CHAPTER 3
The Importance of Knowing Your Numbers
If you are like many dentists in practice, you went to dental school to improve smiles and help people. Running a business was probably not one of your primary objectives. Yet, here you are with your own practice or even multiple locations. The investment in your dental degree and dental business are likely the most significant investments you will ever make. You need to ensure that you are getting a sound return on that investment.
How do you know if you are making money? To be successful, you must understand what your current financials mean and track them regularly. You may be thinking, “Hey, I already know I need to make more money; I want to start with that part.” It’s tempting, I know. But, think of the profitability of your practice as a map. When you look up a location on a map and try to make a plan to get to a destination, you must know your current location. This is the best way to determine how you are going to get where you want to go.
It’s not only important to know what you are tracking, but also the best way to track the numbers and what they really mean. You might be thinking, “Whoa, that’s why I have an office manager.” My hope is that you will trust me and listen to my advice based on more than twenty years of experience. Having a qualified office manager can be a vital component to growing and managing your business. Yet, if the office manager is the only one who knows your numbers, you are not only prime material for embezzlement, you are going to be in for a rollercoaster ride when your office manager leaves.
As the owner, you should have a better handle on your numbers than anyone else in the business. Yes, your office manager should know them too. You should share some numbers with your team. The more educated your team is about how to make and keep the business healthy, the more accountable and vested they will be in your practice.
In the following chapters we will look at:
• The numbers you should be tracking
• How to track them
• How often to track them
• What to look for
The Importance of the Income Statement
Let’s start with your income statement (or sometimes called profit and loss report). Hopefully you use QuickBooks or a similar bookkeeping software—it is likely the system you use to write checks and/or do payroll. I highly recommend you utilize it in your office for paying bills and recording deposits. Most accountants can interface with QuickBooks and you can send them your numbers each month with a click of a button. Even if you use an internal or external bookkeeper to write your checks, the benefit of QuickBooks is real-time tracking of your income and expenses. Not necessarily for tax purposes, but to be able to know weekly and monthly how much has been deposited and spent.
I work with many dentists who have a team member pay bills for them. That is fine to let this work be done by them; however, never, ever allow an office manager or bookkeeper to have authorization to sign your checks. What are the exceptions? The person is a spouse of an owner or you have a group practice and have your own CFO. Even then, you should carefully monitor the income and expense reports. It’s usually the people you would never imagine stealing from you who are the first to do it.
If you have a single office or smaller group of practices, I strongly recommend you take a QuickBooks class. I am not asking you to balance your checkbook or figure out your own taxes. You still need an accountant and it’s very likely you may also want a bookkeeper. But don’t be in the dark. You will never regret having the knowledge of how the program works and how to run the reports. This way, if you do have a new office manager come on board, you are not at the mercy of his or her skill level to be able to get the information you need.
Similarly, one of my successful former clients told me that when he first came into his current practice almost twenty years ago, the senior dentist had him filing his own dental claims by hand. Why? Because the senior dentist knew how important it would be that this young dentist know what was going on the claims. When was the last time you looked at a blank dental claim form? As an owner, it is crucial that you understand all the aspects of the practice’s business dealings.
Be sure to review your Income Statement or Profit and Loss Report monthly. You want to view it on a cash basis. There are many items that may look like an expense for tax purposes but aren’t actually things you are paying for. You only want to view monies coming in and going out.
In most cases, you will have only one income account for your practice. This is the easiest part to set up. The trickiest part is being sure your expense accounts are setup correctly. Your expenses will fall into two broad categories:
1. Fixed Expenses – With a fixed expense, the bill is the same amount each month, no matter how many days you see patients or whether or not the office is open or closed.
Examples of fixed expenses are:
• Rent/Note on the office: 3.5 percent
• Marketing and Advertising: 2 to 5 percent
• Equipment: 2 percent
• Telephone and Utilities: 1.75 percent
• Consulting and CE Expense: 2.5 percent
In a general practice, your fixed expenses should be no more than 22 percent.
2. Variable Expenses – Here variable expenses vary depending on factors such as how many days you work, how many people are working, how many dental supplies you use, etc. In other words, variable expenses increase and decrease based upon the volume in the practice and the hours it is open.
Examples of variable expense benchmarks in a general practice are:
• Dental Office Staff Salaries: 20-22 percent
• Employee Payroll Taxes and Benefits: 3 percent
• Dental Supplies: 5 percent
• Office Supplies: 2 percent
• Dental Lab (internal and external): 11 percent
In a general practice, variable expenses should be no more than 43 percent of collections.
Owners’ salaries may be listed as an expense, but they are actually profit to the owner. You want your practice overhead to be no more than 65 percent. You are shooting for a 35 percent profit to owners, minimum. We have clients with overhead figures as low as 45 percent. The important thing is to work toward getting your bottom line in shape and keeping it that way.
You should run your profit and loss report monthly, by the tenth of the month. You want to be sure you use the option to show each item as an expense of collections. Be sure to set up your report so that you can see the previous month’s stats (the month that just ended), the year-todate stats, and both the previous year’s stats for the same month and same time period year-to-date.
You must plan to spend about thirty minutes per month reviewing these figures to be sure you understand where your money is going. You work too hard to let it fly out the door.
Knowing Your Numbers – Knowing What to Track in Your Practice Management Software (PMS)
We live in an exciting time of technology in dentistry. I still remember, in my early consulting days, working with clients who did all of their billing and claims manually. The office manager used a ledger book or pegboard system to track numbers and manage accounts receivable. All dental claims were done by hand. Needless to say, it wasn’t very efficient.
Now we have some very advanced practice management software, or PMS, systems. For some reason, these software programs are intimidating to some dentists, and they rely solely on their teams to enter data and pull reports. This is becoming less common, yet if you must ask a team member to run a report for you because you don’t know how, it’s time to invest in some training on how to utilize your software. The good news is that the larger PMS companies have great online tutorials and videos. One of my favorite shortcuts to looking something up in a client office is to have a pdf version of their software manual. This way I can quickly pull up references to the data I wish to track.
Here are some useful statistics to track in order to help you understand the business from several different perspectives.
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