51: Your Bank Balance is Wrong

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You have this natural talent, this unique ability. Hello, everyone, and welcome to another episode of DSO Secrets. I am Ken Kaufman, your guest host today, filling in for the illustrious Emmett Scott. In the last episode, when I was with you, I talked about the role of qualitative and quantitative data, your business, and especially in building a dso. I want to build on that with a data point that dentists and business owners around the world rely far too much on to determine if they're running their business as well and what their current performance is. This data point is your bank account. In fact, I will submit to you for your consideration today that your bank balance is wrong. No, not in terms of representing the cash that is in your account today, but in terms of how you extrapolate that balance into a representation of how well your whole business is doing. If you have one practice and you as the dentist are the sole practitioner, then you know so much about what is happening every day that the bank balance will make a lot of sense to you, most likely. But the more locations you have, the more associates you have, the more complexity you have. The bank balance gets further and further from being an accurate source of your overall performance in a given period and especially on a given day. Before I jump into that, I want to make something really clear. Your bank account is important. Your cash flow is the lifeblood of your business. It should be tracked and managed with rigor, discipline and great priority. But the bigger and more complex your business becomes, the less the bank account can tell you about your current performance. Why, might you ask? Well, here's the reality. The most of the money that goes into and out of your bank account for just a single patient visit, it doesn't actually happen on that day. When you see that patient, sometimes not even in the same month, and when you think about the 200 or 300 or 400 or more patients that you see in a month, all of a sudden your bank account becomes a bit of a cluster of things that happened in the past, things that are still going to happen. And what does all that mean? It means your bank balance cannot be an accurate representation of the present. Now, there's nothing wrong with this. Every business is like this with these complexities of when money comes in, when money goes out, and when the actual work to generate that revenue occurs. Let me go ahead and give you an example of. Well, I'll start with just the expense side. You see a patient today, and let's say it's the 20th of the month, the patient interacts with your staff. That obviously cost you money. And then you have to pay. But you usually pay your employees on the 1st and the 15th of each month. So your employees aren't actually going to get paid until the first for the work that they're doing on the 20th. Just one initial example there. How about the supplies that you purchased and are used on this patient? Did you buy them a couple months ago and pay for them maybe a month ago? Or did you buy them and they arrived today? And so you paid for those supplies and all the other patients for today, plus forward two or three or four weeks, you can see really quickly how all of a sudden that starts to get convoluted. How about lab fees? Depending on the terms you have with your vendors or how slow they are to bill, you may be waiting a couple of months before you pay for lab fees for your patients and for the procedures that you're doing. Wait, now, you paid rent and utilities this month, right? Or was that for last month? Again, this is all just part of the issue with the ins and outs of this bank account. How about getting paid for the work that you're doing? Perhaps all your patients come in and they pay you same day, right there on the spot. Well, even then, you have credit cards that take two, three, four days before they settle. So it's not the same day. Or they might give you a check and it takes a few days for that check to clear and actually hit your bank account. Or they pay you cash, but you store the cash up for a week and then make a drop at the bank weekly. Again, even money coming in, let alone what you have to bill for to insurance companies or what you're doing on payment plans with your patients. So all of this comes together and says that all the ins, all the outs point to the bank account not actually being a good representation of what your activity is today. Now, a growing practice often struggles with cash flow because you're spending money and building and growing this practice, investing in supplies and all of these things to get you to this new higher level. So if you think about it, a growing practice, it's going to be more profitable in the short term. The bank account's telling you you're making all the wrong decisions to keep spending and keep growing, even though at the other end eventually it's all going to show up in your bank account again. Just one reason why, or one example of why that bank account is not a representation of the future or of, I'm sorry, of your current performance. Another example is if your practice is starting to slow down and maybe you're going to close it, or who knows what might be going on in that scenario. But you have fewer and fewer expenses. You have collections coming in from last month or prior months or maybe even prior years, depending on how far things go back. All of a sudden your cash in your bank is going up and up and up, but your practice is slowly dying. Again. Another reason why the bank account can be sometimes a false indicator and send us on the wrong emotional roller coaster and lead us to making bad decisions. So in all of this, the sense here is that the bank balance is actually qualitative, not a quantitative input. When you want to determine your daily performance, or often even your monthly performance, production reports are generally the best way that I've seen to track how you're doing on a day to day basis. And my point here in sharing this podcast, in preparing this content for you, is really twofold. First, I see way too many people trying to run their DSOs and they allow themselves to be whipsawed back and forth by this changing bank balance when it really has no relevance on what's happening in the business and what the direction of the business is. And in that scenario they end up making bad decisions, emotional reaction decisions that often can hurt their business and hurt the performance, or hurt their culture and sometimes hurt their patient experience or the experience that their staff is having. The second reason I wanted to share this before I jump to the second reason, I'm sorry. My other point there is that the best way to use your cash to understand how your business is doing is a productive cash forecast. Perhaps I'll be able to do an episode on that in some or at least at some point in the future. But for now, suffice it to say that there is still a lot of value you can get from your cash, especially when you get into forecasting cash out 60, 90, 120, 180 days. That can be a tremendous value in helping you make great decisions in your business and how you're going to do things. The second reason I wanted to share this is is because the inaccuracy of the bank account to report on current performance is a lead in to understanding why cash basis financial statements are inaccurate when it comes to actual performance for the period. Because you have all these ins, all these outs, cash basis financials are recording what's coming in and what's going out of your bank account. It has nothing to do with Here are the patients I saw this month. Here's the revenue associated with those patients and here's the cost associated with servicing and taking care of those patients. And the bigger and more complex your operation becomes, the more you need to consider a move to accrual based accounting so that you can see what's really happening and make decisions on a timely basis according to the information that you're seeing. Otherwise you're going to be making decisions based on inaccurate information. And that's not a great place for any of us to be. And that's not why any of US have started DSOs or are involved in trying to help run and manage and lead DSOs. So there you have it. Why your bank account is wrong. It just can't tell you what's currently happening in your business. Now don't forget to join the DSO Secrets Facebook group. This is a great place where you can ask questions, answer questions. Emmett's done a great job building a community here that's dedicated to helping each other out on our respective journeys. As I leave, as Emmett always says, until next time, keep smiling.

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