Not all costs are equal
Costs fall into two categories: variable costs that change with your levels of dental activity or income, and fixed costs that don’t change regardless of what is going on with regard to treatments. For instance, your rent or mortgage on the dental practice building would be an example of a fixed cost. Even if you don’t see any patients, it still needs to be paid each month, while dental materials is a good example of a variable cost because it changes with the level and type of treatments you undertake in the month.
Remembering the relationships between these numbers is crucial when producing budgets from your business plan and in understanding your results each month when you review your management accounts.
All income is not the same
Income too can be broken down into fixed and variable types. For instance if you have a dental plan, a regular amount of income will arrive into your bank account each month regardless of whether you see that patient or not. In this instance there is no relationship between the arrival of that income and clinicians working. However, your private non-plan income will vary each month and is only generated when your clinicians are in the practice.
Profit and cash
Profit and cash are not the same things. I often get asked how come I have a decent profit but no cash? Your profit has certain items deducted in deriving it e.g. depreciation, which does not go through the bank, and hence it is not a cash flow item. If you have loans in the business these will need to be repaid, and only the interest will have been charged against profit, so cash flow will be affected by the capital element of these loan repayments. There is also the effect of tax and your drawings.
Being in complete control of your dental business
When you have your business plan, one of the outputs is your monthly budget against which you will measure your actual performance in the form of a set of management accounts. Being able to read and understand them is vital. If you know early enough in the year that your business is under performing and you can ascertain why, you quickly take the necessary action to get it back on track.
But management accounts are only the start. Management accounting drills down to look at the numbers from several different perspectives:
- profitability by clinician
- profitability by treatment type
- profitability by income stream e.g. NHS/Dental Plan/Private Fees
By slicing the numbers in the ways mentioned you would ascertain the areas of your business where improvements can be found.
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Spot On Business Planning provides business planning services that assist members of the dental community to respond to the dynamics of an increasingly commercial and competitive environment. Our tailored service provides straight-talking and results-driven advice and tools that transform performance – and our clients typically double their net profit every three years.
If you are interested in improving your financial results and running your practice more efficiently contact us to request a FREE initial consultation.