The Importance of a Cash Flow Budget in the First Years of Practice
by Dr. Michael T. Kolodychak
For many new dentists, the first years in practice can be both professionally and personally overwhelming. From hiring employees, buying equipment and developing an expanding patient base to managing time in an effort to balance responsibilities at work and at home, the early years in business can certainly be a challenge. It is frequently in these early months of private practice that we are all faced with the harsh, cold facts of the real world. We have chosen this career path because of our desire to help and work with people, our love of the sciences and our calling to be “artistic.” Unfortunately, few of us have had any formal training on how to run a business or, more importantly, on how to think like a businessperson. Dental schools spend a great deal of time training us to perform clinical skills but few courses (if any) to train us about the business aspects of our profession. It does not take very long in private practice before one important truth becomes quite obvious: if we spend more money than we collect, we cannot afford to stay in business to provide the services we so love to perform.
Many of us have had mentors, friends or family members in the profession of dentistry who have lived comfortable lives with successful practices. Many of these individuals enjoyed a different era of dentistry – a Golden Age with high reimbursement, low overhead and a reasonable base of patients who had good insurance. While it is true that many of these individuals were, in fact, great businesspeople, and that many actively created their success through a keen business sense, the reality is that success seemed inevitable in past decades for those who chose a career in health care. This is not that era.
The 21st Century brings bigger challenges for the new dentist. Although professional and personal success is still attainable, the road to this success requires that the dentist become more acutely aware of the business world quicker than he or she had in the past. As an oral and maxillofacial surgeon who has been in practice for four years, I have had the opportunity to function in the capacity of both associate and partner. My transition to becoming a partner in the practice afforded me the opportunity to look at many business issues from many different perspectives. Although becoming board-certified in my specialty was very rewarding, I found that the business accomplishments my partner and I enjoyed over the last few years created some of the most exciting moments I’ve had in private practice thus far. Our new 10,000 sq. ft. surgery facility is just one of the many ways in which we have benefited from employing a new, refreshing approach to business in our practice. We could not have accomplished success without the development of one key tool…a structured cash flow budget.
A budget allows for the most organized approach to planning all practice activities in the upcoming calendar year by emphasizing fiscal awareness and responsibility; it also allows for the development of realistic expectations for financial growth of the practice. This budget allows for income and expenses to be tracked and, more importantly, planned for so practice profit is maximized. Maximizing income while simultaneously minimizing expenses results in a better and bigger bottom line.
The development of the cash flow budget is accomplished more easily and expeditiously with the input of a business consultant and/or accountant; certainly every practice should have an individual to turn to for advice on business matters. Nonetheless, it is important to remember that this advisor only can be expected to know so much about the practice. Although the advisor/accountant always could be consulted on specific issues regarding taxation and restructuring of debt in order to maximize the bottom line for the practice, it is ultimately not possible for this person to know, understand and plan for the various business and physical needs of the practice.
It is essential that each business owner/dentist become proactively involved to maximize the business success of the practice. The process required to develop this budget can seem daunting at first, but, with the right attitude and patience, great things can be accomplished within a short period of time.
It is important to develop a system early on to track adjusted collections, as these adjusted collections represent the real dollars that are available to run the practice. I learned early on that it doesn’t matter what the dollar figure is that you produce, it only matters what dollars are actually collected, since this is the only money that exists to pay the bills and your salary. In the pursuit of maximizing collections, attention must be paid to the establishment of appropriate fees, and to with which insurance companies the practice should participate. It is appropriate to reassess the fee schedule on a regular basis to ensure that these collections are maximized. Lastly, refunds and write-offs must be kept to a minimum to make the most out of the billing of the services previously provided.
The other half of the equation requires that expenses be kept to a minimum. It is quite tempting to confuse professional needs and wants during the establishment of the practice. Digital radiography, intraoral photography and computerized charting systems are a few examples of new technology that many of us might be tempted to buy or lease in our early years of practice due to the promise of a more efficient practice (Obviously, “efficiency” seems to only be a concern when the volume of patients mandates that the practice be run efficiently.) The dollars spent on these items could easily be spent more appropriately on advertising/marketing, which is in many ways essential to the establishment of the new practice; supplies for the office, which are truly necessary for patient care; or, even better, on a much deserved vacation. To maximize cash flow, it is prudent to spread the timing of these purchases over a few years as the financial success of the practice continues to grow in order; consulting your business advisor on this matter is essential, as there are frequently tax advantages to the timing of these purchases.
Other expenses should be categorized under general, clinical or administrative cost centers; this makes it easier to appreciate where the overhead costs of the practice are actually located. Every bill the practice will have to pay in the next year should be categorized into one of these cost centers. Many of the specialty organizations, as well as the ADA and state dental associations, are able to provide benchmark indices, which are helpful in determining how much money to allocate to each cost center as estimated expenses for the year are calculated. These benchmarks are representative of relative averages in percentages of the overall overhead of the practice. For example, the American Association of Oral and Maxillofacial Surgeons states that the average expenditure for staff salaries in an oral surgery practice is 13 percent. These benchmarks make financial management decisions much easier, as they serve as a yardstick to which each expense category could be compared as the financial plan is developed for the upcoming fiscal year.
A key concept that is frequently overlooked by a new practitioner is that money borrowed should be borrowed at the lowest interest rate possible. This seems like an obvious fact as one considers the typical lender to be the bank. However, many new dentists utilize credit cards as a source of credit to make initial purchases to run the practice. Unfortunately, many of these credit cards have interest rates of 19 – 21 percent! Don’t forget this golden rule: do not use credit cards unless the balance can be paid in full (without interest) before the next due date! Also make sure that extra payments are applied to the loans with the highest interest rate until that loan is paid in full.
The mechanics of structuring a cash flow budget can be learned easily through basic financial planning textbooks, from courses at local colleges or universities or from your financial advisor. As this column is meant for new dentists to convey their personal experiences, I thought that sharing some of my experiences could be somewhat helpful as you begin or continue in the world of private practice. Through the development of a cash flow budget, our practice has experienced benefits that would have seemed unattainable just a few years ago. The time that it takes to develop this tool is well worth the effort, as it significantly increases an awareness of where and how money comes in and out of the practice. Even if a balanced budget is not accomplished at the end of the year, it will be an invaluable tool in planning the allocation of cash flow for the upcoming fiscal year. I am convinced that it is better to have attempted to developed a realistic budget for the practice and have it not be very accurate at the end of the year, than it is to not developed one at all. Certainly, what at first might seem like an exercise will soon become an important tool in the management of your practice. Remember, proper planning prevents poor performance.