Are you prepared for a rainy day? Can you forecast what your bank balance will be in six months time? Are you certain you will have sufficient funds to meet your tax bill?
Carol Groombridge, an industry-leading dental consultant, breaks down how to manage your dental practice finances.
If the answer to the above questions is YES then you may have no need to read further. However, if that is not the case then perhaps it is time to manage your dental practice finances a little more closely.
Managing your finances is often bottom of your list; at least it is when you are able to draw your usual amount out each month and your bank balance remains within its overdraft facility. However, many practices are experiencing a squeeze of late and you may be finding that drawing your usual amount is impacting upon your end-of-month bank balance and you are wondering why that can be.
You may not have the systems in place that will provide you with the detail on exactly what is happening and your accounting system may not give you timely information about your current cash flow.
A quote to remember is:
‘Profit is vanity but cash is sanity’.
You might have a very profitable practice, but profit doesn’t pay the bills each month.
Managing your dental practice finances on a ‘wing and a prayer’
So, what to do about this?
Sometimes the issue is about time. It could be that dealing with figures just doesn’t ‘light your candle’. Perhaps you have a lack of understanding, or even a fear of the figures and so managing your financials doesn’t even reach your to do list.
However, you can manage your cash flow quickly and easily in your practice and have a tool which provides you not only with confidence in the financial situation of your practice but also, importantly, provides you with peace of mind.
So why do you need to spend time setting this up when the exercise itself may not reap any additional profit for you? Ask yourself what value you place on peace of mind and on being able to sleep well at night. A practice I carried out this exercise for recently said, ‘I feel you have empowered us and I have no doubt the practice will perform so much better as a result’.
Not convinced? Consider this list of major benefits you will gain from setting up a financial management system.
- Have financial management systems in place for your bankers, enabling speedy, straightforward overdraft renewals. (The time of automatic renewal with your bankers is long gone and you will likely need to produce evidence to support your request, particularly if you need an increase)
- Avoid unnecessary unauthorised overdraft fees and interest by keeping within your agreed overdraft facility
- Have a greater awareness of the return on investment by knowing exactly how much you are spending each month on your marketing
- Delegate responsibility to a member of staff for certain areas of spend, such as materials, purchases and training, by setting accurate budgets and passing those over
- Identify easily where cost savings can be made by having an accurate view of what you are spending each month
- Know for the next 12 months what your bank balance will be at the end of each month if the projections you have made on income and expenditure are realised
- Identify ‘hot spots’ where you may need to defer expenses or increase income to remain within your facility
Developing your dental practice finances tool
Firstly, ensure you have Excel software available on your PC. Then set up a cash flow forecast template.
Down the left-hand side of your spreadsheet, set up each category of spend with details such as supplier names and staff names and have a subtotal for each category of spend. You may wish to use the same headings that your accountant uses. Include a section for your drawings. You need to reflect every item that comes out of your bank account each month.
At the bottom of the spreadsheet, set up the formula to calculate start-of-month balance, plus income, less expenditure to arrive at the end-of-month balance.
Enter the last three months actual figures from your bank statement to give you a view of recent income and spend and provide a guide for developing your projections. Differentiate the colours of columns for actuals and projections to assist reading.
From the current situation, plus knowledge that you may have about things such as seasonal fluctuations for Christmas and other holidays which impact upon projected income, enter what you anticipate the monthly income to be in the white columns for each month for the coming year.
For the expenses, project forwards into the white columns what you anticipate the costs to be. However, to make life a little easier, I suggest that with items such as materials and lab costs, you project forwards a percentage, based upon known current spend, of the monthly projected income. That way, if you make amendments to your income projections, your key direct cost projections will alter automatically.
You will also need to think about what you know about forthcoming unusual expenses (for example, planned redecoration) together with the usual annual fees (such as CQC, etc.) and plot them accordingly. It is also good to look at last year’s profit and loss statement in your financial accounts too to make sure that you haven’t forgotten anything which will come out of your bank account. Remember though that your profit and loss statement only shows finance and borrowing interest costs and not the full monthly repayments which need to be fully reflected in your cash flow, and it will also show depreciation which does not come out of cash flow.
Once completed, you have all of your income and expenditure projected and, hey presto, you will be able to see exactly what will happen to your bank balance for the coming 12 months.
Managing your dental practice finances – Conclusion
Don’t just leave it there though. This should be a living tool and should be monitored every month to ensure that you are on track. Each month, enter your actual income and expenditure and compare this against your projections. Understand why there may be differences and if necessary, amend future projections or take remedial action. This exercise, once your spreadsheet is set up, should only take you about an hour each month to update.
An hour a month for peace of mind; it’s worth it, don’t you think?