John K. McGill, JD, MBA, CPAand Holden Sours, CPA
As the landscape of the dental profession evolves, traditional financial statements fail to represent a complete financial picture. In an environment where doctors face increased managed care write-offs, decreased collection rates, and additional production adjustments, these statements must provide the necessary information to help doctors manage their practices effectively. To combat these changes, doctors must accurately track these adjustments in order to analyze their impact. Three simple changes to customary financial statements will make them a comprehensive management tool for doctors.
Incorporate practice production
Traditional profit and loss statements, also known as income statements, begin with practice collections rather than true practice production. Historically, there was minimal variation between these two figures, perhaps with the exception of small timing differences. In today's economy, however, the gap is continuously broadening, highlighting the need to analyze the variations between the two. Through using production-based accounting, in which an additional segment is inserted at the top of the traditional profit and loss statement, doctors are now able to monitor their adjustments easily.
After the profit and loss statement has been modified to include practice production, we recommend that overhead be calculated as a percentage of such in order to provide a more accurate picture. Basing overhead on collections can be misleading at times. For instance, a large overhead rate may lead doctors to believe they have an issue on this front, when their problem could truly arise due to large managed care write-offs or poor collections.
We also suggest questioning any large unexplained variances between production and collection figures to ensure they can be accounted for. Unfortunately, many doctors are faced with embezzlement, and tracking these differences can be an early indication of a possible problem.
The following example demonstrates the adjusted presentation:
February 2015
| Practice production | XXX |
| Less: Managed care adjustments | (XX) |
| Less: Other production adjustments | (XX) |
| Less: Production not collected | (XX) |
| Practice collections* | XXX |
| * The statement then continues as normal |
Implement benchmark percentages with a dental-specific chart of accounts
Basic profit and loss statements are generally organized alphabetically and can require extensive analysis before a doctor can gain specific management insight. We suggest executing a dental-specific chart of accounts, which is designed to group similar expenses into categories to provide a more accurate picture of profitability. We recommend that the chart of accounts be broken into six major expense accounts - Clinical Wages, Clerical Wages, Occupancy, Professional Supplies, Non-Operating Expenses, and Doctor Expenses. By doing so, doctors are able to quickly analyze a subset of expenses as opposed to one small account at a time. We further suggest that each expense category is identified with a benchmark percentage, based on either industry averages or specific practice goals, to allow doctors to easily track their progress or compare their practices to others in a similar specialty.
Include a cash flow statement
Traditional profit and loss statements also fail to capture all cash outlays of a practice, as they neglect to include certain nondeductible expenses that are normally reported on the balance sheet. These nondeductible expenses, including the principal payments on debt service and the purchase of large assets that must be depreciated over time, can be some of the larger expenses a practice incurs. By including a cash flow statement, doctors are able to analyze all changes that affect cash and cash equivalents, thus providing more information regarding the practice's liquidity and its ability to meet future cash needs. Furthermore, by grouping similar cash outlays, a cash flow statement provides doctors the ability to determine the amount of cash affected by operating, investing, and financing activities.
Doctors often tell us they have trouble seeing the connection between what is reported in their production software and what is reported in their financial statements. This complication, coupled with the rapidly changing economic environment, requires doctors to spend a significant amount of time analyzing their financial information. Implementing the tools mentioned here will provide more comprehensive information on the operations of the practice, specifically production, budgeting, and cash flow.
John McGill, JD, MBA, CPA, provides tax and business planning exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group, LLC.
Holden Sours, CPA, provides accounting and CPA services through Elliott Davis, affiliate of the McGill & Hill Group, a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com for more information.
