In Financial Reporting, Better Structure Leads to Better Decisions

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In Financial Reporting, Better Structure Leads to Better Decisions

Reporting looks different in almost every dental organization.

Dental organizations form and grow through many different avenues, so it’s no wonder that the financial reporting of dental organizations is also quite diverse. While many groups are fed by private equity or similar resources, still others grow more organically over longer periods of time. Naturally, their financial competencies tend to grow in similar fashions.

How This Usually Happens:

In the early years of an entrepreneurial organization, financial data can be viewed as mere compliance, a means to file the annual tax return. In these smaller organizations, an understanding of the organization’s performance is crucial to survival and the financial data is often easier to read. 

However, as the organization grows in size, complexity, and number of stakeholders, the financial reporting of the the data becomes more complex and can be interpreted different ways. One underperforming office won’t necessarily sink the whole organization, but if you don’t know the office is underperforming to begin with, then you can be missing out on a lot of profitability and opportunity. So, as the organization grows, your reporting structure must evolve in order to provide meaningful, actionable information.

Here are some questions to ask yourself about your reporting:

  • Are my expenses allocated in a consistent and meaningful way?
  • Do I review my financial metrics frequently enough to identify opportunities for timely correction?
  • Am I tracking all of my practices separately?
  • Am I allocating shared expenses equitably among the practices?

Each of these questions will help you determine how valuable your reporting is for decision making. As an organization grows, financial reporting typically loses value in 2 ways…

#1: Depth of Details

Financial reporting can become obsolete when the Chart of Accounts used in the financial reporting system becomes overly detailed. Simply put, these are the accounts that are used, most importantly, for tracking revenues and expenses. It’s very common for the accounting function to have a multitude of very specific expense accounts to allocated all costs to. The reality is that most do it out of habit and don’t derive much, if any, value in recording items with such specificity. On top of this, it takes much more time when recording transactions in going through the chart of accounts to decide where to allocate the transaction. 

If you find that you’re getting bogged down in the small dollar expenses, it might be time to look for other ways to track details of expenses to streamline your financial reporting. The simple fact is that accounting in dentistry is much more basic than most other industries. There are a few main expenses that really are variable and able to be influenced that truly drive profitability. Therefore, it’s more important to define those key accounts, such as people costs, dental supplies, and lab fees, and aggregate the rest in a manner that gives you insight and transparency to any cost creep, but doesn’t take away from the larger opportunities. 

If organized correctly, there should be no more than 20-25 expense accounts for management review in a dental organization. The biggest opportunities to simplify your Chart of Accounts lies in consolidating expenses that make up less than 1% of collections, or those that are fixed and/or annual, non-recurring charges.

The lack of specific accounts is best compensated by doing this in conjunction with a well thought out, detailed, budget process. The budgeting process should build up the timing and extent of expenses so that financial statement users can easily review the financials compare to budget and identify any large opportunities or white elephants.  

#2: Reporting Only for Compliance, Not Usefulness

The other way that financial reporting can lose its value is in reporting strictly along the lines of compliance in tax returns, rather than profit centers (typically physical office locations). 

This usually happens in one of two ways…

The first is in the case of a multi-location dental organizations: If all locations fall under one legal entity, or one employer identification number (EIN), and you only track financial results in a consolidated manner, then you don’t have insight into the performance and profitability of any single location. In trying to lead an organization, you can’t make informed decisions on which locations are providing adequate patient care, which offices are overstaffed, which offices spend too much on dental supplies, or in the most drastic circumstances, which offices should be closed down due to lack of feasibility in your business model. 

The other is in the case of DSOs:  With a typical DSO structure, the drive for compliance can often override useful management reporting. While state regulations require separate financial books for the DSO and sub-DSO, the financials should still be consolidated for better decision making. When the information is organized by profit center, management is able to truly understand the opportunities, profitability, and economic feasibility of each location.  

Over the past five years, data has evolved to become so much more accessible and usable for leaders. Through practice management systems, add-ons, and industry benchmarks regularly communicated in various conferences, the goals and measurable objectives are clearer than ever for the dental industry. The challenge is to use the data in a meaningful way. 

Better structure makes this possible. In order to best utilize this data and create clear plans for the future, it’s vital that each dental organization organizes their financial information in a manner that they can make the most informed decisions upon.

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