Dental Practice Accounting: Why Financial Statements Are Key to Growing Your Practice and Your Wealth
As dentists and business owners, we have worked hard to perfect our craft. We have business support teams dedicated to providing the highest quality service, and we rely excessively on their knowledge and expertise. That’s all we need to succeed, right?
That’s what we believed when we left dental school. However, as we built and developed our practices, we quickly learned that our professional skills could only take us so far and that our business skills sometimes failed us. Nonetheless, our team members expect us to be experts in all business aspects of dental practice, and they rely on our decision-making process and guidance. While such confidence is emotionally rewarding, we have to admit that we can’t cover everything. It must be admitted that what is often lacking in the management of a dental practice is the necessary financial sense.
Keys to Success as a Dental Practice Owner
Although research shows that the dental industry enjoys a very low failure rate,1 most dentists/owners struggle with high overhead2 and costs that are often impossible to control. That means we’re still working just as hard, but generating less profit, which equates to less personal wealth for us as business owners.
The entrepreneurial dentist and the multi-owner
Accounting is more than your taxes
What is the main reason for high overhead and uncontrollable costs? It is making decisions without taking full advantage of all the numbers and applying basic financial analysis. Yet this is exactly the information that any business owner will find in their financial statements.
However, the problem goes much deeper than that. These same financial statements are essential to understanding and building the value of your practice. The principles of practice evaluation need to be further clarified so that we can all understand the specifics of dental practice evaluation.
Accounting is your control center
The figures are objective. Often they don’t tell you what you want to hear. But that doesn’t mean we should shut them up and ignore them. Instead, we must accept that financial statements confront us with the cold, hard truth. Although it can sometimes be unpleasant, it is precisely the information we need to detect problems early, make the necessary adjustments and make better decisions.
That’s why every dentist/owner needs a solid grasp of bookkeeping and all practice numbers. This is achieved by understanding and analyzing financial statements.
Financial statements provide visibility
In our professional career, we are first dentists, then we studied commerce. We realized the critical difference that financial controls made to business decision-making, which led us to help other dentists/owners implement similar changes so they could achieve their financial goals. In doing so, we realized that many dental practice owners do not prioritize accounting and financial statements and instead rely on their accountants for this essential part of the dental practice.
This is not surprising since, from our own experience, we know that most dental professionals receive little or no formal training in accounting and financial management. But the good news is that you don’t need a lot of practice to get up to speed. You need just enough to understand the numbers and interact effectively with your accountants and bookkeepers. Once you do this, you will quickly understand and be able to use these valuable instruments to manage your practice more effectively.
Your opportunity to create value
Let’s be clear: our goal is to improve the financial performance of our company. Although we may make more money now and in the near future, we must not forget that our most important goal is to create a more valuable practice. When it comes to running a dental practice, we need to think like business analysts rather than clinicians.
Here is a brief overview of financial statements so that you can better understand these critical accounting reports.
Income statement: “The income statement is a financial statement that summarizes the income, costs and expenses incurred during a given period.”3 This report documents the money the business has generated and spent over a specific period of time. At the bottom, it shows you a critical figure: the net profit generated by the company. The detail above the bottom line can help you spot revenue and expense trends, so you can act on problems and recognize opportunities. It also helps you with tax planning and makes it easier to research and implement savings strategies.
The Profit and Loss (P&L) account is one of three financial statements that every business should generate regularly, along with a balance sheet and a cash flow statement. In addition to an annual report, monthly and quarterly reports are recommended to assess the performance of the practice.
It is crucial to compare P&Ls from different accounting periods. This financial analysis allows you to assess any changes in the economic cycle and provide more meaningful insight into the performance of the practice.
Balance sheet: The balance sheet is a financial statement that shows the assets, liabilities and equity of a business at a specific time.4 The balance sheet summarizes what the business owns (assets) and what it owes (liabilities). It is similar to a personal net worth statement. You can quickly see how much money your business has and get an idea of the overall value of the practice, as well as how much shareholders have invested. The balance sheet is represented by this equation: assets are equal to the sum of liabilities and equity. It is also used in fundamental financial analysis to calculate financial ratios.
Cash Flow : Although the cash flow statement is perhaps the most misunderstood financial report, it is one of the most critical elements of financial statements that any business owner should review. This document tracks how money flows in and out of your business, and it can help you quickly assess your financial stability and avoid a future cash flow problem.
Statement of retained earnings: This document tracks the amount the business has earned that has not been paid. The statement of retained earnings can be an important predictor of financial stress.
The beauty and advantage of all these financial statements is that they quickly convey essential information. Plus, because they’re generated in a standard format, these reports can help third parties get a handle on your business quickly. So whether it’s potential buyers or lenders if you want financing, financial statements communicate in a universal language. When used together, the income statement, balance sheet, and cash flow statement provide a comprehensive and in-depth view of the firm’s financial performance.
What is your exit strategy?
When you’re busy, it’s easy to ignore accounting and focus on running the business. But if you’re planning to start and eventually sell your business, it’s a big mistake to ignore these numbers. Buyers and their accountants will likely judge your business primarily on your financial statements. They will focus on specific numbers showing growth and profitability. If your financials don’t reflect a profitable and stable business, you can expect lower offers (or no offers at all).
Selling a dental practice is a challenge. In fact, selling a business is a monumental undertaking with a high failure rate. According to a study by the United States Chamber of Commerce, only one in five small businesses that seek a buyer sell successfully. Other sources only show a 5% success rate for business sales.5
Change of mentality
Is business accounting a non-urgent matter? Of course not. This often requires discipline and a shift in mindset from a clinician spending 100% of their time treating patients to having enough time to attend to professional activities. This is where these financial controls are essential. You, the business owner, will enjoy greater control if you commit to regularly reviewing and analyzing your financial statements. You’ll get the visibility you need to make the decisions that can help your business grow in a financially smart way.
As dentists ourselves, we understand the pressures of our demanding profession. It is difficult to balance business development work with dentistry and patient care. However, we truly believe that if you can learn to make financial reviews and analysis a habit, you will find that your growth will be compounded and you will build a more profitable and valuable dental practice. We also argue that learning accounting and financial statements can be one of the most profitable investments you will make.
Disclosure: Drs. Ruvins, Stein and Kayserman have no financial interest in any of the companies mentioned in this article.
Editor’s note: This article originally appeared in the November 2022 print edition of Dental economy magazine. Dentists in North America can take advantage of a free print subscription. Register here.
1. Rubin K. It’s a phenomenal time to be a practice owner. Dental economy. May 19, 2016. Accessed July 21, 2022. https://www.dentaleconomics.com/practice/article/16388206/its-a-phenomenal-time-to-be-a-practice-owner
2. Levin R. Surviving (and even thriving!) in 2021: 2021 survey results Dental economy/Annual survey of the practice of the Levin group. Dental economy. March 21st, 2022. Accessed July 20, 2022. https://www.dentaleconomics.com/practice/article/14233700/surviving-even-thriving-in-2021-findings-from-the-2021-dental-economicslevin-group-annual- survey-practice
3. Fernando J. Meaning, Importance, Types and Examples of Profit and Loss Statement. Investopedia. July 23, 2022. Accessed July 23, 2022. Updated August 30, 2022. https://www.investopedia.com/terms/p/plstatement.asp
4. Fernando J. Balance sheet: explanation, components and examples. Investopedia. Updated July 5, 2022. Accessed July 23, 2022. https://www.investopedia.com/terms/b/balancesheet.asp
5. Leonetti J. Get out of your business, protect your assets. John Wiley & Son; 2008.