First Month: Accounting and Financial Statements

We're going to now take a moment and talk about managing the financial side of your practice. What I mean by that is understanding or having a process around the creation of the financial numbers that indicate the health of your practice. Financially speaking, those are called your financial statements. More formally it's called your profit and loss statement, sometimes called your statement of income and expenses. That's number one. And then number two, a document called your statement of assets and liabilities and owner's equity, sometimes called the balance sheet. Before you go into ownership, before that first month even starts, it's important that you have selected your CPA and that you've met with your CPA to go over the process of how the financial statements will be prepared. In other words, what does the CPA need from you in order to do that work each month to give you those financial statements? Remember that accounting is the language of business. When I was in dental school, that was the first thing they taught me on the first day of accounting 101, that accounting is the language of business. What do they mean by that? Well, what they means is that every business has commonalities to them, regardless of the type of business it is, E commerce, dental practice, CPA firm.

You know, a company selling shoes, they all have commonalities between them. There are, there's income coming in, there are expenses going out, there's profit, there's commonly debt, there's payroll, there's taxes, and then there's distributions, sometimes known as dividends out of that entity into the owner's personal, their personal accounts. So there are all of these commonalities. And accounting is what sort of creates a language between all of these different types of businesses so that somebody, anybody can evaluate the financial health of that practice. It is a sort of a language. And yes, just like if you were going to learn Spanish or if you were going to learn Chinese or you know, Cantonese or you're going to learn any other language, then you have to take some time to understand what are the variables that make up a sentence, that make up a concept within that language. And accounting is one that you need to understand today in order to run your practice effectively or successfully as an entity, as an organization, as a for profit organization. That doesn't mean you need to know perhaps what a CPA knows in accounting. And you don't need to understand all the tax laws, but you do need to know how to read a financial statement to understand.

At some level what's happening in your practice with your inflows and your outflows and where's your money going? Can you account for everything? And if you understand that, well, you're going to make good financial decisions. You're also possibly going to help prevent the possibility of embezzlement, which is uncommonly high in dental practices. And it's common in a lot of businesses. But dental practices are uniquely susceptible to it because the front office is sort of in their own bubble, their own world, managing money coming in and cash flows and, you know, and all the finances while you're in the back office doing the clinical work. And the financial statements can give you some insight into what's happening to your cash flow. Doesn't mean that the financial statements are always going to prevent embezzlement, trust me. Embezzlers find incredibly creative ways to take money that should be in your bank account and put it into their bank account. But understanding the financial statements is one way of keeping track of where your money's going and could provide some signals or some flags if you needed to investigate the possibility of embezzlement. So there's a lot of reasons why you should understand your basic accounting reports. Now, what I find out there, I'm going to sort of sidetrack myself a little bit just to talk about financial statements in general, is what I've seen so many variations of financial statements in dental offices as we get a new client or we're working with a buyer to buy the practice. And we look at the seller's financial statements, they come in so many shapes and sizes. And the most common software is QuickBooks. And QuickBooks has a certain format. And some doctors just have all their expenses listed out and their revenue or their collections, all of their expenses. And what's left at the bottom is their profit. Really doesn't tell you that much. Tells you a little bit, but not much. And then I've seen some excellently some well designed financial statements that really break out categories like labor and labs and supplies and facility and marketing and your admin. And it puts down below everything for the doctor, the doctor's payroll, doctor, family on payroll, automobile and meals and entertainment and that kind of thing. That's how we do it at practice. Cfo, we put a lot of thought in how we design these financial statements. And you will, you've already seen in our example with Dr. Devlin exactly how we believe a financial statement should be reformatted so you can sort of see it better, almost like a 3D X ray, so you can just have much better visibility into what's happening with the numbers. So when it comes to your accounting and financial statements. The first thing I want you to remember is that you need to meet with your accountant before closing to say, accountant, how are we going to do the financial statements? What do you need from me every month? Okay, you're on QuickBooks. Are you going to import that directly from the bank account or do you need statements from me? Do you need anything from my practice management software? And just come up with your MO so that when you buy the practice, your CPA is already doing the numbers so that there's not a four month lag before you get your first set of financial statements. And errors could be in them when you're trying to go after the fact, well after the fact, to prepare those financial statements. So meet with your cpa, get that dialed in before even closing the other. The next thing, and really this is almost simultaneous or perhaps even before number one, but is to choose your model of service provider in the space of CPA and accounting work traditionally, and what most dentists get is they get a true accountant. And a true accountant is for the most part a historian. And what I mean by that is that they have one job and that job is to aggregate all the data going, going back in time to a certain point, getting it into the software and formatting it so that you have financial statements to review, also so that you have information to report to the IRS and the tax, the state tax agency at tax time. That is a traditional CPA's role in school. That's what they're trained to do. And there's not, there's not an exercise in what's known as finance. Finance is a prospective looking analysis where you say, okay, I've got the data, the historical part's done. Now what do I do with that data to make the right decisions going forward? That is the concept of finance. Now the two models that I'm seeing out there, the most common is just the cpa, the standard CPA and accounting model where you're sort of left to decipher what to do with the numbers on the financial statements. And it's very common that doctors aren't getting financial statements once a month. They might be getting it once a quarter or it's very delayed. And no one's really using them as a management tool. They're primarily being used as a tax preparation tool, which I believe is not the way to approach the finances in your practice. What we believe is the need to have a CFO model, which stands for chief Financial Officer model. And the CFO model is one that takes the data and then uses it to make those decisions looking forward so that a year from now, two years from now, five years from now, you're in a much better situation financially because of the clinical decisions you made, financially speaking, using those reports. That is more of a CFO model and there's a few CFO type model firms out there servicing dentists. And that's really our focus at Practice CFO is providing that level, that style of involvement with our doctors. Number three is make a plan then to review your financial statements each month. Look at them, what's my revenue, what were my labor, what's my labor percentage, what's my, what are my supplies in my labs, what's my profit, how much is going to pay, debt, etc. Etc. And learn how to understand that and review it. It's important that you don't neglect that side of your business. Number four is watch our courses on the subject of accounting and finance. We have accounting 101, accounting 201 and accounting 301. And we talk about the right format, how to interpret financial statements. We talk about calculating break evens in your practice. There's a good subject. And then we also talk about the balance sheet or the statement of assets and liabilities and owner's equity so you understand how you're sort of paying down debt and building your worth over time. Keep in mind too that we also have in our resource center on the Associates on Fire webpage, a template, what's called GL or General Ledger, which is simply a template format for what your financial statements can look like. You can take that to your CPA and say, hey, I'd really like you to format the financials in this way. And of course it's the format that we use here at Practice cfo. So I hope that's a helpful resource to you and that this has been a quick but helpful sort of overview of the process of establishing a good accounting and really financial system within your practice.