When you walk into a make it or break it battle, you want all the tools available to fight for whatever crosses your path, right?
You do not necessarily want to show up to the raging battle with a kitchen knife, right?
Or even a spear, if you were untrained as to how to successfully throw that spear at the enemy?
The result in either of these scenarios would be fatal and yet, every day I see this played out, albeit, thankfully not fatally, in practices in every corner of our country.
If you have heard me speak or worked with me, you know how fanatical I am about a practice understanding the practice’s financial reports.
It is the essence of business management.
If you do not understand the reports, keeping track of expenses is nothing more than a glorified check register.
Most practice owners do not realize what valuable information can be culled in the reports, if only the Chart of Accounts were designed in such a way that they could understand.
Some practice owners depend on someone else to figure that out for them. Too many times I have heard the complaints that “they” did not teach business in dental school.
Okay. Get over it and learn now. Stop complaining and take action.
Who owns your practice???
This is not a trick question and should be easily answered but I have seen too many practice owners controlled by those they substantially pay.
This is the essence of what I have spoken, written and taught to practice owners for the past 26 years.
For 26 years, I have preached this. I am deeply passionate about practices understanding their finances.
This year, I have seen accounts payable software errors, in both design and implementation.
When your CPA does your taxes, they only need the data in a raw format. But designing your software for business management takes that data to a much higher accessible level, and much easier to understand.
Let me ask you a few questions that I want you to honestly answer, not to necessarily anyone else but yourself.
- What reports in your accounts payable software do you review and how often?
- Do you truly understand these reports?
- Would you be able to tell me how much of the practice’s monthly income is spent on Team Member expenses?
If you have heard me speak, if you have read one of my books, if I have redesigned your accounts payable software in the QuickBooks Extreme Makeover, you know the value of what I am about to say.
It all begins with your Chart of Accounts.
Here are the basic suggestions that I have been proclaiming for the past 26 years. To get the practice’s reports in an understandable format, In the accounts payable software’s chart of accounts:
- Do not use accounting numbers but use words that are easy to understand. Most practice owners or small business owners are not CPAs. Then why are accounting numbers being forced on the ones using the accounts payable software? Every accounts payable software has preferences, in which the accounting numbers can be turned off.
- Do not use the word Expense after every expense name. For instance, if it is an Electricity expense, is it necessary to have the word Expense after the account name? No. No, it is not. It is redundant. If it is in the Expense type, then it is implied the account is an expense. Simply use the word. An easy-to-understand word.
- There is absolutely no need to use accounting lingo, such as N/P. 99.9% of practices have no accountant as an employee of the practice. Therefore, since it is the practice’s financial accounts payable software, there is no need to use abbreviations. Simplify.
- Group logical expenses by the area of the practice or business. Have ALL your team member expenses under the same parent account. Have all the owner expenses under the same parent account. And, do not use Cost of Good Sold. I cover the reasons in greater detail in Managing Accounts Payable in Your Practice.
- Choose the report’s customization option to show the expenses as % of income. This is an awesome business management tool. By doing it this way, you will know how much each of the parent accounts and individual subaccounts expenses are costing. One of my favorite questions to ask myself when tempted to purchase something is “how long do I have to work for this purchase?” Having the percentage of income option selected, answers that question after it is purchased.
Let me explain. What if an account on your report looks like this:
2100.5 N/P Drygulch Bank or 6400.2 Electricity Expense
Simplifying the verbiage makes your reports much easier to understand.
Instead of being distracted by unnecessary numbers that do not need reviewing or analyzing or reading extra words, try this instead:
Drygulch Bank Loan or Electricity
These are the basic “must haves” in understanding your financial reports.
In fact, I will boldly state that you will truly not understand your financial reports completely unless these basic suggestions are implemented.
One of my Coaching Clients this year is preparing to sell their practice. Their QuickBooks was a mess for a variety of reasons but primarily that in the busyness of practice life and personal life, details fell through the cracks. QuickBooks was one of the first major overhauls, and once completed, there were many comments about how much easier it was to review the reports now, that they wish they had done this years ago.
Another recent Coaching Client had relied on their CPA for their accounts payable management. The CPA lived locally, also a patient, prepared the financial reports and filed the taxes. My client was frustrated that the reports always seemed to be late, he didn’t understand what the reports told him, and he also wished he had received coaching much sooner as he now understands his reports.
I have had more of these coaching clients this year. And I absolutely LOVE LOVE LOVE cleaning up and redesigning that practices can now know where the money is coming in and going out!
In reviewing an upcoming dental conference I am speaking at, I counted six different speakers that are presenting on KPIs (key performance indicators). To truly know your KPIs, your financial information must be organized in an understandable format. If the format is not understandable and easy to manage, it is likely that the KPIs will be grossly inaccurate. That is what I speak on, and leave the actual KPI information to everyone else.
Do you understand your reports? 2023 is about finished. Are you going to do anything different in 2024?
Call me if I can help!