cash flow) without knowing the cause of those results does little to help you fix problems or repeat successes.

Yes, many seasoned practice owners know intuitively where their money is going. Most of us, however, could benefit from a little bit more data.

Management by Tax Return

“Wow! I must have had a good year because my tax return says I did!”

Here is a short list of reasons why you should not analyze your financial performance based upon what your tax return says:

  • Tax forms are complicated and do not lend themselves to meaningful analysis.
  • Tax returns are due two-and-a-half months after year-end, at the earliest. If you are waiting two or more months to perform a financial review, you are waiting too long.
  • If you are only performing a financial review once a year when you receive your tax returns, you are not looking at the numbers often enough.
  • Due to differences between tax rules and financial accounting rules, taxable income can be a misleading measure of performance.

Management by QuickBooks

“My profit and loss statement is saying I made money, but where is the cash?”

Effective financial analysis requires three elements—accuracy, timeliness and context. When you, or a member of your team, are entering transactions into QuickBooks without capable oversight, it is possible that you are missing all three of the aforementioned elements. That is not to say that you should not be entering your own transactions; however, having a knowledgeable advisor review the numbers and meet with you on a set schedule throughout the year is better than going it alone and hoping you get it right.

Next time, I’ll offer workable suggestions for analysis that will give you a clearer picture of your practice’s financials so you can manage in a smart, effective way.