Great bookkeeping should help you make better practice decisions which will lead to more profit. But if the bookkeeping data isn't good, neither will the financial reports you are using to make those decisions.
Here are 5 bookkeeping mistakes dentists make.
1. Use Incorrect Categories
Every time you swipe your business credit card or receive money in your bank account, those transactions need to be put into a category so when you pull a financial report you can see where all of your money is coming and going.
If an expense is a dental supply but it gets categorized as an office supply. Your profits may still be correct, but your actual expense categories are not. When you go to analyze whether you are overspending on dental supplies in comparison to your benchmark it may seem like you are doing better in that category than you really are.
Making sure that your bank activity is allocated to the correct category is the first step to creating solid financials.
2. Financials are Formatted for Taxes Only (Not to Analyze your Practice)
When it comes to creating a profit and loss statement, there are 2 setups that you should have:
1. For Tax Purposes
2. For Management Purposes
Since calculating and paying taxes is necessary most Dentists have this format. However we don’t see as many with proper management formatting.
Your goal is likely to pay as little taxes as you can. So during your tax planning, you likely are deducting business expenses for tax purposes that really don’t affect your practice and if you include those in your management reports, then it may look like your practice is trending in the wrong direction compared to your benchmarks.
Let’s say for tax planning purposes you decide to hire your spouse and your kids within the practice. They are legitimately doing work and getting paid, but if they weren’t your family you likely wouldn’t hire a separate employee to do those jobs. Meaning the additional staff expenses wouldn’t be there.
So for tax purposes that expense will be on your reports. For management reporting they should be excluded from staff salaries. Otherwise it will show your staff salaries much higher and look like your practice isn’t doing well in that category.
Making sure your tax planning reports are separated from your management reports is key for you to take advantage of both lower taxes and good practice decisions.
3. Bookkeeping is ONLY being completed a few times a year
How often should you be doing bookkeeping? Remember bookkeeping just produces the necessary reports for business planning. So how often are you doing planning within your practice? We recommend it be done monthly. The main reason is we find that you can’t know if an area needs your attention unless you are reading the reports in a timely manner.
Get your reports monthly and keep an eye on your key performance indicators to see what area you should focus on.
4. Hiring the Wrong Bookkeeper
I understand that it would seem that having your practice books done by whomever may not seem like an issue. You may already have someone in the office that has the time and is capable of doing them.
Have you ever heard the saying garbage in garbage out? If your books are done incorrectly then either you are spending a large amount of your time making adjustments to get accurate data or you are making decisions based on incorrect information.
I'm not saying that someone in your office can't do the bookkeeping well and you must outsource it. Just that whoever is doing the bookkeeping has setup the books in a way that is providing you the valuable reports you need to make decisions. If they aren't then you may have the wrong bookkeeper preparing the financials.
5. Viewing Bookkeeping as an Expense Rather than an Investment
Better Bookkeeping = Better Financials = Better Business Decision Making = Higher Profits
Knowing what to look for within your financials will help you make better business moves. Most people tend to get their financials and their eyes go straight to how much profit they’ve made and compare that to how much profit they made last year.
How does an investment in bookkeeping lead to higher profits?
The first step is to make sure the financials are setup for both tax and management reporting as we discussed above. Then you use dental industry standards as a benchmark to compare your practice.
Let’s take Dental Supplies as an example. Dental industry standard is 4% - 5% of revenue.. After analysis your books are indicating that your dental supplies are 8% of revenue.
Now that you have his information you can analyze the reason your dental supplies are higher. Are you overpaying? Is it time to call another supplier for better pricing to get that number to 5% of revenue? That 3% of revenue will go directly to profit and depending on what your revenue is, adding 3% of your revenue to profit can have significant value to you and your family.
If better bookkeeping and analysis allows you to move another 3% of revenue to your profits, then bookkeeping becomes an investment more than an expense.
In order to know how well your practice is doing or if there is an area that is flashing red, you need to be looking at your financials. If you make the 5 dental bookkeeping mistakes above those financials may not be telling you enough to add value