Forming the foundation of financial management for dental practices, income statement, balance sheet and cashflow statement are three essential reports that show profit, financial standing, and movement of cash across the practice.
An accountant for dentists will use all three of these statements to analyze how a dental practice has been performing, guide its owners when budgeting, and make sure that any financial decisions made are in the best interests of the business.
Let’s take a closer look at each one:
Balance sheet
This shows the practices financial standing at a certain point in time, and lists what is owned by the business, what is owed, and what are retained earnings. Reviewing this statement regularly helps practice owners understand their level of debt, and how daily operations are being supported by assets.
Income statement
Otherwise known as a ‘profit and loss statement,’ this highlights the revenue, expenses and net income of a dental practice over a reporting period. Tracking operating costs, patient revenue, lab fees and other expenses tied directly to the business’s operations on a day-to-day basis, this statement should be used to measure profitability and financial performance overall.
Cashflow statement
Tracking the movement of money in and out of a practice, the cashflow statement shows cash from activities related to operations and financing, as well as investments or equipment purchases. With regular reviews, this statement can help practice owners identify risks in cashflow, and better understand liquidity.
How do the three statements work together?
When reviewed as a trio, these vital statements offer financial clarity. Reported profits on the income statement is added to the balance sheet’s retained earnings, while the cashflow statement shows whether that profit translates directly into cash.
On the income statement, depreciation of dental equipment lowers net income, but is then added back onto the cashflow statement due to it being an expense classified as non-cash. Without reviewing all three reports together, shortages in cash can be disguised, while rising debt or a weakening financial position remain hidden.
Other important financial reports
In support of the three most important financial statements – and to give a more comprehensive view of a practices financial health – business owners should also track the following:
- Accounts receivable aging reports
These monitor patient balances that may be outstanding; supporting timely collections.
- Production and collection reports
These show how services carried out translate into revenue received.
- Insurance payments tracking
This report highlights such things as write-offs, delays, or discrepancies that might have an impact on cashflow.
How financial statements can be used to improve profitability
Regular reviewing of financial statements can help practice owners make informed decisions that will have a positive impact on the business’s profitability:
- Income statements
These show those services provided by a practice that are the biggest revenue-generators, and the expenses that are costing the most; making cost-control easier.
- Balance sheets
These identify the affect of assets on liabilities on the practice’s financial stability, and help to highlight potential investment opportunities.
- Cashflow statements
These help dental practices better manage collections and prevent negative cashflow by revealing timing gaps in payments.
By reviewing each of these reports regularly, and ideally with help from dental bookkeeping in Fort Lauderdale alongside specialist accounting services, practices can make informed decisions, enhance operational efficiency, and bolster their financial performance overall.
As important as regularly reviewing financial statements is, not every practice owner – or indeed their team – has the time or bandwidth to carry this out as often as is necessary. But with professional assistance from a bookkeeping and accounting firm who specialize in the dental industry, interpreting the statements in the right way, is a cinch. Budgeting, cashflow and financial strategies all become simpler to manage, and ultimately, more effective.
