The financials of your practice are one of the key business engines in your dental office. There are five components of your financials that every dentist needs to know. As the CEO of your business, understanding your financials is critical to your overall success.
1. Profit and Loss (P&L)
The best way to keep score in your practice is your Profit & Loss Statement. Some dentists may not always have a solid understanding of their profit and loss statement, but we’re here to help. Your P&L is divided into three sections: 1. Revenue (which is your patient collections), 2. expenses, and 3. net profit. Revenue minus expenses is profit (or loss if expenses are greater than profit). Make sure that your revenue matches what your practice management software is reporting for the same time period. Regarding expenses, there are six key expenses to compare to industry guidelines. You calculate the expense percentage by dividing the expense amount by collections. See table 1 for industry guidelines. These will differ slightly from region to region and specialty to specialty.
|Expense Category||Industry Guideline|
|Payroll (including benefits and matching taxes)||20-25%|
For net profit, the industry guideline is 35-40% and this includes the doctors paying themselves for the dentistry they produce. Net profit will be higher for some specialists.
The other components of the financial engine consist of:
2. Third Party Financing. We don’t recommend that dental practices act like a bank and create custom payment plans for patients (except when it comes to orthodontics). We do recommend taking advantage of third party financing options, like CareCredit, for the following reasons. It will be easier for the patients to accept treatment with a monthly payment versus a lump sum. The practice receives the cash up front. There is much less administrative work of billing and following up with patients.
3. Fee Strategy. If you have not raised your practice fees in more than one year, it is time to review them. Fortune Management recommends setting your fees above market averages for your zip code.
4. Accounts Receivable. Measure the health of a practice’s A/R by looking at two metrics: 1. the total A/R should be less than one month of average collections, and 2. no more than 5% of that total amount should be overdue more than 90 days.
5. Financial Policy and Arrangements. Document your financial policy and have patients sign a financial arrangement for any treatment plan.
When a practice focuses on all of these components of the financial engine, it increases its likelihood of growth and success.