Managing a dental practice involves juggling many financial aspects. Proper bookkeeping can help you avoid tax trouble and fine-tune your budget.
The first step is choosing the right legal entity structure. There are multiple options available, including LLCs and corporations. Next is establishing the correct accounting methods and a dentistry-specific chart of accounts.
Know Your Numbers
The key to running a successful dental practice lies in knowing the numbers and how to handle them. It’s crucial for ensuring your profitability and compliance with tax laws.
Whether your new dentist’s office accepts insurance or opts for a fee-for-service model, you must understand the financial implications of each choice. Understanding how each impacts the number of patients you can see, your revenue, and the cost per patient will help you make an informed decision.
You should also closely monitor your insurance costs and the major players in your service area to ensure you’re being offered fair, negotiated rates. This metric will help you spot problems early and save you money in the long run.
Know Your Taxes
Many small businesses significantly overpay their taxes because they need to take advantage of all the deductions and tax benefits available. Whether you are an LLC or a C-Corp, a good accountant can help you navigate the complexities of your specific business structure and ensure you’re taking full advantage of all the tax advantages you’re entitled to.
Medical and dental practices are expensive, with most of the costs for purchasing equipment. To decrease your initial tax liability, you can buy the equipment and reimburse yourself or your employees through a Medical Expense Reimbursement Plan (MERP). This allows owners to deduct 100 percent of out-of-pocket expenses on their tax return.
Keeping your financial records organized is important to keep track of income and expenses. Using dentist accounting software can save you time and money by simplifying your record-keeping. Having fewer bank and credit card accounts also makes monitoring all transactions easier for you and your accountant.
Know Your Expenses
It’s essential for a dental practice to know their expenses. While it’s impossible to eliminate all overhead costs, there are many ways to reduce them, and a good accountant can help.
A dentist’s most significant expense is their salaries, followed by the cost of operating equipment. Other major expense items are materials, lab work, and insurance. These types of expenses typically appear on a monthly profit and loss statement.
It is important to manage these expenses, which are at most 4-7 % of your production costs. This will make your practice more profitable and increase your ability to take on larger cases. A good accountant can also help you negotiate with suppliers to get better deals on these items. They can also provide a cash flow statement showing exactly where your money goes.
Know Your Income
The financial aspect of running a business probably didn’t appear in your dental school dreams, but it’s still important to understand what bookkeeping is and how to manage it. Simply put, it’s the practice of recording credits (money coming in) and debits (money going out).
For example, a new dentist may save money by switching to a credit card processor that doesn’t charge monthly fees. Or, a new dentist should focus on marketing toward patient populations more likely to need larger procedures.
An accountant can help by providing insights into managing expenses, revenue, and profit. They can also assist with determining the best structure for your business, as well as filing taxes. It’s a good idea to work with a local accountant for convenience and to ensure they stay up-to-date on tax laws.
Know Your Cash Flow
As a new practice owner, knowing how much money comes in and goes out of your dental business is important. This knowledge will help you determine if you are budgeting correctly and if your profit margin is sustainable.
Many businesses need help with cash flow due to inefficient processes. For instance, manual reminders and appointments can take hours out of the day that could be spent on billable work. Automated tools like text-to-pay and online payment portals can reclaim this time, so more money is coming in and less going out.
Keeping a close eye on your financial situation will allow you to address cash flow fluctuations early when they are more manageable. This is the best way to avoid the costly effects of an unexpected shortfall.
