Know your numbers
Penny Reed offers some key advice on the numbers to track to follow the financial performance of your practice
Most dentists go to dental school to help people improve the quality of their oral health. Running a business is usually not the top motivator. Yet having the facts about what’s happening is vital to knowing how to manage and plan for growth in your practice.
How do you know if you are making money? You must understand what your current financials mean, and track them regularly. Most dentists think, ‘I will spend most of my time making money now and figure out the rest of it later.’ This can lead to decisions based on emotion and unnecessary debt.
Think of the profitability of your practice as a map. When you look up a location on a map and try to make a plan to get to a destination, you must know your current location. This is the best way to determine how you are going to get where you want to go. Why else is knowing your numbers so important? The investment in your dental degree and dental businesses are likely the most significant investments you will ever make. You need to ensure that you are getting a sound return on that investment.
So, what exactly should you be tracking? How often should it be tracked? What should you be looking for? And…how in the world are you supposed to track them? These are all valid questions.
Let’s start with your income statement (sometimes called profit and loss report). Quickbooks or a similar bookkeeping software is a necessary investment that provides you with real-time tracking of your income and expenses…the income statement. Be sure to review your income statement or profit and loss report on a cash basis and look at it monthly. In most cases, you will have only one income account for your practice. The trickiest part, however, is being sure your expense accounts are setup correctly.
Your expenses will fall into two broad categories:
• Fixed expenses – With a fixed expense, the bill is the same amount each month, no matter how many days you see patients or whether or not the office is open or closed. In a general practice, your fixed expenses should equal no more than 22%.
• Variable expenses – variable expenses increase and decrease based upon the volume in the practice and the hours it’s open. In a general practice, variable expenses should be no more than 43% of collections.
You should run your profit and loss report monthly, by the 10th of the month. You want to be sure you use the option to show each item as an expense of collections. Be sure to set up your report so that you can see the previous month’s stats, the year-to-date stats, and both the previous year’s stats for the same month and same time period year-to-date.
You must plan to spend about 30 minutes to an hour per month reviewing these figures to be sure you understand where your money is going. You work too hard to let it fly out the door!
Practice management software
We live in an exciting time of technology in dentistry. I still remember, in my early consulting days, working with clients who did all of their billing and claims manually. The office manager used a ledger book or pegboard system to track numbers and manage accounts receivable. All dental claims were done by hand. Needless to say, it wasn’t very efficient.
Now we have some very advanced practice management software, or PMS, systems. Take advantage of the robust reporting in the system by tracking the following data:
• Collections. This is one of the most, if not the most, critical statistic to track. Collections refers to the amount the practice has been paid for procedures rendered. Usually Collections are broken down into two categories:
1. Gross collections are the total dollars received into the practice, before any credits or refunds
2. Net collections is the net amount of money received into the practice after any refunds or adjustments.
• Production. The best ‘business’ term for production is items sold and delivered. This is the amount the patient is charged for the service or product. Production is also broken down into two categories:
1. Gross production is the amount charged for a procedure, at the practice’s full fee, before any discounts or adjustments
2. Net production is the net amount charged for the procedure, after discounts or PPO adjustments. The easiest way to describe net production is it’s the amount that is charged to the patient that is actually collectible.
Many practices focus solely on gross production and build their business plan around that figure. However, the number you should goal set around is net production. After all, you can only get paid for the amount that is actually collectible.
Production by department
In general, paediatric, and periodontal practices, production is usually tracked by departments as well as providers.
Hygiene production is defined as production that takes place in the hygiene department. This includes but is not limited to exams, X-rays, prophylaxis, sealants, periodontal treatment, fluoride, etc. At this point, only a dentist can charge for an exam and X-rays are not billable until they have been interpreted by the dentist. Therefore, many practices show the production for the exams and X-rays done in hygiene as doctor production. It is also important to look at the actual production (total) that takes place in the hygiene department.
What should the hygiene department produce? If exams and X-rays are included in the hygiene production, hygiene should produce 35% to 40% of practice production. If exams and X-rays are credited to the dentists, hygiene should produce 25% to 35% of the practice production.
Operative production is defined as production that takes place in the operative department. This usually includes fillings, crowns, bridges, dentures, partials, implants, endodontics, sealants, etc.
Orthodontics department – In a general or paediatric dental practice that has an orthodontist on staff or performs orthodontics, it’s a great idea to track these procedures to see the percentage of overall production that comes from orthodontic procedures.
Aesthetics department – Botox, dermal fillers and other facial aesthetics are an income centre being added to many practices. If you carry out these treatments you will also want to track these statistics separately so you can see if providing them more than covers your cost to provide them.
Production by provider
Production by provider is especially important to know when comparing actual production to daily goals by provider or if you have hygienists on commission and/or associate or partner dentists who are compensated based on production. It’s also important when calculating commission based on collections. The work must be produced before the income can be collected.
Production by procedure reports have a goldmine of information in it. Not only can you track how many of each procedure is being conducted, but also the production from those procedures. In addition, this report can be sorted by provider so you may see how many of a certain procedure were done by dentist or hygienist.
A healthy accounts receivable amount should be no greater than one times the average monthly net production. The key to keeping the accounts receivable manageable is to work it consistently each day. The benchmarks should be:
• Current (less than 30 days old) – 66%
• 30 to 60 days old – 10-13%
• 60 to 90 days old – 10-13%
• Over 90 days old – no greater than 8%
One of the key strategies for effectively managing accounts receivable is to offer outside, third party, financing sources.
Outstanding insurance is a component within the accounts receivable that is owed, or estimated to be owed by the dental benefits company / plan provider. Keys to keeping insurance reimbursement simple are to file claims electronically, including the attachments, daily. Accurate treatment notes make the job of the administrative team easier as the clinical record should contain any information that might be needed in a narrative.
Days and hours worked
As we delve deeper into knowing your numbers, you will find it vital to know not only how many hours the practice was open and treating patients, but also how many days and hours each provider worked each month.
Here is how I recommend you track days and hours worked by provider:
In a practice with one dentist and one hygienist, if both work on a particular day, it would be: one day for the practice, one dentist day, one hygiene day.
In a practice with one dentist and two hygienists, if all three work on a particular day it would be: one day for the practice, one dentist day, two hygiene days.
In other words, each day that each doctor works is counted as a doctor day and each day that a hygienist works is counted as a hygiene day.
Tracking the figures this way gives us more flexibility in measuring our productivity as well as our efficiency. By breaking the days worked down in this manner you can more easily compare month-to-month and year-to-year how productive you were based not only on how many days the practice was open, but how many providers were there. It is also very beneficial for each provider in your practice to know their production per day, per hour, and per patient.
Marketing and advertising expenses can make up a considerable portion of your practice expenses. Be sure to track not only new patients but also how many come from referrals as well as the specific marketing source. On a quarterly basis look at number of new patients by source. This will help you determine which advertising sources are working well and also encourage the team to focus on asking for referrals. Your patient base is one of your greatest assets. Be sure to let them know you appreciate them and that you would love to take care of their friends and family.
Understanding and monitoring the numbers in your practice is a discipline that takes intentional effort and planning. The benefits to you as far as decision-making and profitability far outweigh the weekly and monthly investments of time to track the data. Share the key metrics with your team so that they can know when the practice is winning and when a new approach or strategy is needed. The short and long term financial health of your business is worth it!