Dental practice accounting: Why financial statements are the key to growing your practice and your wealth

As dentists and business owners, we’ve worked hard to perfect our craft. We have business support teams dedicated to providing the highest quality service, and we rely excessively on their knowledge and expertise. That’s all we need for success, right?

That’s what we believed when we left dental school. However, as we built and developed our practices, we quickly learned that our professional skills could only take us so far, and our business skills sometimes fail us. Nonetheless, our team members expect us to be experts in all business elements of the dental practice, and they rely on our decision-making process and directions. While such reliance is emotionally rewarding, we must admit that we cannot cover everything. We must admit that what is frequently missing in dental practice management is the necessary financial acumen.

The keys to success as a dental practice owner

While research shows that the dental industry enjoys a very low failure rate,¹ most dentists/owners struggle with high overhead² and costs that are frequently impossible to control. That means we’re still working as hard as ever but generating less profit, which equates to less personal wealth for us as business owners.

The dentist entrepreneur and the multilocation owner

Accounting is more than your taxes

What is the primary reason for high overhead and out-of-control costs? It’s making decisions without the full benefit of all the numbers and application of basic financial analysis. Yet, that’s exactly the information any business owner will find in financial statements.

Still, the issue goes much deeper than that. Those same financial statements are vital to understanding and building the value of your practice. The principles of practice valuation need further clarification so we can all understand the specifics of dental practice valuation.

Accounting is your control center

Numbers are objective. They frequently don’t tell you what you want to hear. But that does not mean that we should silence and ignore them. Instead, we must accept that financial statements confront us with the cold, hard truth. While it may be unpleasant at times, they’re precisely the information we need to spot issues early, make needed adjustments, and make better decisions.

That’s why every dentist/owner needs a firm grip on accounting and all practice numbers. One achieves that by understanding and analyzing financial statements.

Financial statements provide visibility

In our professional career, we are first dentists, and then we later studied business. We realized the critical difference financial controls bring to business decision-making, which led us to help other dentists/owners implement similar changes so they could achieve their financial goals. In so doing, we realized that many dental practice owners don’t prioritize accounting and financial statements, and instead rely on their accountants for this essential part of the dental practice.

That’s not surprising since, from our own experience, we know that most dental professionals get little to no formal training in accounting and financial management. But the good news is you don’t need much training to get up to speed. You need just enough to understand the numbers and interact effectively with your accountants and bookkeeper. Once you do that, you’ll quickly catch on and be able to use these valuable instruments to run your practice more effectively.

Your opportunity to build value

Let’s be clear: our goal is to improve our business’s financial performance. While we can make more money now and in the near future, we should not forget that our most important goal is to build a more valuable practice. When it comes to dental practice management, we have to think as business analysts rather than clinicians.

Here’s a quick overview of financial statements so you can better understand these critical accounting reports.

Income statement: “The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.”³ This report documents the money the business has generated and spent over a specific period of time. At the bottom, it shows you a critical number: how much net profit the company generates. The detail above the bottom line can help you spot trends in both revenue and expenses, so you can act on problems and recognize opportunities. It also helps you with tax planning and makes it easier to find and implement saving strategies.

The profit and loss statement (P&L) is one of three financial statements every company should regularly generate, along with a balance sheet and cash flow statement. In addition to an annual report, monthly and quarterly reporting is recommended to assess practice performance.

It is crucial to compare P&Ls from different accounting periods. This financial analysis allows you to assess any changes in the business cycle and provide more meaningful insight into practice performance.

Balance sheet: The balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time.⁴ The balance sheet summarizes what the company owns (assets) and what it owes (liabilities). It’s similar to a personal net worth statement. You can quickly see how much money your business has and get a sense of the practice’s overall value, as well as the amount invested by any shareholders. The balance sheet is represented by this equation: assets equal the sum of liabilities and shareholder equity. It’s also used in the fundamental financial analysis to calculate financial ratios.

Cash flow statement: While the cash flow statement is perhaps the most misunderstood financial report, it is one of the most critical elements of financial statements any business owner should examine. This document tracks how money flows in and out of your business, and it can help you quickly assess your financial stability and help avoid a future cash flow problem.

Statement of retained earnings: This document tracks the amount the business has earned that has not been paid out. The statement of retained earnings can be a significant predictor of financial stress.

The beauty and advantage of all these financial statements are that they quickly convey critical information. In addition, because they are generated in a standard format, these reports can help outsiders quickly get a handle on your business. So, whether it’s potential buyers down the road or lenders if you’re interested in obtaining financing, financial statements communicate in a universal language. When used together, the profit and loss statement, balance sheet, and statement of cash flow provide a comprehensive, in-depth look at the practice’s financial performance.

What’s your exit strategy?

When you’re busy, it’s easy to ignore accounting and focus on running the business. But if you plan to build and eventually sell your business, it’s a huge mistake to ignore these numbers. Buyers and their accountants will likely judge your business primarily on your financial statements. They will focus on specific numbers showing growth and profitability. If your financial statements don’t reflect a profitable and stable business, you can expect lower offers (or no offers).

The sale of a dental practice is challenging. In fact, selling any business is a monumental undertaking with a high failure rate. According to a U.S. Chamber of Commerce study, only one in five small companies that seek a buyer sell successfully. Other sources show only a 5% success rate for business sales.⁵

Mindset shift

Is business accounting a nonurgent matter? Of course not. It often requires discipline and a shift in your mindset from a clinician who dedicates 100% of the time to treating patients to allocating adequate time to address business activities. That’s where these financial controls are essential. You, the business owner, will enjoy more control if you commit to regularly reviewing and analyzing your financial statements. You’ll achieve the visibility you need to make the decisions that can help your business grow in a financially intelligent manner.

As dentists ourselves, we understand the pressure of our demanding profession. It’s challenging to balance business development work with dentistry and attention to patients. However, we truly believe that if you can learn how to turn financial reviews and analysis into a habit, you will find your growth compounding and build a more profitable and valuable dental practice. We also advocate that learning about accounting and financial statements may be one of the most worthwhile investments you’ll make.

Disclosure: Drs. Ruvins, Stein, and Kayserman have no financial interest in any of the companies mentioned in this article.  

Editor's note: This article appeared in the November 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.