Gaining control of your finances includes staying current with your financial reports and working closely with your accountant.
Bryan T. Marshall, DDS
It`s time again for your monthly meeting with your accountant. You sit down and he briefly goes over your profit and loss statement. You ask him how you`re doing financially and if you`ve paid enough in taxes, then go home. Sound familiar? Unfortunately for most of us, that`s as far as we go. Instead of looking closely at how our financial statements can help us, we merely throw them in a pile and forget them until the next meeting. I find that one of the best ways to understand the importance of these statements is to look at a scenario where properly maintained financial statements could have saved a situation before it became a problem.
Dr. Abel is your typical solo practitioner. He has been in practice at the same location for almost 20 years. He owns his own building. Most of his staff members are long-term, but there are always one or two "new people" in training. Dr. Abel always wants to be sure that there is enough staff during the hectic times, so he makes sure that his three assistants and two front-desk people are always in the office. His patients love his hygienist, who has been with him for years. Dr. Abel likes to think of himself as "cutting edge" because he always purchases the newest materials available. This tendency causes the assistants some problems because they are often out of the material the doctor wants. As a result, they have to phone in orders for rush shipment on a regular basis.
Dr. Abel is very empathetic to his patients who regularly refer others to the practice. Although Dr. Abel doesn`t think advertising is particularly effective, he maintains the same half-page Yellow Pages ad he has used for the past several years. Why? Many other practitioners in the community are doing it. As a matter of fact, he had the page colorized just last year on the advice of the Yellow Pages consultant in order to "stick out from the crowd."
Dr. Abel doesn`t particularly care for the management side of the office, so his wife pays the bills. His accountant handles the payroll function so that all forms and taxes are deposited correctly. On a monthly basis, Mrs. Abel takes the receipts, bank statement, and check register to the accountant to prepare the quarterly financial statements (which he usually goes over with her two to three months later). Dr. Abel doesn`t like the "business" side of dentistry and Mrs. Abel doesn`t understand the statements; both assume all is well as long as the accountant doesn`t mention any problems. After all, revenue is listed as positive and expenses are subtracted from that. As long as there is money left over, they feel confident in the job they are doing.
Although the practice is still making money, Mrs. Abel has noticed that the income flow has decreased over the past several months. At first she thought it was because of normal seasonal fluctuations, but as time goes on she begins to worry more. Dr. Abel suggests that they look at their latest financial report to see where the money is going, but it`s May and their most recent quarterly report is from last December. The report is listed in Figure 1.
Given this information, how are Dr. and Mrs. Abel going to evaluate their financial situation and look for a solution? We need to begin by looking at their financial statement.
There are several problems here, not the least of which is the timeliness of the report. This information is five months old and out-of-date. If they had a more timely report, this information may have been useful as an historical reference. The report also covers too much time. A lot can happen in a three-month period. The report needs to be done on a monthly basis and needs to be evaluated within two weeks of the end of the reporting month. May`s report should be available by June 15.
Another problem with the report is that the categories are too broad. Revenue is listed as one entry when there are at least two sources of revenue - Dr. Abel and his hygienist. Also, any refunds should have a line item in the revenue section.
The "operating expenses" categories are also too broad. They need to be subdivided into two categories - cost of services and operating expenses. The cost of services category has to do with everything related to the delivery of dental treatment and, as such, should vary depending upon how much treatment is performed. The operating expenses usually are not directly involved in patient care and should remain relatively constant. Since Dr. Abel`s financial statement doesn`t break down salaries other than doctor and staff, it`s difficult to keep an eye on the payroll cost - the greatest expense in any dental practice.
The last major problem with Dr. Abel`s current financial statement is that depreciation is listed as an operating expense. Since it is a "paper loss" - an expense for which you don`t have to pay cash - it should be listed under "other expense."
There can be several reasons for the problems with the financial statement; the most probable is that Dr. Abel`s accountant is not familiar with the dental business. Dentistry is different from a retail store or manufacturing facility. Accountants by nature know numbers, not how you arrived at them. One of the biggest mistakes dentists make is to assume that their accountants know more about their businesses than they do. Remember that accountants know accounting, not dentistry. It is vitally important to your business that you have an accountant who is familiar with the dental field. Speak to your colleagues and interview several accountants before making your final decision. Remember also that as your business changes over the years, your accounting needs will change as well. Don`t let habit or friendship keep you from making a change if it appears necessary. That being said, let`s reorganize our profit and loss statement to more truly reflect our costs (see Figure 2, next page). The categories are still too broad, but it`s what we have to work with.
Notice that it took 91 percent of revenue to produce treatment in the last quarter of the previous year. That`s 11 percent higher than the average of the year as a whole. Although the production was less for this quarter than what appears to be average, the cost of services should still not be out of line with the year to date. These costs vary directly with the treatment being performed, so they should be less if treatment is less. In other words, the percentage should remain constant. There can be several reasons for this, but it`s best to go line item by line item.
First, we see dental supplies (although very high) are consistent with the year-to-date percentage. The next item we look at is salaries. The percentages for the doctor and staff are much higher than the year-to-date, which is reflective of a constant salary on the doctor`s part and overstaffing in the fourth quarter. Since the payroll numbers are not properly broken down, it is impossible to pinpoint whether the problem is hygiene, dental assistants, or front-desk staff. The last item is lab fees. Although they are a bit higher this quarter than year-to-date, they are not too far out of line. The proper conclusion is a serious problem with increasing payroll.
Upon analysis of operating expenses, we notice some percentages in the fourth quarter are higher than the annual average. The biggest items are in the general/group insurance, laundry and uniforms, and office expense. These things can be easily researched and explained. For example, an insurance premium paid once a year will make the number for that period high. If uniforms were purchased in the fourth quarter, that would explain the difference in that category. If new computers were purchased for the office in November, the cost would inflate that category.
Now that we`ve analyzed the information we have, what do we do with it? First, look at payroll. Did we give big raises or bonuses? More importantly, did we raise fees to compensate the increase in staff salaries? If we didn`t increase salaries, were there too many staff members "on the clock?" If there isn`t enough work available to keep everyone busy, send someone home! You`ll be surprised to find that staff members will often leave if the office is slow and someone asks for volunteers.
As I mentioned previously, Dr. Abel`s biggest problem is the lack of current information. If that`s the case, why are we spending time reviewing an out-of-date profit and loss statement? It`s the only information we have and, although not current, it may point to errors that have grown worse over time (the most likely scenario in Dr. Abel`s case). What can Dr. Abel do to correct the situation? He knows that payroll was high a few months ago; now he needs to review the time sheets. Are people being paid overtime? Are salaries too high? Does he have too many staff members? These are all hard questions that need to be answered.
His next step is to go through his checkbook and input all deposits made and checks written into a program such as Quickbooks or Quicken. Although this will be a time-consuming task, it is necessary in order to pinpoint where his costs have gone up. The key is to be consistent with the categories while putting together the check register. Dr. Abel needs to look at everyone he pays and decide which category he or she falls into, and then be unswerving with his decision. He also needs to separate his front desk from his dental assistants when recording payroll. Most importantly, he needs to ensure that his hygienist payroll is separated from his staff salaries.
Dr. Abel`s next task is to look at his end-of-the-month reports for the past year, then separate his personal production from his hygienist`s numbers. The income a hygienist brings into the practice should be proportional to her salary.
After completing this enormous task, Dr. Abel finds out that his increasing payroll appears to be the cause of the problem. It seems that hours have steadily increased over the past few months while income has remained constant. He also found that his hygienist was being paid about 55 percent of her production.
The staff issues can be corrected through proper scheduling. There are several possible solutions to his hygiene problem. The best one is to place his hygienist on a production-based salary instead of a daily guarantee. This will ensure that her salary will stay in line with practice goals. By doing this, he may also find his hygienist becomes an advocate of fee increases and less resistant to RP&C appointments. Having another person in the office with an incentive to produce will certainly improve the bottom line.
His last and most important task is to find another accountant. If his accountant had been timely with the reports, had properly expensed items, and had warned him of disturbing trends, this problem would have been caught and corrected months ago! Financial statements need to be prepared by someone knowledgeable. His categories are still far too broad and he needs a better breakdown of expenses in order to fine-tune his business. He needs his reports done on a monthly basis and he needs to have them within two weeks of the end of the month. Nothing short of these requirements will be useful to him.
You can?t make good business decisions without sound data. Dentistry is a business; to survive in an ever-competitive world, we need to use all of the tools at our disposal. Proper financial statements are some of the most important defenses we have for ourselves. It?s important that we use them wisely.
