Within the next five years more than 45% of dental practices will fail and another 25% will struggle to remain in operation.
Most dental practices suffer from overspending, underperforming staff and inaccurate systems which mostly result in the sale, foreclosure or bankruptcy of the practice.
Based upon five years of research and working closely with dental practices the 4 primary reasons a dental practice fails are lack of budget preparation, inadequate cash flow, lack of internal controls and business monitoring systems, and high receivables with no collection process.
LACK OF BUDGET PREPARATION
Most dental practice owners never take the time to prepare a budget. Once the loan is approved and the money is credited to their account the overspending begins. A well prepared budget can prevent future cash flow problems and increase the likelihood of success. A budget can assist in identifying the practice peak and slow seasons, areas of improvements and industry trends compared to the practice.
A simple way to prepare a budget is to gather the previous year or previous four months of financial data. Take the average of each category along with set benchmarks and company goals. Once the budget has been created use it to monitor the practice on a monthly basis. Compare the budget against the current month financial data then notate the changes and why. Make the budget review apart of the monthly closing then use it to determine how close you are to reaching your company’s benchmarks.
INADEQUATE CASH FLOW & OVERSPENDING
In general, people tend to spend more than they earn. Therefore it’s no surprise that dental practice owners are having trouble with their cash flow. There are several reasons that contribute to inadequate cash flow for dental practices, such as a 30 to 60 day gap between billing and receiving payments from insurance companies, low production, lack of patient retention and high overhead.
The reality is that regardless of when the funds appear in the account, the bills are still due, the employees still need to be paid and the company must continue to operate. However, a dental practice can prevent inadequate cash flow problems by preparing in advance and building a funds cushion. Strive to maintain at least 2 month’s worth of expenses in reserve to maintain cash flow during slow months.
LOW TREATMENT/CASE ACCEPTANCE RATE
One of the most important numbers in your practice is the number of customers that agrees with your ideal treatment plan. Over the last three months, how many treatment plans have you created? Of that number, how many of your patients agreed to move forward with your plan?
Your treatment acceptance rate is important because it identifies if you have established the trust factor with your patients. Most dentists believe treatments are not accepted because the patient cannot afford it.
Although in some cases this is true, most treatment plans are not accepted due to the reasons listed below:
Communication between patient and staff is not clear and professional
Presentation is geared more towards money and not towards helping the patient
Examination was not thoroughly completed and the patient does not trust the doctor’s recommendation
If the practice has established the “know, like and trust” factor patients will find the funds needed to move forward with the treatment plan. This is because the patient trust and believe that the dentist has their best interests at heart.
HIGH RECEIVABLES WITH NO COLLECTION PROCESS
Dental practice accounts receivable is the monies owed to the practice. If this number is high then this is an indication that patients are not paying or are extremely late on their payments, sometimes 60 to 90 days late. During this time the practice still has a financial obligation which leads to cash flow problems. Setting up a collection process can alleviate the practice from having high receivables.
Managing accounts receivable and creating a collection process can be implemented when the practice establishes an accurate, timely and reliable bookkeeping system. This system will include invoicing patients and insurance companies immediately, following up in a timely manner, and maintaining and reviewing financial records.
Ensuring that profit is earned and accounted for relates directly to managing accounts receivables and collection. With the high cost associated with running a successful practice financial data must remain current in order to determine and prepare for the future.
Even though the estimated number of practices that will fail within the next five years is extremely high, you can prevent this from occurring.
Take the four reasons above and begin implementing smart systems of prevention for each. Strive to build your practice to fight against the common reasons listed in this article. The first step to building a smart prevention system is establishing an accurate, timely and reliable accounting system.