59: The Roadmap to DSO Financial Supremacy

Welcome to DSO Secrets. I know what it's like to be an entrepreneur in the dental industry. I've had my ups and downs, just like you. There's so much opportunity to be excited about, but so few resources to get answers. From here on DSO Secrets, we get you those answers so you can change the lives you're meant to bless and achieve your personal success.

When I was working as an associate rat at a school, I never imagined I could own these many practices with this amount of support. So thank you.

You have helped build my marketing mind

to a whole new level. You have this natural talent, this unique ability. Hello, everyone, and welcome to DSO Secrets. I am Ken Kaufman, your guest host for today, filling in, of course, for the illustrious Emmett Scott. My subject today is the roadmap to DSO financial supremacy. Now this is a pretty bold statement, financial supremacy. I could replace the word supremacy with clarity or anxiety reducer or remover or fear and stress reliever. Or we could say of financial power in terms of powerful decision making. Or for those that are contemplating a future transaction with their DSO down the road, this is actually the roadmap to make yourself so attractive to financial buyers because you will be and your whole system will be speaking their language. So here's the roadmap. There are six steps to the roadmap. And I'm just going to describe each one in a little bit of detail, not a whole lot. And then it could be that down the road, when I fill in for Emmett in the future, I could come back and revisit some of these or all of them. Feel free to reach out once you've listened to this. If you have one or another that you want to hear more about or you want to understand more as opposed to another. So step one in this roadmap to DSO financial supremacy is cash basis, monthly accurate and timely financial statements. Accurate means they're right now I guess I should back up. Cash basis means this is basically all the transactions that are happening in your bank account, your credit card account. And an accountant may be putting in some entries for fixed assets or a few different things like that into your books. But primarily, cash basis is just what's coming in the bank and going out of the bank and recording all those transactions. That's step one. This is very, very basic. And generally speaking, most practices have an accountant or have somebody that's helping them so that they can file a tax return each year. There you're looking at these things on a cash basis. Now, I did say accurate and timely, which means you should be getting them monthly, and you should see them by no later than about the 15th, maybe the 20th of the following month. So, for example, if we're in the month of November and we've just finished the month of October, I should look to see my updated October financial statements somewhere around November 15th or November 20th, certainly before the Thanksgiving holiday this year. That is step one on this roadmap. Step two is accrual basis financial statements. I've talked about this in one or two episodes in the past. What's happening here is we are aligning up revenue, which ultimately for us would mean what we're going to collect. So whatever fee schedules we're using and how all that data is flowing through, we work our way down to this is what we think we're going to collect for all the work that we did during this month. And these are all the costs associated with delivering the services to the patients that generated what we are going to collect for those procedures, not what we're going to collect this month, but what we will ultimately collect over time. This is lining up. There's a matching principle here. It's under GAAP or Generally Accepted principles, where we're lining up the revenues to the costs associated with producing them or facilitating those revenues so they they could occur in your practice. The best way I can describe accrual basis financials is that this is the truth as best as you can see it and as best as you can understand it, because you're going to have to make some estimates when you get into this accrual basis. You're making some estimates about the future. Now you, over time can get very, very accurate and very correct with your estimates, but you are estimating what your collections are going to be and ultimately it's an estimate of what you think your profitability. Like I said, you can get within a few basis points even or like.0102 0.03% of where things are going to end up. So it's very, very accurate. And it tells you that today, as opposed to waiting months or even years to see what you actually collect from the production today and apply it back to the costs associated with is the best vision of truth that you can have about what's actually happening and going on in your practice today, or in this case, if you're getting these statements again, maybe 15th or 20th following month, it's the best statement of truth for everything that happened up through the end of the prior month that's being reported on. Step three in the roadmap is what we call a 12 month rolling forecast. And my nickname for this one is visibility. This gives you your first insight into being able to look forward and see what might be happening out there 12 months into the future. And it's a very simple process. And when I say simple, the lots and lots of spreadsheets and there's a lot of data and there's a lot of complexity that goes with with this, but you keep a 12 month rolling forecast and that means if so in today, if it's November, it means I have in front of me what I think is going to happen in November based on my forecast all the way through October of next year. And then when the month of November finishes and I my actuals come in from my monthly financial statement, I now have just a forecast that tells me what's going to happen December through October. I add on November of next year and each time I complete a month, I add on a year to the back end of that forecast so that I keep this ongoing 12 month rolling forecast. Now this is not a budget. What this is is it's looking at what your current trends are and it tries to advise based on hires or acquisitions or terminations or new services that you've added in to your DSO or fewer services services. It does its best to anticipate and understand just based on what we know today about the business and if those trends are going to continue out for the next 12 months. 12 month rolling forecast, also known as visibility into the forward looking future. Step four. Now that you've got that forecast in place and you've started playing with looking at the future. Now we get into an actual annual budget where once a year you pull your team together and data and information and all of your revenue drivers which generally that's number of patient visits and the care per visit that each of those patient visits receives. And you are doing your best to estimate what's going to happen, who's going to be coming into the practice over the next year and getting a really good look at what's going to happen with your revenue and then doing a really good job at looking at all your initiatives and where you want to try to cut costs or where you may be spending more money, where that's going to happen throughout the year and you get your whole year lined out beautifully. And then the really cool part about this, the annual budget, and by the way, my nickname for this one is accountability because now no longer are you just looking at the future, but now you're setting some stakes in the ground and some Benchmarks saying, financially this is what we need to be accomplishing. And it also allows you to then allocate, hey, here's how we want to spend our money. And here, based on these revenues and based on all these things that we think are going to happen, this, these are the costs that make the most sense to make sure that we're supporting that revenue. So it can happen, but still make sure that the enterprise overall is profitable. The annual budget, once it's done, it now goes back to those accrual financial statements back in step two. And it adds a whole nother layer of reporting where now you can look at your budget versus actual month over month and see how you're doing. And some people say, well, why would I do that? I can't ever predict the future. Why would I want to hold myself accountable? It's because this and Jody Evans, our COO and I just recently had this conversation. It is so powerful when you engage your team and when you pull in all this information and get them talking about what's going to happen in the future for the next 12 months and then to see them go about and execute it. And what's amazing is we always are wrong with what practices are going to do more or less than others, but directionally we end up so close to being accurate. Once everything's said and done, when our team gets really involved and has buy in in that budgeting process and it ultimately it becomes a benchmark for us to try to shoot for and to try to hit through the year. You can also reward employees and things based on if you can beat that or by how much you can beat what you've set out as your goals for the year in this annual budget. But it also drives this level of accountability where now no longer is everybody out in the dark about can I buy this, can I spend this, can we do this initiative? What happens if we do this over here? It creates a ton of clarity through your whole organization. I'll stop on that annual budget. Really, really valuable tool. The next one. Step 5 in this roadmap is a cash forecast. I call this the Sleep at night report. If any of you are out there listening, actually I think all of you or most of you will fit in this category. My definition of entrepreneurship is if you have ever been less than five days away from payroll and had no idea how you were going to make it, that qualifies you as an entrepreneur. And you know the pain of the cash ebbs and flows in business. You know it so well. Well, what we do in step five is we organize with all of the data now that we're getting from all these other reports. And by the way, each one of these build on each other. You can't just always go jump to step four or five if you haven't gone through these initial steps. So you can get the right information and the right information is available to build this reporting capability. This 3 to 12 month cash forecast or this sleep at night report is now the power of being able to look out week by week and see, not exactly, but very with a high degree of accuracy what is going to be happening to your cash flow week by week. Now think of that. If you had three months ahead broken out week by week, that showed you exactly what's going to happen to your cash flow, how would that feel? How well would you sleep being able to look at that? And here's the even more powerful thing. And I know for those that are trying to build DSOs and build multi group practices and really trying to push forward and drive initiatives, and you've got a really powerful why as to why you want to do it and who you're serving and how you're adding value to the world. The power of people like you is that when you see a problem, you can solve it. If you have five days to make payroll, you're going to scramble and scratch and do whatever you can. But the problem is you do that and you've taken your eye off the ball of all the other things you need to work on. What the cash forecast does is it keeps you looking forward and gives you clarity. And if there's anywhere where that cash flow is going negative or getting too close to negative, you're going to see it well in advance and have plenty of time to address the issue, plenty of time to make sure that it's solved. For I have not yet met an entrepreneur or an executive in this DSO space that when presented with a problem, given an adequate amount of time, that they can't figure out how to solve it. That is the power of the cash flow forecast you can see. And even if you know there's an issue out there in the future, you're still going to sleep well at night because you know you've got time to solve it. And you know you've got the resources to be able to pull together to figure out whatever's causing it to get it turned around. Enough on that one. And then the step six is called the five year financial Model. This is the strategic decision making tool. When you think about where do you want to go? Do you want to acquire? Do you want to build de novos? Do you want to have an organic growth campaign? Do you want to add specialties? Do you want to do all. Whatever it is that you might be thinking about, the power of the five year financial model is you can plug those assumptions in and watch and see what happens and then see what the equity outcomes are for all the partners. If, for example, we thought the business was going to sell in five years, the power in this is you can plug in all these different assumptions and you plug in all these different potential ideas that you have. But the model doesn't lie. The model helps you see. If you do this and now you're making assumptions, who knows? Five years out, nobody has a crystal ball. Nobody knows for sure, but we can make our very best guesses. And really quickly we can start to see which decisions are going to add tremendous value to the organization versus which aren't, or maybe which might even hurt the organization over time. The five year model is, like I said, my nickname for this one is it is the strategic decision making tool. So there it is. This is the roadmap to DSO financial supremacy, or more specifically, the six steps that DSO needs to take to get to this financial supremacy. Which means we're getting clarity, we're getting anxiety reduced, we're being empowered to be able to drive our organizations toward the best outcomes that we can drive. Not just for our patients that we're serving, not just for the doctors we're supporting and all of our staff, but also ultimately for the DSO owners and all of the effort and blood, sweat and tears that they put in from the very, very beginning. So thanks again for joining today. We appreciate every one of you that have joined the DSO Secrets Facebook group and would invite any of you that haven't joined to do so. Emmett's done a great job building a community there where all of you leaders in this DSO industry who are trying to solve problems and figure things out and build and grow and help each other along the way. It's a great community to be able to share, answer questions and engage in all those ways. And again, I thank Emmett for letting me jump in and do a quick episode here. And maybe in the future I'll be able to do some guest host podcast episodes as well, where I'll jump into a little more detail on each of these six steps to financial supremacy in the DSO space. As Emmett always says, keep smiling.

Thank you for listening to DSO Secrets. Join our community on Facebook at DSO Secrets and get answers and resources to some of your most challenging question. If you want to get a copy of the seven Secrets of any dso, go to our website at dsosecrets. 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.