5: HOW TO FIND THE PERFECT CFO

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Hello everyone. This is your fearless host, Emmett Scott. And I'm so glad to have you here on another episode of DSO Secrets. Today we're gonna really dig into probably one of the biggest frustrations that any business owner feels in trying to get to the next level. And it's really around finding awesome support around financial management. And though this can get a little bit nerdy on the accounting and finance side, there is nothing quite as overwhelming for any business owner, especially those trying to manage patient care on the dental side along with all of the business management side. When cash flow, or you know, well, let's just say cash flow, when cash flow is not clear and there's concerns about, you know, tracking that and projecting that and really understanding that. I mean, that by itself can create days where the heart is beating fast and the frustration level is high. You know, I think the main reason we feel so much concern, or a better word might be lack of support in this area. I think number one is kind of the industry itself, the accounting and finance industry and, and some of the components there. But I think a big part is also our assumptions and perceptions. That's what I want to dig into today mostly because I can't change the industry itself. I want to give you some areas to focus on that you can really understand how the industry works and manipulate and organize your org chart and your support teams in such a way that you can take advantage of it and lower the pressure and noise that you feel as a business owner and as a professional. And you know, I'll say up front that as I thought through this, it's going to sound like I'm, you know, ragging on the accounting industry. And so I want to say up front that I have a lot of respect for the accounting industry and what they do, but I think we try to cram too much onto their plate and sometimes they accept it, which is kind of more disastrous for us. And so I really want to break down this accounting and finance industry. I think one problem first off is we say that kind of as one word. You know, accounting and finance, and they are such different worlds. If you've ever gone to an accountant and asked about future things, you know, so you go in to, let's say, do your tax return, and accountant says, man, if you would have done X, Y and Z, that really would have saved you money. Or, man, you shouldn't have done this because that really cost you a lot. And then you say to them, well, what about this next year? What do you think I should be doing? Now, they might not always say this directly, but this is the feeling you always get is they go, well, come back next year and I'll tell you what you should have done. See, the accounting world is built on being able to look backwards accurately and organize all the data that's already happened. And so the first thing I'd say is stop thinking about the accounting world as something that's going to help you with future projections and future results. It's really about the looking backwards. If you break down the accounting business model, their core product, their core revenue stream and profitability typically comes from the tax return. Now, I have to tell you, from a business perspective, a tax return is the most beautiful product on earth. Number one, after you sell it, it expires annually on the consumer. It's complicated. So especially for business owners and professionals, they can't do it on their own, so they need somebody else's help. And if they decide they don't want the product anymore and they're not going to do it, well, then they could go to jail for not buying your product. Right? So the accountants have this really great product that their business model really circles around. And if you know that, you'll understand when you start utilizing them for some of your bookkeeping or try to get them to do some of the finances, you know, some of the things that you'll experience is, number one, they don't feel like the financials need to be timely. You're not going to get, typically from an accounting firm and their bookkeeping team monthly timely financials. And if you think about that, they're centered on the tax return. As long as your financials are all done by the end of the year or even after that, as long as they're done by the time you need to file your taxes, then for them that's good enough. And, you know, obviously for us, from an operational perspective, really understanding what's happening month to month on a Timely basis that doesn't work. Well, number two, they'll always be cash based financials. They're not going to be accrual based. And, you know, I might get into the difference between cash and accrual a little bit and in this podcast, if not, I'll do another one on it. But the cash base, the primary thing you need to remember there, if you already know this, is that cash base is when things got paid and when income came in. It's not necessarily aligned with when it actually happened. All right, I'll get into cash and accrual right now. So accrual based, you're saying, you know in what month represents when that transaction or production happens. So if I go in and work on teeth and do any level of procedures on my financials, I would recognize at the time I build it, I would recognize that production and revenue, not when I collected it. Okay, so I'd recognize in the month, here's the activities I did, here's the production I did, and the expenses that I pay would be accrued for that month. So payroll that represents the 21 days of that month would be represented on the financials for that month. Rent that represents that month would be represented on the financials for that month. Let me contrast that to cash. Cash based accounting would say, well, when did the cash come in? So if I got paid for procedures I did six months ago in a cash based environment, I would recognize them this month. If I paid my rent late or double paid it in a certain month, then I would recognize both rent payments in the month I paid them. And even though one represented for May and one was for April, for example, why is this a big deal? Because if you're trying to run your business off of your financials and you're cash based, you're having a really hard time figuring out what actually happened in any given month. Because you've got payments coming in from all different months that you did procedures and you got payments going out for all different months of what you were really paying for. So bringing that around and we can get into it more. If you have a lot of questions around it, go to the Facebook group DSO Secrets and feel free to post questions there and I'll help to untangle more of that for you. But the main point here is that if you're having accounting professionals help you on this, they're going to be fine with cash based because cash base is what you need for tax returns. Okay. And the last thing that we've seen, and I've seen Over my career is any time that I've used accountants for booking entries, they're just not going to be as specific. You know, if they put supplies under, you know, expenses for utilities, that's not a big deal for them. It's a big deal for us as operators, but not a big deal for them. Because again, on the tax return it's going to be an expense. And if those aren't perfect, at the end of the day, it doesn't affect your net tax return. It definitely affects how your financials look. So again, I warned up front that this would sound like that I'm down on accountants. I'm not. I just think that like attorneys, you've got litigation attorneys, you got estate planning attorneys, you've got family divorce attorneys, etc. Sometimes when we group accounting and finance together, we really are trying to do round peg, square whole components. And I'm not saying that early on it's not a good option. I'm just saying if you're building a true dental support organization and if you're going to really have the clarity and frankly, if you're going to ever have partners, whether financial or otherwise, you're going to create a lot of noise for yourself if you don't have clear financials. So let's talk about the finance side. Finance is really more about the future projections. And for pure accounting finance guys, they're going to say, I'm oversimplifying this, but I think for us we're going detailed enough here. But finance typically is about those future projections. So they are thinking about what assumptions go into a model in order for you to figure out what you should be doing in the future. Now the argument would be they are assumption based. So the models are only as good as the assumptions. If you want to open up a new dental practice, you have a finance person help you model that out. You're assuming a lot of things. You're assuming the budget up front, which is a little easier to nail down as you talk to vendors and contractors. But you're assuming how quickly patient flow will happen. You're assuming what you're going to be able to hire people at and what those rates are at, but at least gives you a model. And that's kind of their expertise is to build working models. They're typically Excel gurus and they know how to create those sheets. And that modeling to provide you some perspective on sensitivity analysis too. Like if I change this assumption and our patient flow is an X, it's Y, how much does that change the model? One way or the other, they really need to dig in and understand the business model. They're not trying to drive to a tax return, for example. They're trying to drive to give you future clarity. And they want to get better and better at understanding what are the key drivers, revenue drivers and expense drivers to make that, to make that business model as clear and accurate as possible. Finance people tend to be more operationally minded. So when they're preparing financials, they're thinking about where things are booked and what the net results are and when did these certain events happen. So they're going to lean towards wanting to have accrual accounting so they can line up in the month of May. Here is what we produced, here's what the expenses that are represented for that month. And, and therefore, here is the true net result of, of the month of May. Now, cash is separate from that, how we collect, and all of that. That's going to happen separately. But by having accrual accounting, they really are saying, here's how the story ends. Also, finance guys are going to look at your data. So this is where they're going backwards a little bit. They're going to pull your data and make it consumable, okay? They're going to do the graphs and the charts and all of those things, and they understand that the data is only as good as how quickly they get it to you. So if they come to you a year later and say, here's what happened last year and this month, there's not a lot you can do about it. But if they're able to create products and tools for you to track your key performance indicators or other metrics that you're just interested in, they understand that getting that as timely as possible is critical. So that kind of leads us to the ultimate position on the finance side, which is hiring a cfo. And I think for a DSO structure with the dental and the management components and the entities, this is probably one of the most critical positions within your organizations. First off, just looking at the entity structure, having the management company and having the practice entities, you've got to get all of that structure right from a regulation and legal perspective and also from an operational perspective to ensure you don't violate any state or federal laws and ensure that the company can also just run appropriately and you're providing the right support to the clinicians. And from there. So here's what I'd say and why the CFO is so critical. Attorneys will be helpful in getting all your documentation, entity management agreements set up, but after that's done, the actual flow of the money and ensuring that's done correctly is all managed by a cfo. It's a lot like how attorneys will set up your LLC or your entity. But they always remind you that you need to have your board meetings or shareholder meetings because again, they give you the vehicle. But the engine piece, the thing that keeps you from, you know, allowing others to pierce the corporate veil and really protects the entity is from those day to day components being done right. And the cfo, especially in a DSO environment, ensures that that's happening. The other thing that a CFO does is really helps with this accrual versus cash on your financials so you can know what the heck is going on at your practice and overall company level. So I mean, you think about all the rules of thumb that are in dentistry, right? How is production, gross production, net production, collections, net income with the doctors pay in it, net income without the doctor pay in it? Well, it has the associate pay taken out, but not the owner doctor's pay taken out. I mean all of that mass as well. Well, a good CFO can get that aligned. Just kind of walking through the financials. You know, your ideal financial statement should have a gross production at the top. And let me define that. That is everything that you could have built billed. Okay. On the procedure level, the next item should be an adjustment. And in that adjustment is all the marketing and office level adjustments. Okay, so let's say you had a procedure that you would typically billed $1,000 and we'll take a cash pay patient and you're going to give them a discount of $200. I would put $1,000 as gross production and $200 as a marketing adjustment. Why is that? Or an adjustment of some kind of office adjustment. And I would code it for marketing or discount or whatever you want to name it within your company. And the main reason is because I want to see how much over multiple locations or even individually from the front desk perspective. How many of those adjustments are we doing and are they adding up? It's not that you're going to change it, you might still always do them, but you want to understand them. The those are marketing costs or adjustment costs that you want to have clarity around. The second line item underneath that would be the write offs. Now I define write offs as I thought I was going to get this money and we didn't. The EOB comes back and says you don't get them for this reason. Might be frequency of the procedure. So they're not going to pay for it it yet it could be that the documentation wasn't right, whatever it might be. But these are things that if I operationally improve, then we can get the that money back. And again, all of that, all this clarity is gone. If you're cash based and then net income, absolutely have all the doctor pay in there. I don't care whether you're the owner or not the owner or whatever, whatever you want to be thinking. So let's say you are an entrepreneur dentist. Okay, you want to be thinking about if somebody replaced me, what's the true net income of this business model? Now you don't have to book every dollar that you're taking out of the company because some of it you're taking out as distributions. But you need to book what your replacement cost would be so you have a true perspective of whether your company is profitable and to what extent. So in an accrual world, all of this stuff and I just hit on a couple line items that I often see are not done well, all of this stuff should be related to the month it happened in and that's, you know, this ideal accrual. So this is where my mind goes on why a CFO is so critical to the business model of a DSO and why it's really a secret. Because so many try to attack this through an accountant or a bookkeeper or some other path and without these key principles they just never get there. And they don't know it because it's a cruel accounting or they don't know it because of this, that and the other they just feel pain on. Why don't I have more clarity in my business and why can't we drive towards these results that I want? So hopefully this has created some aha's for you. You know, I'd love your feedback down at our our DSO Secrets Facebook group or on the Facebook page. And if you have any other thoughts or questions, feel free to post them there. Until next time, keep smiling. Thank you for listening to DSO Secrets. Join our community on Facebook @DSO Secrets and get answers and resources to some of your most challenging questions. If you want to get a copy of the seven secrets of any DSO, go to our website at DSO secrets.com and we will get that emailed to you. Remember, don't go at this alone. Let us be your team while you build your team.