When it comes to the numbers side of the business, most of my dentist clients have a very low pain threshold. I get it, you have plenty on your plate, and while I may think that accounting and tax are super exciting, I am well aware that I am in the minority! So, when I am talking about financial performance with a dentist, that conversation normally centers on “How did I do?” and “How much tax do I owe?”

As a scorecard of past performance, the numbers rarely lie. However, an often-overlooked power of the numbers is how you can use them to influence future performance. If you had a great year, what made it great? If you had a lousy year, what made it lousy? If you can consistently repeat the good and avoid the bad, you can build a very nice business and career. Here are a few tips:

1. Financial statements need to be accurate. Duh! Your in-house team and your CPA need to thoroughly scrub the financials to ensure accuracy. Otherwise, you are potentially making poor decisions based on faulty data.
2. Financial statements need to be timely. By “timely”, I mean that you ought to have financial statements to review within one month of the period under analysis. If you put too much distance between the activity and the analysis, you are less likely to remember what you did that was so good…or bad!
3. Financial statements need to be reviewed regularly. Review your financial statements at least quarterly. I prefer monthly. The more connection you can have with your financial performance, the more likely you will be to spot trends and opportunities that will make you a better decision-maker.
4. Finally, financial statements need to be used to set targets for future performance. I prefer that you start with a net income or cash flow target for the upcoming year. You can then build a monthly profit and loss forecast with that end result in mind.

Financial Forecasting Example

I recently completed a financial forecasting engagement with a dentist client. Here is how it worked:

• We used the last 12 monthly profit and loss statements as the starting point. One point the dentist made at the outset of the process is that she does not think she earned enough from the practice last year, so I knew we would need to figure out the best path to getting her “take home” pay up.
• The fixed expense part of the exercise was pretty easy, and since roughly 84% of her costs are fixed, I was able to build out most of the expense side forecast. If you are contemplating big changes in fixed expenses like staffing and occupancy costs, we estimate the timing and effect of these changes here.
• The variable expenses are those expenses that fluctuate with production. In a dental practice, the variable expenses are dental supplies and lab fees. You may have others in your practice. It is very important to properly identify these expenses and determine what percent of collections they make up.
• If your established target is a positive cash flow amount (which I recommend), then you also need to plug in an amount for monthly debt service of the practice. Principal repayments do not show up on your profit and loss statement but they do eat up cash, so we need to make sure we cover that in our analysis.
• Once you have identified your cash outflows, the plug number to hit your income and net positive cash flow targets is collections. There are several considerations when setting collections targets:
• Your business is seasonal, so be sure to build seasonality into your collection models.
• Collections are based on production, so you may want to build production-based goals by provider in order to hit these targets.
• Generally, discounts to production in the form of contractual allowances and patient write-offs are necessary to get to a solid collections target. Analyze your historical discounts to build your production goals.

For my dental office client, I wanted to build a forecast that resulted in $60,000 in extra cash flow for the owner to take home or re-invest. In her case, she had made a few expense cuts mid-year from which she will recognize the full benefit in years to come. The remaining extra cash flow will come from more aggressive production targets. At first glance the new collections target seems daunting, but when spread across an entire year, it really isn’t. And even if she and her team fall a bit short, chances are they will have performed better than if there was no target to shoot for.