Your dental office invests in numerous resources, such as equipment and staffing, to treat patients. Maintaining a ledger for these expenses can be challenging if you don’t have an in-house accounting department or recordkeeping policy.

Dental practice financial statements allow you to track your spending and adjust budgets when needed. Knowing how to interpret these documents is essential for the success of your practice.

Why Are Dental Practice Financial Statements So Important?

Your dental practice offers high-demand services with a relatively low failure rate compared to other industries. Still, without proper financial recordkeeping, you can easily misallocate money and suffer from high overhead costs.

Dental practice financial statements help you visualize your daily, monthly, and annual expenses, providing justification for policy changes. In fact, your accounting department can use raw data from these documents to identify financial problems well before your office becomes too expensive to manage.

As a practice owner, you depend on a knowledgeable bookkeeper and accounts receivable department to communicate discrepancies as they arise. However, you should also take the time to educate yourself on how to read dental practice financial statements for better in-office decision-making and transparency. These skills will help you accommodate your practice’s financial situation and decide where to cut costs.

Which Financial Statements Should Your Accounting Department Monitor?

A balance sheet is a document that provides crucial information on your practice’s tangible assets, taxes, stocks, and retained earnings. In other words, it summarizes your practice’s financial health from year to year. You can use these sheets to see your practice’s total liabilities and any changes that impacted your bottom line the previous year.

An income statement is the second financial report you should monitor. These documents outline costs—building leases, office materials, electric bills, etc.—that contribute to your earned revenue. Income statements track revenue annually, biannually, or monthly, depending on the reporting period. 

Cash flow statements show the movement of money going into and out of your practice. Statements typically categorize cash flow into operational, investment, and financing activities. These documents detail how fast your practice collects or spends money and who receives it.

How Should You Manage Your Financial Reports?

First, you must separate costs into three categories: 

• Fixed expenses include expected costs, such as employee salaries, insurance, withheld taxes, and delinquency accounts from patients that don’t pay their bills. Generally, these expenses will not change and are relatively simple to keep track of in a spreadsheet.
• Direct expenses include tools and equipment you may need to purchase for individual treatments, such as veneers or anesthetics. These orders vary from week to week and month to month, necessitating the need for accurate financial reporting. Always take inventory of your direct expenses down to the smallest purchase.
• Discretionary expenses, such as desk supplies, marketing costs, fuel, and food, can cut into your revenue if you aren’t careful. It’s a good idea to set a strict annual budget to avoid overspending on these things. You can adjust the annual budget corresponding to what you spent the previous year.

How Does Keeping Track of Statements Help When Selling a Practice?

Years of accurately reported financial statements are significantly beneficial if you decide to sell your practice. Prospective buyers can use these reports to determine the profitability of your practice and whether it has room to grow. Well-managed finances will lead to better offers.

Dental Practice Management Resources to Track Your Finances

Knowing how to keep and read your dental practice financial statements is the key to managing a well-rounded budget. Unfortunately, many practices neglect these responsibilities and waste thousands of dollars on overhead costs. You can avoid the same mistake by investing in dental practice management tools to streamline the accounting process.

Check out our blog to learn about factors affecting your dental billing statement. Schedule a demo to see how we can help you intelligently shape the future of your practice.

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