By: Erick Cutler, CPA, Partner
What if we told you financial statements could be your best friend?
Imagine an assistant who could quickly give you insights into your dental practice that you’d otherwise spend hours trying to gain on your own…an assistant who could tell where you’re making the most money, and what’s happening in hygiene…an assistant who understood the ebb and flow of every dollar that came through your practice?
Of course, no such person exists, but you do have a source that can help you put together your most important KPIs (key performance indicators — the numbers that point to factors that can make or break your practice), and that source is your financial statements.
Reading Financial Statements
First, remember that you don’t have to fully “get” every line item on your statements. You just need to know where to look for different types of information, like how much you’re paying out in salaries or how much income you bring in annually for dental hygiene services. Yes, in an ideal scenario, you would have an in-depth understanding of why you use cash basis vs. accrual basis, but you’re not an accountant, so your knowledge of these terms may be superficial at best. Move on.
The Segments (And Why They Matter)
Dental financial statements are comprised of a Balance Sheet and an Income Statement.
- The Balance Sheet (a.k.a. Statement of Assets, Liabilities, and Capital) is a snapshot. You could even look at it as the accounting version of a dental impression – it tells you where things are at the moment it was prepared. You may not know where items are moving or where they’re coming from, but you have a static picture from which to make future decisions. It includes two main sections, the first of which is “assets”. This section tells you what you own and is ideally ranked by how quickly those items can be converted into cash (liquidity…something that will become very important to you if you plan on selling your practice in the near future). It also includes “liabilities,” which is what you owe (to vendors, banks, etc.) These should be ranked according to due date.
- The Income Statement (a.k.a. Profit and Loss Statement) tells you what happened to your practice over a period of time, somewhat like tracking the progression of gum recession. It tells you how your practice is performing in a block of time and can give you insight into what your future might look like and where you need to make changes.
You’ll want to get at least marginally comfortable reading these statements as they provide the base information for determining some of your most important KPIs.
The Essential KPI Questions
As you make examining your practice financials a habit, you’ll determine which indicators are most important to you. To get started though, we want to cover some of the most elemental and universal questions you can ask. You’ll be able to expand from here once you get comfortable pulling information from your statements and diving deeper into the meaning behind the numbers.
How much are our people costing us?
This can be a difficult question, but it’s still a very important one.
Examining staffing delves into questions about compensation, production levels, hours, and overall staffing needs. All of those topics touch on areas that can be volatile when it comes to decision-making.
Overall though, you want to look at your salary costs and determine important qualities such as whether you’re over or understaffed and whether you’re overpaying your employees (you might not be if they’re stellar). A good goal for staffing is around 25% of net production. If you feel the need to make adjustments, keep in mind that changes in this area impact the very culture of your practice.
How much are we spending on dental supplies?
Your statements should have this outlined clearly so that you’re able to quickly assess how much you’re spending, as well as how those expenditures fluctuate across the years. You should keep a guideline percentage (5% of net production is recommended) to use as a check against supply prices creeping up in comparison to what you’re actually bringing in.
What are we paying in dental lab fees?
This cost can vary greatly depending on your patient and service mix, but a good general goal is 6% of net production. You can adjust that number upward if you do a lot of work with crowns and other highly customized services.
What are we spending on (and getting from) advertising?
Advertising costs can get overlooked, but it’s worth giving this expenditure a little review time.
Advertising generally shouldn’t be included in your overhead. Unless you’re just looking to maintain your current practice performance, you should be viewing advertising as an investment. You can consider spending as much as 10% in revenue on this area. Just make sure you’re getting your money’s worth by tracking effectiveness.
If you have difficulty applying any of these points, you may need to consider how your statements are prepared. There is quite a bit of variation within dentistry, so if you want to get started creating your statements in a way that best fits your needs, we suggest you read this article, “5 Steps To Producing Effective Practice Financial Statements.” It is also advisable to seek out the help of a professional who can take you through all of the ins and outs of using your financial statements to assess the health of your practice.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.