As small group practices add new locations and build the infrastructure needed to become a dental support organization (DSO), they need to take a close look at their accounting practices.
This is especially important if the group is planning to sell in the future. Just like selling a home, practice owners need to make their DSO appealing to buyers.
However, instead of upgrading home appliances, you’ll want to update business accounting practices to draft a clean, reliable blueprint of your practice’s financial stability.
And while brand-new appliances may appeal to homebuyers, potential investors want finances with history.
Moving from Cash-Based to Accrual-Based Accounting
TUSK Partners Director Kevin Arnold recommends having two solid years of accrual-based accounting, known as generally accepted accounting principles (GAAP), in place before attempting to sell.
No matter how meticulous, detailed and organized cash accounting statements may be, GAAP financial statements are always more reliable and, as such, are preferred by investors.
Arnold explains, “[Potential investors] are looking at consistent financial results. That year you change from cash to accruals, there’s going be some adjustments and your financials are going to look a little different.”
The goal is to create quarterly financials for comparison and a 12-month rolling period to provide an accurate picture of the dental practice or group.
Hire a CPA
While the transition may create a bit more work for your bookkeeper, the heavy lifting should be done by your CPA. The CPA will guide your team and designate exactly how things should be tracked.
Get your conversion rolling by choosing the accounting program or system that you and your team are comfortable using.
Next, create a chart of accounts that will be used in every location of your practice. This consistency is key in establishing a direct comparison between locations.
Along with profits, EBITDA expenses figure significantly in a financial profile. EBITDA stands for earnings before interest, taxes, depreciation and amortization.
Key Expense Metrics
Arnold notes three key expense metrics to focus on: wages, lab costs and supply costs. Take time to sit down with your CPA and discuss how these components can lead to better business decisions and strategies as you grow.
Consider things like whether a new formulary could be beneficial, or whether your increased scale allows for the negotiation of better rates with laboratories.
“Financials are no longer just for compliance, but to manage the business. Looking at the numbers doesn’t do anything. You have to interpret them and apply them to business to so you’re getting better from quarter to quarter.”
Growing your dental practice or small group means making the appropriate upgrades to your practice, including accounting practices. Plus, planning ahead will make for a smoother, faster sale if that is your ultimate goal.