November 4, 2021

Three Steps to a Financially Healthy Dental Practice

By Drew Hinrichs, CPA, CEO of Engage Advisors

When it comes to building a financially healthy practice, it’s important to focus on the fundamentals. Here are three steps you should take to make sure your practice is thriving.

  1. Increase cash inflows
  2. Reduce cash outflows
  3. Improve financial position

Let’s take a closer look at each of these to understand how they impact your dental practice and what you can do to implement all three.

Step 1 – Improve Cash Inflows

Simply put, cash flow is the movement of money in and out of a company. You have positive cash flow when you have more money coming into the business than going out. Positive cash flow is just as important as profit when it comes to determining your dental practice performance. Think about it – your dental practice may have continued months of high production but if your money is tied up in accounts receivable, you have no cash to pay employees. It’s not enough to be productive, you also need maintain positive cash flow. There are several things you can do to increase the cash inflow to your dental practice.

  • Reduce Accounts Receivable – Increasing payment at the time of service is one of the best ways to increase cash flow. You can start by tightening your patient account policies and making sure your staff and patients understand them. You might also consider establishing automatic payment policies that link to a credit card, debit card or checking account. Another option, at a patient’s first visit collect a deposit on any expected balances in addition to collecting the insurance co-pay.
  • Reduce Insurance Write-Offs – Insurance companies have worked aggressively to lower reimbursements to providers in recent years and their efforts have really hurt cash inflows to practices. Some providers have successfully combatted these efforts by partnering with firms that know how to take on insurers and negotiate with them to secure higher fee schedules. We recommend PPO Advisors, who work with dental practices of any size and level. Established practices working with PPO Advisors see a 400% ROI based on the average first year increase of PPO fees. Increases like that make a big difference in both your cash flow and bottom line.
  • Expand Procedures – Increasing treatment options is more than just a way to increase cash flow to your practice, it’s also good for your patients. They are more likely to follow through on treatments if they can get it done at one place, with someone they already know and trust. There are many procedures dentists refer out that are within the realm of a general practitioner’s training, like endodontics. If you currently refer all endodontic procedures, try to cut that down by half. Invisalign is another good treatment to consider adding. Patients pay on average $5,000 for the case, after which they come back for check-ups once a month for 12-18 months. The demand for these procedures fluctuates from week to week, making them a good way to fill open time in your schedule. Think about what procedures make sense for your practice, reduce your referrals, and increase cash to your practice.

Step 2 – Reduce Cash Outflows

The flip side of getting more cash flow into your dental practice is stemming the cash flow out of your dental practice. The two main areas to consider are overhead and debt. Start by looking at your overhead, something you should do periodically to be sure all of your individual expenses fall within a reasonable range for your practice size and specialty. Here are a few ideas to consider.

  • Supplies – Supply costs are up for just about everybody due to COVID. Even so, look at your list of suppliers and consider if it makes sense to consolidate. By becoming a more important customer to one supplier, you may get a better deal. Another option to consider is leveraging your buying power by joining a group. A growing number of dentists in private practice have found they can maximize their purchasing power by working as a collective.
  • Lab Expenses – Most dentists don’t like to think about switching labs and risk getting subpar work to save a little money, which makes sense. The good news here is that technology has lowered the costs of producing high quality final products. If you’ve been with the same lab for a while, you owe it to yourself to look at your options – you might be surprised.
  • Personnel – You may not be able to make cost reductions in staff, but you can look for ways to maximize employee productivity. For instance, technology can help you streamline clerical services and lower the cost of performing routine administrative tasks.

Debt is part of owning a practice and sometimes is needed for you to grow, but you also need to manage it. If you have a loan, work to pay it off in a reasonable time. If you have debt you need to carry for a while and you haven’t refinanced recently, now is the time. Current rates are so low, the only way they can go is up.

Step 3 – Improve Your Financial Position

This is always an objective when we work with clients. To do it, we often focus on two main areas:

  • Reduce Taxes – Be sure you take advantage of every tax deduction you can, even some of the more aggressive ones, such as paying your kids and buying a vehicle for work. For more information, here’s our Top 4 Tax Saving Tips for Dentists.
  • Optimize Retirement Fund – Saving for retirement provides a lot of opportunities to reduce your taxes while helping to increase your wealth. First, be sure you are optimizing retirement funding in order to achieve the largest possible tax deduction. At the same time, be smart about your retirement investments and don’t spend money on products that don’t enhance your overall financial position, such as whole life or permanent insurance products. These can be very expensive and most of the time end up being a waste of money. I’m not opposed to insurance; it just needs to be the right kind of insurance.

If you have questions or concerns about how your practice is doing, schedule a call with our team at Engage Advisors. We are ready to help you move forward and build a financially healthy practice.