Revenue, profit and cashflow: What every practice owner needs to know - Part 1

By Dr Jesse Green

Areality of life for almost every dental practice owner is that beyond education and training received at university and even as a practising associate, there’s a need to very quickly upskill on all aspects of business management. Financials, human resources, marketing and productivity and that’s all after a long day of seeing patients. The challenge for most of us is we gain our business education “on the job”, learning as we go. Consequently, many practice owners make costly avoidable mistakes, often through a lack of experience and knowledge and failing to analyse information that is readily available to them in the financial statements of the business.

In this first of a six-part series on how to work less and earn more, we’ll cover exactly what a dental practice owner must understand about three vitally important aspects of their business: Revenue, profit and cashflow. Importantly, we’ll also learn practical, actionable steps to optimise these in a dental business.

Revenue (and how to accelerate it)

Iregularly meet many dentists who equate business success with meeting revenue targets. Of course, there is merit in higher turnover, but I remind clients

“I regularly meet many dentists who equate business success with meeting revenue targets. Of course, there is merit in higher turnover, but I remind clients that revenue is vanity, profit is sanity and cash flow is king...”

that revenue is vanity, profit is sanity and cash flow is king. If our current business strategy is focused on accelerating revenue, then as far as possible, we want to do so without increasing overheads.

Increasing revenue means working the “levers” at our disposal and in my experience, there are just three that can be manoeuvred. The first of these is the number of patients seen at the practice. The more patients we see, the more revenue is generated. We can attract more patients to the practice via marketing, retention of existing patients and reactivation.

Lever number two is to see the patients more frequently, a measure that’s achieved by ensuring your recall system is in place and that patients are returning for planned treatment.

The third lever is to increase the size of transactions. This could involve examining your case presentation and diagnosing comprehensively. It could also involve a review of fee structures and ensuring correct use of item numbers or your auxiliary.

In any discussion around levers, I use the analogy that small hinges swing big doors, so in terms of these three levers, we need to remember they compound each other. For example, making a 10 percent increase across all three levers will result in a 33 percent increase in revenue

overall because there’s a compounding effect. Remember though the key is realising the benefits of any acceleration in revenue without impacting overall costs. When robust systems are in place, this is achievable.

Profitability (and how to increase it)

Imentioned before that profit is sanity. It follows that for dental business owners, it makes total sense to look for ways to increase profitability. The challenge of focusing only on one lever, that is, hitting the accelerator pedal and driving revenue up, is we miss the opportunity to review expenses and identify opportunities to reduce costs.

Contrary to what you may think, reviewing expenses is the best place to start if you’re interested in improving profitability. Doing this boils down to a simple question: Where are we spending money we don’t need to?

Let me walk through an example that explains what I mean. Practice A and Practice B both have a hundred dollars revenue for the month. They both also have $90 of expenses and $10 profit. Not surprisingly, both practices want to increase profitability by 30 percent to $13.

Practice A decides they will only focus on increasing revenue, that is, grow current revenue to the necessary $130. Practice A reaches their revenue and profit target, but also increases expenses to $117 meaning their expense ratio has not changed at all.

Practice B takes a different approach. They leave revenue exactly as it is and take time to review their profit and loss statement. In doing so, they reduce expenses by just $3, so expenses are now $87 and they achieve $13 in profit.

This simple example shows it is easier initially to address expenses if we’re looking to increase profitability. Chances are if you haven’t looked at your expenses in a while, you’ll definitely discover opportunities to reduce costs in your business. And while we like to have all the latest gear and gadgets, do we really need them all now? A good hard look at wants versus needs through the lens of profitability can be very revealing and it’s why I always recommend starting with this kind of analysis before taking other steps to change practice operations.

Cash flow (and how to improve it)

Afan of metaphors, I’m going to use another one here that keeps things real. Not only is cash flow king, Cash flow is like oxygen for a business. It really is, because without cash flow, a business goes broke. Our job as business owners is simple (but not necessarily easy): To maximise cash flow.

Cash flow is created when we use assets, for example our physical assets - our building, chairs and equipment, patient database, our team and intellectual property assets - to generate cash flow. When it comes to maximising cash flow, however, there are really only five levers we can move. Understanding what these are means taking a good look at our prac-

“We need to structure payment terms and financial arrangements so we receive the bulk of the money at the time of transactions, not weeks or months later. When our practice time and resources are spent chasing payments, we inflict a double cost onto the business...”

tice profit and loss statement and balance sheet. We’ve already touched on revenue and expenses above (you’ll find them in the profit and loss statement), so let’s shift gears to the balance sheet.

Now looking at your balance sheet might not be quite as exciting as checking out the latest piece of dental kit, but time spent analysing the balance sheet reveals a lot about the cash flow of your practice. To start with, let’s dive into accounts receivable. Moving this lever to improve cash flow means doing what you can to bring money in, rather than having money outstanding through payment plans or third party providers for treatment, bad debts or slow payments. To make this lever work, we need to structure payment terms and financial arrangements so we receive the bulk of the money at the time of transactions, not weeks or months later. When our practice time and resources are spent chasing payments, we inflict a double cost onto the business, which is why it makes good sense to reduce outstanding payments to a minimum.

A second lever we can use to move cash flow is reducing inventory days. What this means is minimising the stock held in the practice. I’ve visited many practices and discovered an excess of stock that is either slow moving or infrequently used. The bottom line is if we’re holding stock, we’re impacting cash flow. Just like our levers to increase profitability, together these levers can have a compounding effect, only in this case it’s negative. For example, let’s say you only place an implant once a month and the patient’s payment plan is nine months, this has a negative impact on cash flow. For positive cash flow purposes, it would be better to receive the money upfront and order the implant system in as required.

The final lever we can use to improve cash flow is by increasing accounts payable. While we need to pay our bills in a timely fashion we can use the terms available to us, whether they are seven, 14 or 30 days. By doing that we keep cash in our bank account as long as possible before we pay it out, remembering that it’s the oxygen that keeps our business alive.

The wrap up

Any practice owner interested in earning more and working less really needs to start with these financial fundamentals. Becoming educated in what’s required to accelerate revenue, increase profitability and improve cashflow creates a solid foundation for dental business that is not only profitable, but scalable too.

About the author

Dr Jesse Green is a leading business coach for dentists, author of Retention, a sought after speaker and founder of the Savvy Dentist Academy. Jesse shares his knowledge, skills and experience as a practice owner through the Savvy Dentist Academy, a digital hub of training, events, courses and resources for dental practice owners who want to earn more and work less. To learn more, book a Practice Growth Call by visiting http://SavvyDentist.com/Practice-Growth or by calling the Savvy Dentist team on 1300-668-384.