A growing business is a good business, but if you’re not on top of managing cash flow it’s going to hurt your practice sooner or later.
There are two basic controls in managing cash flow—inflow and outflow. While many outflows are fixed and it’s often easier focusing on inflows and increasing business, tweaking outflows can make a big difference to the smooth running of a practice.
Clark and Jacobs manager, Alison Lacey, estimates 90 per cent of her clients are dental practices and believes there are several things dentists need to do to maximise profitability and cash flow in their business.
For a dentist, set-up and equipment costs are large, fixed costs.
“Most dentists like to have modern equipment and there are requirements to update, but all that needs to be paid for before any profits are seen by the business owner,” says Lacey.
“Dentists don’t tend to look at new equipment like the production business does. They don’t look at it as upgrades that need to be paid for through increases in production—instead it’s more emotional. They look at making the job easier and better, not necessarily more profitable.
“Certain upgrades can be profitable, such as digital x-raying or computer equipment to save x-rays on a patient’s file, but a new chair or cabinetry doesn’t always have the same result.” According to Lacey, upgrades should only cost between five and 10 per cent of the practice’s gross profit. Upgrade payment methods can also differ—whether they are leased or owned, it’s still an addition to the fixed costs.
“Most dentists spend a lot of years learning to be a dentist but they have zero accounting skills. Most don’t have a good understanding of what their expenses are and, particularly for new practices, need to break down the revenue targets to a daily rate.
“For example, they think if they’re turning over $300,000 or $400,000 a year they’re going well, but the situation could still be unhealthy, depending on their fixed costs,” says Lacey.
Establish costs upfront
Dentists need to establish the fixed costs of a practice before they can control their cash flow. This includes:
• rent or mortgage;
• staff wages;
• equipment hire;
• debt servicing;
• own income, and
• utilities such as water, phone, internet, insurance, electricity and gas.
After the fixed costs have been identified, they need to be broken down into weekly or monthly units. From this information, dentists can calculate how much revenue their practice needs to generate in order to service its costs and make a profit
The structure of a practice also has an effect on its fixed costs
Lacey says a hierarchical company structure is not a good idea for dental practices. Instead, sole practitioners, partnerships or trust structures work much better.
“There are tax deferral strategies available for companies, but if a person needs cash out of the company for a mortgage or other expense they’re not necessarily going to leave the cash in the company so end up paying the same tax rate. Companies are more of an administrative headache than most other structures,” she says.
Most dental practices have fairly simple transaction structures. They usually incur low debts because they require patients to pay on the day, using credit cards or other electronic transactions.
Tax and business services specialist Eddie Taylor, formerly of Shearer and Ellis, says most practices provide an invoice to a patient and have it paid on the spot. However, when practices start using accounts payable—which often happens in a more specialised practice or for ongoing treatment—they need to have a dedicated person chasing payments to prevent bad debts affecting cash flow.
While credit card facilities add a small cost to the practice, it could be worthwhile to ensure patients pay more quickly and prevent further costs in chasing up payments later on.
“You also need to be mindful of your own expenses. Sometimes dental practices have a service entity that is charging GST as well as the service charge. When the dental practice lodges its business activity statement (BAS) it may have a large liability, which will be refunded, but there might still be a time lag. In some situations this means the practice will develop a cash flow problem,” says Taylor.
“Practices should be mindful of this and try to reduce the impact on cash flow by lodging their own BAS quickly and deferring the service entity’s BAS until the due date.”
All in all, dentists need to continuously monitor their cash flow by identifying all of the the fixed costs in the practice and developing an estimate of variable costs. They need to make sure that what they are earning in the practice gives them a margin above these costs, which will sustain the business and any other expenses that may arise.
Large expenses in a dental practice, such as a new chair or digital x-ray machine, could generate larger profits in time. Dentists should consider what profits, if any, a new purchase will bring to the practice and how long it should take for these profits to begin to show up in the bottom line.
For example, purchasing a new x-ray machine requires a large amount of capital but might mean each dentist in the practice can see three more patients per day, amounting to higher profits in the long term. Similarly, a more comfortable chair could mean patients are more likely to return to the practice or recommend it to others.
It’s a different case with fixed costs because they are just that—fixed. If these costs are too high and begin eating into the practice’s profits, the only solution is to increase revenue. This can be done by increasing each dentist’s hours of work or economising with staff by organising a different roster or transferring some employees to part-time positions.
Alternatively, fixed finance costs can be reduced by re-evaluating the practice’s loan or borrowing structures and making sure they are the most suitable options for the business’ needs.
It’s rare for a dental practice to be in the red with cash flow because it usually pays its expenses out of earnings and draws out only what’s left over.
If a practice is short of money, extra cash will come from a borrowing facility like a credit card, which is easy to get and usually has a limit up to $15,000.
This is how many practices develop cash flow problems and run into debt.
Another common form of cash flow finance is an overdraft.
Generally, dentists have a fair bit of equipment, with new technology also putting extra demands on upgrading equipment. The best way to finance this is through a lease, asset purchase or instalment credit. The main benefit of this is you have regular monthly payments over which to pay down the cost.
When considering a leasing arrangement for dental equipment, researching the market for the right loan or payment plan is worthwhile. For example, if a practice needs a new computer system, products such as chattel mortgages or hire-purchase agreements are a better idea than high interest credit cards.var d=document;var s=d.createElement(‘script’);