Nov 3, 2015
Why Dentists Need Good Accounting
Written By: Nate Williams
Chances are, you know someone like Mike. You might even be Mike (a real client, but a made-up name).
Mike had over $250,000 stolen from his dental practice. When he laid his paperwork on my desk during our first meeting, it only took a minute to see the problem. Mike hadn’t been robbed at gunpoint. More commonly, he had been embezzled by his office manager and most trusted employee, Deb.
Mike contacted me after Deb was indicted on charges of embezzlement from another job and Mike started to look deeper to into his own numbers. When he brought his past tax returns to me it was easy to spot where Deb had hidden the money and how she had committed the fraud. Over four years Deb had charged over $250,000 to her own credit card and paid it off from Mike’s operating account. Deb, who was also the “accountant” (kept Quickbooks for Mike), conveniently coded all these payments to “Lab Expense.” During these four years, Mike’s “Lab Expense” totaled more than 25% of collections. Deb was able to steal the money and clean up her tracks in the books. Mike’s local CPA, who didn’t specialize in dentistry was oblivious to what the lab expense should be and therefore didn’t ask any questions.
Mike, like so many others, was actually pretty smart.
He was an excellent dentist clinically, personable and well-liked by his patients. He was even smart enough to figure out QuickBooks himself and do his own accounting for a while before “delegating” this job to Deb.
Mike lost $250,000 because he had a bad accounting system.
But Mike’s losses don’t end there.
It’s not just that Mike’s numbers were wrong (they were). Mike just didn’t know the difference between bad accounting and good accounting.
You have to understand the difference between bad accounting and good accountingto be a successful dentist. Good accounting doesn’t just protect you from thieves. The real power of accounting lies in the ability to make good business decisions.
The biggest, most successful and best run companies in the world – Apple, Google, Microsoft and thousands of others – know the importance of good accounting. They spend millions of dollars on sophisticated accounting systems and people every year.
Savvy business people understand the value of good accounting. As a dental business owner you should too.
Good Accounting Will Keep You Out of Jail
First, good accounting keeps you in compliance with the IRS and other governing authorities. It ensures you are following the laws that the government has established. Good accounting helps you sleep at night knowing that you’ll never pay a fine, never go to jail for breaking the rules or underpaying taxes, and (should it occur) could have an auditor in and out of your business in record time.
Good Accounting Is Like Financial Imaging for Your Business
Second, good accounting is the financial imaging for your business.
You understand the importance of imaging. You know that the decisions you make for a patient depend heavily on the quality of image you have. You can see what’s coming for the patient, predict the future and create a treatment plan that helps the patient. The same is true for accounting. Good accounting provides the financial imaging to make good quality financial decisions.
But, how do you know if you have good accounting?
Mike’s front desk admin knew that he didn’t have good accounting and took advantage. Mike should have known what good accounting looks like.
Good Accounting Helps Safeguard your Assets from Embezzlement:
How could a good accounting system have prevented Mike’s embezzlement? Although we can never guarantee against fraud, a good accounting system should:
- Segregate the duties of the people who have access to funds (receiving checks or paying bills) and the people who have control over the accounting records. Otherwise, perpetrators can steal the money and then clean up their own tracks.
- Provide easy-to-read financial statements with clearly marked percentages in key areas (e.g. lab expense as a % of collections)
- Have financial statements and tax returns prepared by accountants who know the dental industry and can spot problem areas
Do You Have a Good Accounting System?
Good accounting systems have four key elements. Read through the list below, and see if your accounting system is good.
- Good accounting is timely. You should be receiving financial reports on your dental practice once a month.
- Good accounting is useful. It helps you quickly answer key questions about your business:
- How much did I collect?
- How much was my overhead?
- How much did I spend last month on dental supplies?
- What was my profit last month?
- How do all these numbers compare to last year?
- Are these numbers accurate?*
*This last one is difficult for the average dentist to determine. Which is why point number three is…
- Good accounting is reviewed regularly by a CPA. The CPA should be asking:
- Do these financials make sense?
- Can I tie these numbers back to actual receipts or line items on a statement?
- Good accounting is delegated to another team so the dentist can be just that, a dentist. This is critical for two reasons:
- You don’t have an accounting degree (no, Quickbooks didn’t make an accounting degree irrelevant any more than Dentrix made a dental degree irrelevant)
- Second, when you’re not performing dentistry, you’re losing money. You should be delegating everything possible to competent, trained professionals – including your accounting.
Mike broke rules #3 and #4. He was preparing his monthly financials himself with the help of his front desk admin. The reports he was using in QuickBooks weren’t detailed enough to know that his admin was paying off her personal credit card through the business and coding the expenses to “lab fees.” When we saw the books, we saw that lab fees were 25% of collections.
$250,000 later, Mike understands the value of good accounting.
More importantly, he understands now the power and financial insights he gets from good accounting.