When it comes to the numbers side of the business, most of my physician clients have a very low pain threshold. I get it, you have plenty on your plate, and although I may think 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 doctor, the conversation normally centers on “How did I do?” and “How much tax do I owe?”
The Power of the Numbers
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.
To make the best use of your financial statements you need to make sure they are accurate, timely, reviewed regularly, and used for financial goal setting.
It may seem obvious that financial statements need to be accurate, but not everyone knows how to go about this. It is critical that your accountant and in-house team thoroughly scrub the financials to ensure accuracy. Otherwise, you are potentially making poor decisions based on faulty data. 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! Regular review is at least quarterly and preferably monthly. The more closely in time you review your financial performance, the more likely you will be to spot trends and opportunities that will make you a better decision-maker.
Using your financial statements to set targets for future performance and goals empowers good decision making throughout the year. I recommend starting 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 in Practice
I recently completed a financial forecasting engagement with a dentist client. We used the last 12 monthly profit and loss statements as the starting point. At the outset of the process she said 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 increasing her take-home pay. To do this, we started by looking at expenses vs revenue.
Fixed Expenses
The fixed expense part of the exercise was pretty easy because approximately 84% of her costs are fixed (see our blog Fixed Vs Variable Expenses). If she was contemplating big changes in fixed expenses like staffing and occupancy costs or equipment, we would estimate the timing and effect of those changes here.
Variable Expenses
The variable expenses are the 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 comprise.
Monthly Debt Service
If your established target is a positive cash flow amount, which I recommend, then you also need to include an amount for monthly debt service of the practice. Principal repayments do not show up on your profit and loss statements, but they do require cash outflows, and so must be included in the expense analysis.
Income is Revenue Less Discounts
Once you have identified cash outflows, the number to achieve your income and net positive cash flow target is collections (see our blog Why Revenue Matters Most). Make sure you build seasonality into your collections models (this is why starting with 12 months of prior financial statements is helpful). 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.
Goals Motivate and Drive Performance
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 reinvest. In her case, she had made a few expense cuts midyear from which she will recognize the full-year benefit in 2020. 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. Even if she and her team fall a bit short, chances are they will have performed better than if there was no target.
And at the end of the day, knowing what pay you are likely to take home and whether you will have the standard of living you desire is one of the best ways to fight burnout.
by Trey Whitt, Partner, DentMoses, LLP, Birmingham, AL
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