You’ve already learned how to understand your financial statements in our article here. Now it’s time to use these statements to check where you are at financially and guide important decisions for your practice.
Remember the phrase garbage in, garbage out? When inaccurate or fraudulent data goes into your financial statements to begin with, inaccurate or fraudulent data is what will be reported.
Accurate statements will aid in the analysis of your business’ financial wellness and in tax planning and preparation. However, they won’t necessarily show if you are being embezzled, something one in four dentists will deal with over the life of their practice.
Your CPA can spot unusual bookkeeping postings and discrepancies from year to year and variances from industry benchmarks. As you become comfortable reviewing your own statements, you will be able to spot similar items.
While you may not be able to spot fraudulent data in your financial statements right away, here are a few safeguards every dentist should have in their practice:
- Your practice’s bank statements should always be sent to your home. Scan each statement for discrepancies on checks or signatures, unauthorized transfers, and debit and re-occurring debits.
- Set secure passwords for QuickBooks and other audit software. Strong passwords should include letters, numbers and special characters. Be sure your password is still easy to remember, and never write it down. The best way to create a secure and memorable password is by substituting numbers and/or special characters for letters in a word or phrase.
- Monitor and implement a system of recording the cash received from patients and reconcile this to the practice deposits.
- Be aware of excessive accounts receivable patient adjustments and whether or not they were authorized.
- Monitor credit card payments through accounts payable for anything that does not seem business-related.
- Look for changes in the percentage spent on dental supplies each month. Significant increases might indicate that dental supplies are being sold over the internet or being returned for cash.
- Look duplicate payments in your accounts payable. The vendor may be returning refund checks to a perpetrator who opens the mail and keeps the checks.
- Make sure all employees take regular vacations and cross-train them on each other’s duties.
- Make deposits daily.
- Be the shining example of honesty and integrity for your staff. Never pay for personal expenses using practice resources.
How else can you use your financial statements?
You can use the current year’s month-by-month information to help with future cash flow budgeting. This is especially important when you have uneven production months. Download your month-by-month income and expenses into an Excel spreadsheet. Then, review the monthly income and expenses and make adjustments for unusual or non-reoccurring items. Build in planned changes such as fee increases, additional work days, new services, inflation factors and payroll changes. You have just completed a budget that can now be used in cash-flow planning. Add note payments, equipment purchases and personal draws or distributions to see, on a monthly basis, what your cash balance should be. This will point out some optimal cash flow moves to consider making.
By extrapolating information from your financial statements, you can also prepare a break-even analysis. This helps you determine what you need to produce to cover your basic expenses and also what discounts or adjustments can be given in the practice. Dentists should not accept or add additional PPOs until they know their own break-even point. First, segregate your expenses into fixed and variable costs. Fixed costs include your rent, insurance, utilities and other costs that do not change month-to-month. Variable costs are your staff payroll, dental supplies, lab and other costs that fluctuate with your business needs. Take your collections percentage and subtract your variable costs percentage to come up with your contribution margin. Then, take your fixed costs and divide it by this percentage to determine your breakeven point.
|Variable costs||$430,000 (45.26%)|
|Fixed costs||$235,000 (24.74%)|
|Breakeven = fixed costs / (collections % less variable costs %)||$235,000 / (100% – 45.26%) = 54.74%|
|Monthly breakeven point||$35,775|
Each of your financial statements contains different information to help you make informed financial decisions. Review them regularly to see trends, anticipate necessary tax payment adjustments and compare with industry benchmarks. By understanding your own statements, you can make better decisions to operate your practice more efficiently and profitably.