Buying a dental practice can be a lot to take on; the new practice owner suddenly has the responsibilities of running the practice stacked on top of doing great dentistry. The financial realities quickly become an important priority in your practice and personal life.
There are 6 basic numbers to monitor as you’re getting started, we call this Practicing Financial Hygiene. You can download a list of them here, 6 Steps to Financial Hygiene for the New Practice Owner. we’ll cover just a few in this article; we recommend implementing them one at a time to avoid financial overload.
The very first step is to know what you have. Calculate your Net Worth by writing down everything you owe and everything you own, personally and through the practice. Include the value of the practice and practice loans, student loans, your car, home, etc. Remember any old IRAs and infrequently used credit cards, write down insurance policies, too.
Knowing where you stand can help reduce financial stress. Financial uncertainty, which causes stress, can affect the health of your practice, your relationships and your physical well-being. Tracking your Net Worth will give you a big-picture benchmark for how you’re doing financially; it’s a measurement you’ll track for the rest of your life.
Know your overhead. Overhead, on the most basic level, is what it takes to keep the lights on and everybody paid – all the expenses of running the practice. You need to know this number. There are professional ratios practice consultants quote about how much of this should be spent on advertising, staff, rent, etc., and those are important to know and benchmark.
When you get into the weeds a bit, we need to know the difference between Overhead, and your Break Even. Technically speaking, Overhead is what it takes to stay open without seeing patients. The other expenses fall under Direct Costs – you only incur them when you see patients. These costs include dental supplies and lab expenses, and some calculations will include clinical staff as well.
This subtle difference between overhead and your break even number will make a difference when you are figuring out how much it will cost to GROW the practice, and how much will drop to the bottom line, but the first step is knowing what your practice expenses are NOW.
One of the most informative exercises you can do is to know what your practice cash flow will be over the next 6 – 12 months. Export a monthly P&L from a normal 12-months (the last 12 months have hardly been normal, but you can go back farther or estimate) from QuickBooks. By adding a few extra lines and formulas you can see how money flows through the practice on a month to month basis (basic instructions are on the download). This can help you see and predict seasonality and can help you anticipate the need for a Line of Credit before the month that might come up short. Now you’ll know whether you can really afford the new equipment, or to take the draw from the practice.
If just thinking about it stresses you out, don’t worry, the anticipation of math can be more stressful/painful than actually doing it (it’s true, there’s research), if that helps you tackle your numbers.
Create a regular check-up for your finances. Maybe take one topic every week, and cycle through our Guide to 6 Areas of Financial Hygiene for New Practice Owners every six weeks.
If you need help getting a Financial Hygiene plan set up, let us know, we’d love to help. We’ve created the spreadsheets, have fancy software and we actually like math.