Dentists, are you an entrepreneur? Do you have a competitive nature? If you do have a competitive nature, would you want to know how your practice compares to other dental practices? I am sure some of you have answered yes! But did you know it's not just about being competitive, even though for some of you it's a great driving force to perform better.
Comparing financial statistics of your office to other offices that are similar can help you find areas to improve or change for more profitability. Now, I know most dentists are interested in more profitability. Well, this can be achieved through benchmarking. Your bookkeeper can easily help you do this, but let's give you an idea of how it works.
Financial ratios first need to be calculated and analysed before any benchmarking can be done. Financial ratios are a great measure of productivity. They will tell you how well your practice is doing making use of it's assets, generating profits, turning over inventory, etc.... Financial ratios are a time tested method of analyzing a business and are also used by banks and investment firms to determine a companies health.
Basically to create financial ratios, information is taken from your Balance Sheet and Income statement (P&L). Then, with benchmarking, you can use these numbers to compare current and past performance of your practice to your competitors.
There are four types of financial ratios:
COMMON SIZE RATIOS: these make comparisons meaningful and provide context for your data.
LIQUIDITY RATIOS: measure a companies ability to cover expenses
EFFICIENCY RATIOS: efficiency of companies operations, such as returns on assets or inventory turnover to name a couple.
SOLVENCY RATIOS: a companies ability to repay debt.
For the dentist, the common size ratio is the most purposeful, useful and powerful. Hence, this is the only one we will discuss in this article.
The Common Size Ratio can be developed from both the Balance Sheet and the Income Statement. Each line item is calculated as a percentage of the total.
For instance, with the Income Statement, each income account would be calculated as a percentage of total sales. Each operating expense account would be figured as percentag of the total operating expenses.
In the Balance sheet you would figure every asset as a percentage of the total assets. Every liability would be calculated as a total of liabilities plus owner's equity.
So how do these numbers help you, the dentist? Well, it would help to spot trends in spending and productivity affecting your practice and give you a clearer picture how your practice uses it's cash.
They are also helpful when comparing to your competitors. For example, say your competitor has $10,000 in cash and your practice has $25,000 in cash. It really isn't very informative. However, if you know that your companies cash is 10% of your total assets and that your competitor's cash is only 7%, it provides context and is much more informative.
Just a side note on some common mistakes made when calculating ratios.
Personnel costs: When calculating the personnel costs, many times a billing service or answering service that are actually performing front desk activities are overlooked in this category. Salaries of the owner, associates or independent doctors should not be added to this category.
Variable costs or cost of service: These include dental supplies and lab fees. However do not include equipment loans, purchases or repairs of equipment.
Now that you have this information, how do you begin? The first and most important step is to have a reliable set of financial statements. Without those, your information and comparisons will be off and not give you accurate data to make profitable decisions.
Secondly you will need reliable ratios to compare with. The RMA (Risk Management Association) puts out annual statement studies that covers over 300 lines of business. They are highly credible and used by many banks and investment firms. You can purchase the North American Industry Classification System (NAICS) for dental offices even if you are not a member.
The American Dental Association is another resource to find comparisons with the common ratio. Finally, if this is something you want to do for your practice and need advice or help, please contact me at BookkeepingAesthetics@gmail.com or check out my website: BookkeepingAesthetics.com where you can even book time to discuss your challenges. So, are you feeling competitive?