ACCOUNTING FOR THE AMBITIOUS HOW TO TAKE YOUR DENTAL PRACTICE FROM MEDIOCRE TO HIGH GROWTH

Transcription

1 ACCOUNTING FOR THE AMBITIOUS HOW TO TAKE YOUR DENTAL PRACTICE FROM MEDIOCRE TO HIGH GROWTH

2 Introduction Our experience in the dental industry has taught us, that like all successful businesses, you must set goals, measure performance, and learn from your performance analysis to become highly profitable. The reality is that there is no magical tip or secret that will turn your dental office into a high growth practice; all high growth dental practices have only one thing in common, they all work hard at becoming efficient and profitable. This book is for all dentists who are looking to reduce stress and create work-life balance, while simultaneously increasing profits. We will help you learn the type of goals and targets you should be setting, the most efficient ways to measure your performance, and how to transform the data from your performance analysis into information that can help you grow. Mohammad Ismail Founder & CEO

3 Contents 1. Goals and targets high growth practices are setting a. Production Targets i. Setting production targets for Dentists ii. Setting production targets for Hygienists iii. Why you should know your daily breakeven point b. Profitability Targets i. The key to managing expenses ii. How much you should be spending on wages and dental supplies 2. Tools and tips on knowing how to measure performance a. Tools for measuring success b. What you should be benchmarking c. Focusing on metrics that matter 3. Learn, adjust and repeat a. How to build efficiencies in your practice b. The art of management accounting

4 What goals & targets high growth practices are setting? Setting business targets gives everyone on your team direction and links your strategy to your operations. When everyone is working towards the same goal you are more likely to reach your targets. 1.Why you should set production targets Without increasing your production you can t expect to become a high growth dental practice; gone are the days when practices could survive without increasing production. In today s economy a practice should aim to see production increasing annually. Your growth rate should relate directly to what stage of the clinic life cycle you are at ; start up, growing or maturity. Successful practices use production targets to help them reach their profitability goals. To do this they set production targets for their practice and for each provider. Looking at production at a granular level (ie. by provider, per hour, per appointment) will give you insight into how much you need to increase production in your practice. To hit production targets you need to track the following: How many days each dentist is working and its impact on reaching annual production targets Hourly production of each hygienist to monitor efficiency How many patients you will need to see per day to hit financial goals and new patient flow on a monthly basis WITHOUT INCREASING YOUR PRODUCTION YOU CAN T EXPECT TO BECOME A HIGH GROWTH DENTAL PRACTICE.

5 1.1 Production targets for Dentists Having a target score card for each dentist in your practice sets the stage for success. It makes it really clear what each provider needs to produce and how many days they ll need to work to help you reach your targets. With the scorecards it s easy to figure out who isn t reaching production targets or who is exceeding them. Both types of information can lead to productive conversations in the office about changes that need to be made in your operational processes. This could include discussions about how to reduce no-shows, if you need to increase the number of days a dentist is working or if you need to to better manage the number of low profit procedures per month. For simplicity here is one way to calculate production targets for each provider on a spreadsheet. AVERAGE DAILY PRODUCTION X NUMBER OF WORKING DAYS PRO TIP: Don t use 365 for number of working days since you will be taking 6 weeks off during the year; most dentist work 3-5 days a week X 48 weeks

6 1.2 Production targets for Hygienists Production goals should be shared with all team members and each person should know how they contribute to this goal. Setting targets for hygienists is really important since hygiene revenue accounts for a good portion of patient visits. Compensation To set goals for hygienists you have to start by looking at their compensation. Most high growth practices want each hygienists to make 3-4 X their compensation (includes pay and benefits). For example, if you have a hygienist in your office that is paid $6000/ month then this hygienist needs to produce at least $18,000/month. This is a good target for a practice that is trying to grow. Average hourly production Another way to measure hygiene efficiency is to measure average hourly production for each provider. A simple way to calculate this hygiene metric and measure it against targets for each provider is: MONTHLY PRODUCTION / NUMBER OF WORKING HOURS IN A MONTH PRO TIP: Number of working hours should match payroll hours. Don't include lunch hours or hours the hygienist was not paid for. Looking at this number will highlight the following: Top performances in the team - Find out why they do a good job. Low performances - Find out why they are behind. The answers may expose the need to improve clinical skills or improve scheduling. Setting and tracking these targets will keep your hygiene team efficient because you ll be able to identify when changes need to be made to increase efficiency. Again, share this information at team meetings to start conversations about operational issues that may be impacting production.

7 1.3 Why you should know your daily breakeven point Successful practices don t just want to know how much they make a month, they want the details. They ask us at what point in each day they actually start making money. We tell them exactly how much revenue they have to earn or how many appointments they need to book, per day to cover expenses. This automatically motivates our clients to keep an eye on their fixed and variable costs, but it also keeps their production targets at the forefront of their minds on a daily basis. If you re not familiar with breakeven points, here s a simple example of how to quickly calculate it: STEP 1 Take your monthly fixed costs such as rent and divide by the number of working days/month STEP 2 For variable costs ( ie hourly wages for Hygienist) multiply by the number of hours you are open per day STEP 3 Add all of your daily expenses to determine how much revenue you need to generate to cover expenses. Fixed Costs Variable Cost Breakeven Point Daily Rent Expense Daily Wages Expense Minimum production per day $625 A $920 B $1,545 A+B **Use this format for all of your fixed and variable expenses to calculate your total breakeven point.

8 This underused calculation is really important for startup practices who are aggressively trying to grow. If you want to hit your targets, everyone on your team should be aware of what needs to happen on a day to day basis. In the above example, the dental office needs to bill a minimum of $1,545 in one day in order cover expenses (this is excluding Dr s compensation). Although it s not as vital, we still use this analysis for our established clients who want to maintain a certain level of profitability. 2. Why you should set profitability targets Being profitable is when your practice has more money coming in from dental billings and hygiene fees then money going out from expenses including wages, supplies and rent. We are big fans of reviewing net income as a percentage of production, it s a really quick and easy way to tell clients how efficient they are at generating a profit. Too often clients think that their production totals alone, dictate if they are profitable or not. This is not always the case. Take a look at the table below where we have compared the profitability of two firms, to see what we mean. Practice A Practice B Total Production $400,000 $600,000 Net Income $100,000 $120,000 Net Profit % 25% 20% So even though Practice B has a higher production, Practice A is more efficient because they re earning $0.25 in profit for each dollar of production, whereas Practice B is earning only $0.20 per dollar. You always want to aim for a high net profit % and high production.

9 It goes without saying, that net income as percentage of net production is a powerful tool for understanding profitability and can quickly tell you which direction your practice is heading. If this isn t already a part of your monthly review we would highly recommend asking your bookkeeper to include it going forward. 2.1 The key to managing expenses If you want to continually grow your practice you have to invest in your business. If you don t invest enough you ll slow down your growth. On the other hand if you spend too much you ll diminish your profit margin. It s a tricky balance to find a happy medium. Try to be mindful of your expenses and before spending on your business, always do a quick check by calculating your return on investment (expected profit/total investment). PRO TIP: Always do a quick check by calculating your return on investment (expected profit/total investment) Another point to remember is when reviewing your monthly expenses remind yourself that you re not looking at the full picture. It s likely that you ll spend more heavily on something like marketing in one month and not realize the increases in revenue until later. If you just look at a monthly view this will give you a skewed profitability. Alternatively, if you look at the year to date actuals you ll get a more accurate picture of where you re at. Monthly profitability will fluctuate due to variability in spending, but year to date profitability will be more stable. The key is to run a lean practice, but to not think of cutting expenses as a way to increase net income. Your main focus for increasing net income should be to increase production, always. Managing expenses is a tool that you should use to improve your profit margin.

10 2.2 How much you should be spending on expenses We ve found that our most successful clients manage their expenses by setting aggressive but smart targets for each expense item. Even though they know that there are a lot of moving parts that can sway them from hitting these targets, they work hard to keep their expenses at the following levels. Target Range Dental Supplies 5-7% Lab 4-6% Payroll 20-25% Rent 5-10% To manage your expenses you have to understand the difference between fixed and variable costs. Your variable costs includes things that vary with production including supplies and payroll. You need to try and control these costs so they are proportionate to your production. Use the target range above to check if your variable costs remain reasonable as your production increases. Fixed costs do not fluctuate, they are what they are. This includes items such as rent. Once you ve signed on the dotted line you have no more control over this cost. It doesn t matter if you produce $30K or nothing in a month, you ll still have to pay the same amount. The only way to manage fixed expenses is to increase your production so that it becomes a smaller percentage of your revenue.

11 Tools and tips on knowing how to measure performance To track progress you have to measure performance; it s the only way to know if you re coming close to hitting your goals. If you don t keep track of how you re doing throughout the year, you ll miss the chance to implement strategies for growth. Tools for measuring success Once you know what you re measuring you need to figure out how to measure the targets you ve set. You can do this by using performance management software or by using a simple excel spreadsheet. At the end of the day it doesn t matter what you use, as long as you re able to measure everything accurately and efficiently. Having said this, you don t want to spend hours measuring targets when the goal is to reduce the number of hours you re working. We'll discuss apps you can use that ll save you time and increase efficiency in the next section. Our experience with dental practices has made it clear that clients need to receive management reports on a monthly basis. For productivity and profitability targets you should rely on your accountant to measure your performance against your targets. Our experience with dental practices has made it clear that clients need to receive management reports on a monthly basis which includes performance measurement such as benchmarking and KPI analysis. Without these numbers we can t help our clients identify what they need to do to become high growth practices. Key Performance Indicator (KPI) : Metrics that are measured and tracked by practices to quantify their objectives. Effective KPI s help you understand if you are reaching your goals.

12 2. Why you should be benchmarking If you re not comparing yourself to peers or past performance you ll have no frame of reference for how you re doing. In order to grow your practice, you need to know where you stand - it s as simple as that. Benchmarking against your industry gives you a good idea of where you stand compared to your peers and can give you motivation to make necessary changes in your practice. Most of our clients are curious to know things like; if they are making the right progress; and how their expenses compare to others. Industry benchmarks are a great point of reference but it s important to keep in mind that you re never comparing apples to apples. An industry benchmark will not allow you to compare yourself directly with a high growth practice or a practice that is the exact same size as yours. It ll be an average of high growth and low growth practices of varying sizes. Now to compare apples to apples, we highly recommend that you do internal benchmarking on a monthly basis. If you ve put together a useful annual budget, meaning a budget for all line items on your profit and loss statement, you ll already have all the data you need for this type of benchmarking. Taking your actuals and comparing them to budget and YTD totals gives you direct insight into if you re on track to hit your targets. Benchmarking against your industry gives you a good idea of where you stand compared to your peers and can give you motivation to make necessary changes in your practice

13 3. Focusing on metrics that matter There s so many different metrics you can use to check your practice s financial health. We know that our clients are busy running a business so we try to give them information that s useful, easily digestible and gives them an honest picture of their business health. 3.1 Cash Vs. Profit You need cash to keep your business afloat. Too often we come across clients who don t know the difference between cash and profit. It s so important for you to know that your net income or profit, is not equal to the amount of cash you have available. If you don t understand the difference and if you don t monitor both separately you may end up spending money that you don t have. Let s start with profit or net income. This is calculated as the difference between your revenue and expenses (both found on the profit and loss statement). If you have it available, bring up your profit and loss statement and take a look at all the numbers that make up your net income. The calculation for cash flow isn t the same. For this you have to take your revenue, less your expenses, less items such as personal loan payments that are found on your balance sheet. That s right----the cash available to you is not always equal to your net income. If you don t understand the difference and if you don t monitor both separately you may end up spending money that you don t have. To stay on top of this, ask your accountant to provide you with a profit and loss statement, balance sheet as well as a cash flow statement each month. Further, during your monthly reviews you should be asking questions such as: do I you have enough cash to meet current obligations and what is my YTD profitability in comparison to budget. Questions like these will help you reach your goals and avoid any unnecessary cash flow issues.

14 3.2 Production per patient As discussed earlier, production is a key metric that all practices should be tracking. Throughout this book we have even mentioned increasing production numerous times. But it s not always as simple as that - sorry to burst your bubble. Sometimes even if your practice is fully booked you may not be realizing as much profit as is possible. That s why we suggest looking at production per patient. Let us explain why, using an example. Practice A Practice B Number of patients/day Avg production/patient $200 $370 Revenue $3,750 $5,550 What we are showing here is working faster and harder isn t always the same as working smarter. Practice B may be seeing less patients but they are offering more comprehensive dental care and increasing their production per patient. This translates into less stress, a slower practice and often times more profits. 3.3 Collection / Accounts Receivable It doesn t matter how much you increase production by, if you re unable to collect revenue, you won t see a significant increase in your profitability. You ll have incurred the expenses of a client visit (which will appear on your financials) with no adjoining revenue. We suggest that you aim to collect 99% of your revenue and that you keep an eye on any accounts receivables over 90 days; we like to see our clients A\R over 90 balance below $5000 at all times. Engage your Office Manager to track your collection time and to help implement strategies to increase collections. Learn, adjust and repeat Learn lessons from your past performance and make the necessary adjustments to improve future performance.

15 a. How to build efficiencies in your practice If you want to be a successful dental practice you have to get to a point where you can focus your resources (employee time) on patient care and other important aspects. One of the best ways to do this is by finding efficiencies for repetitive administrative tasks - these tasks don t make you money so why spend time doing them? By automating these tasks and streamlining processes you will reduce stress and redirect time towards doing things that actually make you money. By automating administrative tasks and streamlining processes you will reduce stress and redirect time towards doing things that actually make you money. We re big advocates of using cloud based solutions. We have helped all our clients migrate to apps that have streamlined processes for tasks including document management, payroll and accounts payable. These solutions integrate with one another and with accounting software, it s one of the easiest ways to build efficiencies and reduce costs. Here s a list of cloud based solutions that have helped our clients.

16 Get a virtual filing cabinet - Introducing Hubdoc As the name suggests this cloud based app is an online hub for all of your financial, and business documents. It allows you to or use your smartphone to upload receipts and will automatically retrieve bank statements and bills from vendors. Benefits: Hubdoc stores all your financial documents in one central location. Along with saving you time on data entry it also syncs this information to your accounting software reducing the back and forth between you and your bookkeeper. Watch our video: Process payments easily using Plooto This easy to use all-in-one payment solution makes sending and collecting payments for payables (bills for vendors) and receivables painless. Benefits: Simplifies complicated and/or repetitive payments by giving you the ability to automate processes and pay or receive payment electronically. This translates into easily paying CRA source deductions and reducing administrative time by setting up automatic recurring payments to vendors. Watch our video:

17 Realize efficiencies in payroll using Wage Point A user friendly online payroll solution that can easily be integrated with other cloud solutions. Benefits:Manages all things payroll related. This includes government remittances, direct deposits, and all year-end reporting. They also offers a service to help companies switch over their existing payroll system to Wagepoint. Get access to data anywhere using Xero Xero for small businesses is a must. It s a cloud based accounting software that gives you real time financial data, no matter where you are. Xero can be integrated with multiple other apps (ie document management or accounts payable apps) to increase administrative efficiencies and streamline workflows. Benefits: Makes tedious accounting tasks less time consuming for your staff and your accountant. This means more time for your staff to focus on patient care and more time for your accountant to turn data into useful metrics that can help you become profitable. The software has multi-user access which makes it very easy for you and your staff to collaborate with your accountant. Everything is run online, which means no initial installation or daily backup. Watch our video:

18 b. The Art of Management Accounting If you re like the majority of small businesses you likely don t have someone looking at your books everyday. And if they are looking at your books, they re probably not looking at the things that ll help you reach your business and personal goals..enter Management Accounting. What is Management Accounting? Management Accounting is more than just having someone look over your financials and file your taxes; it s accounting for the ambitious. It s the type of accounting that will give you the answers you need to make strategic business decisions that will help you grow your business. Management Accounting is the type of accounting that will give you the answers you need to make strategic business decisions that will help you grow your business. Management Accounting is for you if you re curious to know the answers to questions like: How to increase staff productivity How you are doing compared to peers What areas you can reduce expense in Why your profit is not as high as you expected Looking Forward As we mentioned above, there s no easy way to become profitable. There are however steps that you can follow to help get you there. Set clear and measurable goals and targets Measure these targets accurately and review key metrics on a monthly basis Evaluate operational processes to find efficiencies Implement new systems where appropriate (hopefully cloud based solutions!) Collaborate with your accountant to build a strong business

19 About Shift Accounting is a modern accounting firm that was founded by Mohamed Ismail in Mohamed s passion for technology and experience with the dental industry led him to open one of the first cloud based Management Accounting firms for dentists. Mohamed and his team focus heavily on using cloud based systems to help clients reach their financial goals. Their niche focus has allowed them to build strong relationships with clients and develop expert knowledge in the dental industry. Their combined experience has given rise to insight into how profitable practices build strong accounting processes to help them boost their bottom line. Mohammad Ismail Founder & CEO