204: Mastering Dental Financials with Good Margins Dental Accounting

Embezzlement's a real thing inside of dentistry that you've got to build some systems for. The key to that is understanding your financials. Believe it or not, it's not really front end systems about having people check with credit cards and approvals, all stuff. It's actually about understanding in the back end all your finances so nothing can fall through the cracks.

Hi, I'm Emmett Scott, and just like you, I've had my ups and downs in the dental industry, but times are changing. The DEO has built a map of how to succeed in one of the most challenging industries to navigate. On this show, we talk to dental industry leaders, solve problems, and get you the an you need to face these challenging times and thrive. Welcome to DEO's Growth Secrets podcast for dental organizations. Now let's get started.

All right, everyone, welcome to another episode of deo's Growth Secrets podcast. Today, we're going to be talking about one of our favorite subjects inside the deo. And you know, one of the things that we kind of decide or we believe is the focal point of the entire business, which is understanding your finances. One of the things we talked about here is no margin, no mission. And in order to understand your margin, you've got to have really clear financials. And the key to that is good accounting. So we have Michelle Lee here, who is going to talk us through what their company does and to help you with your finances. So, Michelle, do you want to give yourself a introduction and say hello?

Sure. Again, my name is Michelle. I'm with Good Margins Dental Accounting. And that that title or that that name comes from not only good margins in your finances, but as dentists, you want to have good margins on the teeth that you're working on. So we'd want to kind of play on those words a little bit there. We've been doing accounting for 30 years, but in the dental industry, five to six years now, specifically working with various practices, from single practices on up to 5, 6 locations. Our largest client currently has 21 locations.

Beautiful, because I think when you start growing, as a lot of our DO members are, you start to encounter some unique challenges with understanding your finances. So let's talk about those. What are some of the things that start to come up once you get beyond just the single doc, which I'm sure you guys help out quite a bit too. You know, you start adding more operatories or adding more associates, you start adding more revenue. What are some of the unique challenges that our folks are gonna find themselves running into?

I think globally, some of the challenges that they come up with or have is obviously keeping staff. And when you got multiple locations, the doctor who owns all of them can't really be at every location. So how do you incentivize your staff and how do you keep good staff? That's always one issue, but from an accounting perspective is making sure all those expenses are allocated to the proper locations so that each location you can compare the KPIs and vent marks against each location. And that way locations that are performing very well can mentor locations who are maybe needing some assistance in certain areas. So having that underlying data that's accurate and detailed enough is very, very important for managing your actual practices. And then at the same time, understanding the difference between cash and accrual and what those mean, and the fact that maybe one's not necessarily better than the other, but understanding which each version means and how can that help you manage your business?

So I think you're touching on something important here, which is, you know, getting the data accurate and getting it structured in a way that makes sense. I think one of the things that we forget about is that all serves the purpose, which is to make decisions right? In order to run a business, we have to make decisions, and in order to make decisions, we have to have the information right. And so one of the first things you all do is you help going. And let's talk about allocating expenses. So how do you help? You know, let's say I'm doing, I got two to four locations, I'm doing 3 million, a 5 million. And you know, I. I'm pretty good. I've been a bookkeeper, maybe that's doing some stuff. What are the first things you would do to help me get better information for better decisions?

You know, it really has to do with how you're structured. Do you have payment methods that you're paying delineate which location is for? Is it one operating account that somehow you have to know based upon the address of the vendor or where the product was shipped or whatnot, which location that's for, that's very critical. It's very easy to get some dental supplies or labs located to one location that actually is for another location. So making sure that that's consistent. We also do some reviews over the past year or 365 days, and we look at all the transactions by vendor and make sure everything's been coded the same. It's very difficult to have consistency if suddenly one thing for $6,000 in one month is under labs and the next month it's under dental supplies. That can really throw those percentages off when you're talking about your percentage of labs and dental supplies compared to your revenue. So those things are really critical to make sure there's consistency over time. One thing I always tell people in accounting is if you're going to make a mistake, make it consistently. If you're going to code something wrong, do it consistently because then it's easy to find it and fix it when it needs to be fixed. It's when it's inconsistent and all over the place, it becomes very difficult to make sure that we can get some good information for your clients.

Yeah. And if it's all the same, then you can, you can discover and then change it pretty easily.

It's like. Right. And fix it.

Yeah, yeah, yeah. It's kind of reminds me of this idea of garbage in, garbage out. Right. When you're kind of thinking about data and information and even computer programming. But, you know, if it all depends on what's going in. So it sounds like you'll recommend really some systems to keep things organized in the beginning. So maybe even having, like you said, credit cards or different accounts that are associated with different locations and, you know, they probably can cut down the work a ton if you have the proper setup.

Right. Yeah. That can make a big difference. And then also just letting technology to some extent work for you. You know, your accounting systems often, obviously, frequently will connect with your bank accounts and credit cards to bring some of those transactions in, and then they're coded. You do have to be a little cautious about AI. Everyone's talking AI is the best thing. And for some industries and some tasks, it's a wonderful thing. But for accounting, about 75% of the time, AI codes it wrong. And then you've got to spend extra time going back and fixing it. So knowing where those tools and technology actually help and benefit your company and make you more efficient and in what areas they really don't, and knowing how to focus on that.

Beautiful. So we got to get the cost allocated correctly to start getting some clear information. And then we're looking at understanding at least the idea between accrual and cash accounting. So maybe talk through the difference there for us, for folks that are still kind of learning that it's almost like essential information. If you're running a business, you have to understand this at a high level and then maybe how you guys think about it with some of your clients.

Sure. So like I was saying earlier, cash and accrual methods both have, you know, their benefits. And their, and their negatives to them. And how you're looking at the information on the cash method. It really is looking at where is the, where's the money moving? When is the money moving? You don't recognize the revenue till you receive it, and you don't recognize the expense till you send the money. And so that's more of what is your cash flow? How much money do you have available at certain times? And that could be very beneficial. The problem is, is that you can modify those, you can escalate your receivables and try and get that money in quicker. So your revenue for a couple months can look much higher and then you can push paying your bills and your expenses for a while. So you're not actually capturing those expenses until later. And so your bottom line and EBITDA for a period of time can be modified and makes it difficult to make decisions because of that inconsistency. But just also, you know, makes a little difficult to manage your business from an accrual perspective. That is based upon when things happen, not when the money moves. So your revenue is recognized when you actually produce the service. And then the expense is when you actually incur the expense. When did you receive the dental supplies? When did the lab fees happen? Now the difference is, is your bottom line at the bottom says a certain dollar amount. You say, well, where's that money? It told me I made this much money. Where is it? Well, that is based upon when things happen, not when you receive the money. So it's important to look at your statement of cash, cash flows to see when money is going in and out. And your bottom line number on your, on your balance sheet or profit and loss sheet really doesn't take into account what funds of that bottom line money are now being used to service your debt obligation, other things on your balance sheet. So the financial profit and loss is very important to look at, but the profit and loss rolls up into the balance sheet as part of your net income. And that's really where you see the total health of your business. What assets do you have? What liabilities do you have? Owner's equity. And that income from the financial statements or profit loss statement is part of that equity net income on the balance sheet.

Yeah, I love, I mean it's very nice, kind of the nice way to set is your bet here with cash accounting, your bottom line can be modified, right?

Yeah.

Otherwise probably not as also probably a little off as far as you're actually done. Right. And so when you're making decisions, although cash is probably where you want to start out. You know, if you do a service in, in June and you don't collect it until August and then you, you kind of book that that revenue in August, it really happened in June and so you're behind, your numbers don't match up and it becomes really hard, we find, to make decisions off that.

Yes, especially in the dental industry there are, you know, up and down months based upon school year and holidays and such. And when you're seeing the revenue in a different month, especially when it's delayed for insurance payments based upon when you actually did it, it makes it difficult to plan your staff also. Oh look, in September we're really high. Well, that's because that was all the June, you know, the June revenue that you produced. That's when you needed the extra people or extra hours and resources. So it is really important to look at the accrual even for a sing single practice to be able to really see how to manage your business going forward so that the data you have is valuable and actionable for you to look towards the future. The past data is what has happened and it doesn't really mean anything if you're not going to do anything with it. It really is there to help you make decisions for the future.

Yeah, you know, and one of the things we've seen in the industry is this. The industry is maturing, right. And truly with cash, it kind of worked for many years and there was a lot of docs who where as long as money in the bank account, things were going well. And the challenge now is that everyone around us is getting a little more sophisticated. And so we're kind of competing against other practices that are looking at these numbers and able to make good decisions because we're looking at clear numbers. So at some point in the game, I would imagine, Michelle, most people have to move to accrual when maybe not have to, but at some point in the growth journey becomes very much something to look at. So when to do this, do you think? When do you guys recommend to think about this?

So there's two options. One, when you're moving to accrual is based upon what you're going to report to the irs, which method you're going to report to them that you're booking under. That's a definite change and you can't flip back and forth. One thing that we try to do for our clients based upon the data that they have, and it's critical, the biggest thing that impacts that is your accounts payable. Do you have that accuracy of when you actually spent, you know, when did you actually receive services. But we try to provide for our clients financials in both a cash and an accrual method. So even if they're technically on a cash reporting, we can show it to them in both methods so they can make good decisions no matter how large or small their organization is based upon the accrual method. And we try to help assist them with either providing services to help them with their accounts payable so that's more accurate or kind of coach their staff if needed to help get that good information so we can do more of an accrual analysis on their finances, even for single practices.

Well, so are you able to then switch people over, run both? I mean, if I have a location or a few locations, how are you going to walk me through the process or the journey?

Yeah. So like I said, one of the biggest parts of that is the accounts payable, being able to recognize those expenses when the actual bills happen, not when you pay them. And so that becomes a critical stumbling block for many locations or many practices is getting those details of changing that thought as far as the expenses of their accounts payable rather than just when the bill comes, write a check and pay it when it's due. So there's a little extra effort that comes in that way. But then we also look at the practice management software and do some entries to accrue the income into the appropriate month compared to cash and be able to show those financials in both methods. We do obviously have to do a little bit of an estimate of what do we expect if your practice management software is not right on with your fee structure with the insurance companies. So we have to kind of look at the history and say generally it's about this and make an adjustment accordingly. But it really does help those clients who aren't on an accrual have more of an accrual outlook in their finances and be able to make better decisions.

Cool. So you'll be able to walk a client through that whole process and get them kind of just basically looking at the right numbers. Yeah, I like how you. I like how you kind of offer both really. And it's as much information as possible.

Yeah, I think that our clients like that too. It does take a little to get used to because it is a different way of thinking. You kind of have to change your thought process a little bit. So. And there's a little bit of effort that goes into it. So sometimes that can be a little painful. But in the long run, it's much better for your business. And when you do go to the point that you do need to make a change permanently to accrual, you kind of already done some of the work and you're already a little bit more prepared for it. Most practices will generally move over when they hit about 5 million annually to an accrual method. And based upon the size of locations, that can be between three to five locations is when you start to look at, hey, I need to be on accrual from a more permanent perspective. Answer your question earlier of when?

No, I love that, you know, so it's, it's like if you're at 5 for sure, if you can see yourself getting to that level, if that's your goal, if you're finding yourself having a hard time making the right decisions because you don't, you're unclear. All these are kind of indications that that might be the next move. But really working with somebody like you, you guys will have a great insight and you'll probably guide people along pretty closely on when to make the decision.

Yeah, beautiful. Ultimately, it's the dentist's decision, but we like to give as much information and feedback as possible to help make good decisions.

Okay, amazing. So we're talking about the income statement, which is essentially the P and L, what people generally are used to looking at. Then you all kind of work with the balance sheet. So that's one that probably as folks are getting started or just starting to understand how to look at their finances, it's probably secondary, you know, looking at, however, very important. So what are some of the things that you see the balance sheet telling us and anything that you would look at or advise people listening to get your balance sheet accurate and start getting that flowing as well.

So the, the accounting principle or the accounting equation is very simple. It is assets equals liability plus equity. Assets are all the things of value that you own, whether they are tangible or intangible. So in other words, your building, your equipment, intangible would be your actual client files and such. Your liabilities are what you owe, whether it's long term or short term. And then the equity is the difference. What is the value of your business when you take those assets, take away what you owe? The difference is, here's how much equity I have in my business. Just like in your home, your home is worth this much, you owe this much on it. The difference is what's your equity? I think some of the key things in the balance sheet that need to be paid attention to are, first of all, Loans, all of your loans. One, what are the interest rates? Do I need to be looking at modifying to lower interest rates on some of my loans? Two, many times dentists will record the full payment of the loan, of the loan, payment to the loan, and a portion of that is interest. So you want to make sure that you're separated out that interest portion so that the balance of what you owe is accurate. Because if you're applying the interest to that loan payment, then throughout the year your loan looks like it's worth it's lower value, you look like you have more equity. And generally your CPA will fix that at the end of the year when they're filing taxes. But that doesn't help you throughout the year. So we make sure we look at every single loan and allocate the interest correctly on a monthly basis. So that is accurate. So that is very important. But then also making, just making sure that those balances are accurate. I have many clients that when I start working with them, their loan balances are all over the place compared to the actual statements from the bank. So it's obvious that no one paid attention for a little while to those, to those things on their balance sheet.

Yeah. You know, my hope, my heart goes out to all the folks that are running these businesses because on one hand you have to do dentistry, right? You know, go to school, learn to be a dentist and do quality dentistry. Then if you're growing it all, you got to hire other dentists and manage that. And then there's this whole other side of the business which is managing the operations of the business. And so it makes sense why that stuff would be maybe a third and fourth priority. But it is super important. And I think that's why you really got to have people, experts like yourselves kind of.

We're.

Hang on. So. So the balance sheet is going to give us insight into equity, which is kind of like house equity. Right. Like this is how much value that you own inside the business. And hopefully as you pay your loans down and you increase your assets, then that's going to go up. Right. So we want to start looking at that as well. And then let's talk about depreciation and debt obligations, which kind of go hand in hand with both of those with, with your income statement in your balance sheet. What are some of the things you think about with depreciation and some additional things?

Sure. Most, most companies, especially when you're looking at valuations, they look at ebitda, so they look at the number before any taxes, interest or depreciation and that's all well and good for them to crunch their numbers on what they need to know. But I think for the dentist, it's really important to understand that even though depreciation is not something that's impacting your cash, because you're writing off an expense of a piece of equipment that you purchased a while ago, but that piece of equipment is real. It's something that really, you're using it. It is an expense to your business. So if you bought a scanner or some type of expensive scanner and it's on your balance sheet as an asset, either you have a loan that you're paying for it or you paid it in cash, but it doesn't ever really hit your balance sheet except for depreciation. So you're taking that piece of equipment and chopping it up into maybe five years and saying, we're extensing this off in over five years. And some people kind of overview that and don't, don't really pay attention to the fact that that is a real expense to my business. If not, I would have had to take that piece of equipment and put it all in one year and expense stuff during that one year. So paying attention to those things. And then also one thing we like to do with the income statement is below, you know, the regular net income is show another line that says, what was your debt obligation? How much did you actually have to put of this number? That's your income. Just for a visual, how much went back to your debt obligations. That's a little more easy to see on the report, what's happening. So that answers that question of where's that cash? Where'd my cash go? Well, here's a portion of it. It went to these, these expenses that hit your balance sheet. So this one location to kind of see things a little more easily.

Yeah, exactly. So you're really kind of doing the trifecta there, which is understanding cash, cash flow. You've created a little bit of an easier way to do it rather than having a whole other set of, of documents. At least if you're trying to get your finances straight. And not only that, there's a lot of tax implications. Right. To how you're managing your debt.

Yeah.

And your appreciation.

Yes, there is. And so being able to have good information to make good decisions. Of course, none of us wants to pay extra in taxes. We're all trying to minimize the amount that we're paying in taxes. So that's important for your tax planning. But that also is a real expense. To the business as well, you know, so it's important to keep that in mind in your, in your income statement as well.

Yeah. All right. So lastly we talk about something another one, you know, taxes and this topic, which is ones we don't always think about, which is embezzlement. Right. This is a, you know, because dentistry is a business where the operator is doing the practitioning. Right. Is the practitioner as well. Um, and then we have this idea of back operations that necessarily isn't always what people went to school for and don't wouldn't always have the team in place. Investment's a real thing inside of the industry to that you've got to build some systems for the, the key to that is understanding your financials. Believe it or not. It's not really these front end systems about having people check with credit cards and approvals, all stuff. It's actually about understanding first of all in the back end all your finances. So there's nothing can fall through the cracks. So how did you all help clients avoid and detect embezzlement?

Yeah, I was really surprised when I got into working in the dental industry, how much embezzlement there was. I'd never seen that in other industries that I've worked in. And so I was very surprised and just very shocked that that that is such an issue in the dental industry. One thing, one service that we do provide is some revenue cycle management support. We don't do the full revenue cycle management, but looking at, out of your practice management software, looking at the daily reports at the end of the day, how much money should have come into the bank accounts and various, by various methods, whether it's a cash deposit, credit cards or whatever, insurance, and then going and looking at the bank and making sure those funds actually arrived. It's very easy for someone to contact one insurance company and say actually start sending the money here. And let's say you take 10 different insurance companies, if you picked one that's fairly minor, you probably would never notice that. You know, if you, if you moved all of them, you notice, but if you move just one, you may not notice that hey, there's a little bit of funds that are never hitting our bank account. Also there are issues that outside of embezzlement where maybe a claim got denied and no one checked the explanation of benefits soon enough and it didn't get resubmitted. And so as a result there's a loss there because you can't get paid because they denied the claim. So it's just Some checking of additional information by someone outside of your organization as a second set of eyes just to make sure. Because you want to trust your staff and employees. You have good staff, you support them, you're good to them, you want them to be good to you. But you can't control every single person that is in the world or maybe possibly in your organization. You want to make sure that you trust but also verify to protect you and protect that.

Yeah, yeah. I mean, most folks don't know just yet, but the way, I mean, having squeaky clean financials, it really creates a situation where there's nowhere to hide. There's. There's nowhere that the money can hide. If you're doing it right and you're reviewing shows up, it might not show up like the same day, but eventually you will see where this, where this money is going. So this is another reason why it's absolutely crucial to deeply understand your finances. You know, we, we say it's the North Star. I mean, this is the North Star of your whole business. And it's worth spending a lot of time on. It's worth working with, with the right people. So, you know something cool. Michelle, you guys are. If you see any events, you guys are wearing superhero stuff. Can I see?

I got my superhero shirt on.

Yeah, yeah. Very cool. Any. I mean, this gets fun. What's, what's, what's the superhero stuff so that you guys have fun as well on top of provide a good service.

Sure. I'm going to share my screen with you real fast. Yeah, I don't know if you can see that. That's my superhero card there. Oh, my. My character's name is Plumerics. Okay. I was actually born in, in Hawaii and I love the Plumeria plant. And I did some research on what the plumeria means to the Hawaiian people. And, and some of the description. I'm like, that sounds just like me. So my character is Plumerix. And as you can see in the background behind me here is our background we use at the DEO show with our various characters on it. We consider ourselves super accountants, where we do a super job and we're superheroes. And we are super accountants that work for super dentists. So at the show we had face boards that you could hold up and put your face in. And we took a picture and printed out a super dentist card for those dentists who stopped by. So any dentist who didn't get a chance to do that can always contact us and send us their picture and we'll let them know which Boards were available and they can pick which, you know, which design they want and we'll send them a digital copy. But like I said, we consider ourselves to be the super dentists or the super accountants. And we are so grateful to be working with dentists that have such a great mission to really improve the lives of their clients and their patients. And we are so happy to be able to be a part of that and support their mission and really increasing and bettering the world. Some dentists are in it for just the money, and money is important. But ultimately, I'd say 90% of you are really in it for what you could do for your community and what you do to serve humanity. And we, we can't do the same. I'm not going to drill people's teeth, but this is a way that we can really support that mission and make a difference in the world. And we're so happy to be part of that.

Yeah, that's so well said. And I totally agree. It's such a cool industry where everyone, you know, the folks who are providing the services, they're doing it to usually help people, help people's health, make the world a better place. And we get to serve them. And I love taking finances and accounting and making it fun. It can be done, Michelle. And you guys are doing it. We love that. You know, we don't always, we don't need to take everything so seriously. We need to have fun along the way. And I love the fact that you guys are super accountants. The industry needs it. So any final thoughts or anything else you will leave our listeners with?

No, just I'm assuming there'll be a link or something that when you're ready to get a hold of us and improve your finances, you can get a hold of us@goodmargincfo.com and we'll talk to you and walk through what your business needs are. We provide a variety of services. Some of our competitors will do one big package and if you don't use certain things, you're paying for it, no matter what. We have made our model around a base service and then you can add on CFO services, accounts payable, payroll support that you need to help your business grow so that it's more of a customized package to your needs as opposed to just a bundle ized here. You have to take it all or nothing type of situation.

Yeah. And the coolest thing for me is, you know, we have a way that we're really promoting for folks to structure their finances, to think about their finances and and you all follow that as well. You have that option. Should. Should people want. So we appreciate that inside the dpo, you guys can basically fulfill all the ways that we're recommending people to look at their finances, and you guys recommend the same thing. It's like, we're very kind.

So we.

We love the. The partnership here.

Yeah. Yeah. So we were discussing earlier, before the show, I had a client who. Or a potential client who was asking for some sample reports and such and then wrote back. I said, well, can I get a sample income statement? And is it the way that Emmett suggested it at the show? And I'm like, we. We lay that out exactly the same exact way that the DEO has. And that also is in the. The book by Ken Kaufman about DEO secrets. And we've laid it out the exact same way. We've done that for many years. So we've always been very excited and say, see, that's the way it should be done. It's so great.

So, yeah, we're. We're totally aligned on that. So that's. That's really good. A great group to. For any of our DEGO members, any of our audience, a great super accounting group to. To fulfill all of these best practices that. That we all agree on so well. Thank you so much, Michelle. And we were going to see you in your superhero uniform at more events across the industry.

Yes. Yes. Thank you so much for the time. You guys have a nice day and everybody out there and. And the. What is it? What would we call it? The podcast world. Have a night. Thanks for tuning in.

Yes, thank you.

Thank you for listening to deo's Growth Secrets podcast for dental organizations. Continue the conversation on our Facebook group and meet other dental leaders. Get questions answered and the strategies you need to succeed. Plus, we have some free resources for you right there on the Facebook page. Remember, you're not alone. Let's do this together. Join DEO's Growth Secrets Group on Facebook. And until next time, keep smiling.