Financial Clarity In Your Dental Practice

In a dental practice, patient care and operations go hand in hand. As such, financial clarity and understanding your financial position is critical to success. Financial statements provide a clear view of your dental practice’s financial health and past performance. From there, you can plan for the future by creating measurable goals and financial objectives.

In this blog post, we’ll explore why financial statements are vital for dental practices and how they can help you make smart decisions that drive success.

Financial Statements

Financial statements include the balance sheet, profit and loss (P&L) statement, and cash flow statement. These reports show your dental practice’s financial performance, liquidity, and solvency (the ability for you to meet your long-term debts and financial obligations). These reports help owners and managers gain financial clarity by assessing profitability, managing resources, and planning for the future.

Financials can also show comparative period performance, identify trends and aberrations and be compared to industry benchmarks or goals.Financial performance is an indicator of long-term growth and success, so it’s important to regularly review your financial statements with your accountant. 

Understanding Profitability

Profitability is the foundation of every dental practice. The Income Statement (or Profit and Loss / P&L) helps you understand your dental practice’s ability to pay expenses like staff wages, rent, and supplies. The P&L shows revenues, expenses, and net income over a specific period, usually monthly and annually. By reviewing each income and expense account and your financial KPIs, you can gain financial clarity by finding opportunities for growth and cost minimization in your dental practice.

Profitability is separated into gross profit and net profit. Gross profit is the total revenue your practice makes, less any direct costs like dentist wages and consumables. Net profit is calculated by taking your gross profit, and subtracting all operating expenses like rent, insurance, and utilities. Both gross profit and net profit provide insight into areas where you can increase revenues and minimize unnecessary costs. Gross profit is needed to calculate your break-even revenue.

Assessing Your Dental Practice’s Financial Health

Financial statements also provide visibility into your dental practice’s overall financial health. The balance sheet shows assets, liabilities, and equity at a specific point in time, which includes bank accounts, equipment, purchased goodwill, credit card and loan balances and owner capital.

By analyzing your balance sheet, you can gain financial clarity by assessing your liquidity, solvency, and debt ratios. By reviewing these on a regular basis, you can evaluate your financial stability and make educated decisions to further reduce your financial risk. You can focus on specific financial targets and ratios depending on what your short and long-term goals are.

Forecasting Cash Flow

Cash flow is vital for any business. Financial statements help you forecast and manage cash inflows and outflows. This helps ensure that payables are paid on time, and allows you to invest in new equipment, expansion, or hire additional staff, without affecting your financial stability.

The cash flow statement tracks cash inflows and outflows by adjusting the P&L for non-cash expenses and adjusting for loan principal payments and owner contributions or distributions. If you’re a dental practice operating as an S corporation or partnership, you will not see any owner’s income tax obligations on the business cash flow statement, so this must be factored in separately.

As a dental practice owner, you can gain financial clarity by forecasting cash flows, identifying spending patterns, and applying strategies to improve cash management. This ensures liquidity and helps you navigate uncertain periods and seasonal fluctuations with more confidence. Reviewing past cash flow data can help you plan for the future. By identifying your main revenue sources and expenses, you can estimate future inflows and outflows in your business.

Informed Decision-Making

In a competitive market like dentistry, it’s important to make informed financial decisions. Financial statements can provide you with data-driven insights to assist with this. By calculating your financial KPIs you can assess your dental practice’s performance on a monthly, quarterly, or annual basis. You can also allocate resources within your practice by investing in marketing or hiring additional staff, and plan strategic initiatives like community outreach or patient information nights.

Regardless of your dental practice goals, financial statements can be an asset to help you make smart decisions that align with your objectives, which creates financial clarity in your business. If you review the costs and potential revenue benefits of your decisions and investments, you can maximize your profitability even further, while growing your dental practice.

A Practical Example

Assume that your dental practice onboards 10 new patients per month. Let’s say that your goal is to double or triple that inflow to 20-30 new patients per month. How would you do it?

New patients come from increasing your exposure to your ideal patient base. So, if you want 30 new patients per month, you may need to reach 1,000 – 3,000 individuals online or via your community, assuming that 1-3% of these people will convert into patients for your dental practice.

So how do you reach these additional 1,000 – 3,000 people per month? By investing in marketing. There are many marketing options available, including updating your website, increasing your social media presence, using SEO to generate organic web traffic, or investing in paid advertising (e.g. Facebook or Google Ads).

Let’s say the industry benchmark for marketing expenses is 4.5% of revenue. If your P&L shows $10,000 of marketing expense and $1,000,000 of revenue, you’re only spending 1% per year on marketing.

By increasing your marketing spend, changing only one marketing element at a time, and tracking the cost and results consistently, you can gain clarity on your marketing performance and calculate your return on investment (ROI).

If your new marketing strategy costs $2,000/month and brings in 10 more patients with average annual revenue of $500 per patient, then your ROI is 10 x $500 = $5,000 of annual revenue, divided by $2,000 cost which equals 250% ROI. Plus, this will grow each year as you retain the patient.

It’s important to track and measure the results of your marketing activities to see which is most profitable for your dental practice. The results may change depending on where you’re located, the demographic of your ideal patient base, and how effective your sales team is at converting interested leads into paying customers. By reviewing your entire marketing system, you can find ways to maximize your ROI over time to get even more patients for the same cost. 

Conclusion

Financial clarity is essential for managing a dental practice. Accurate financial statements provide insights into your dental practice’s financial performance, health, and long-term growth. Financial statements help with assessing profitability, forecasting cash flow, and making informed decisions. Having this financial clarity empowers you to navigate challenges, invest in opportunities, and achieve sustained growth for years to come.

To find out more, book a free consultation with our expert team of dental CPAs here at DrillDown Solution. We are a dental CPA firm that puts dentists in the best financial position possible with innovative and proactive accounting, tax planning, and business consulting solutions.

www.drilldownsolution.com

(801) 225-8474

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