WSW newsletter September 2013

Accounting for the Dental Profession

by Trenton D. Watrous, CPA, CVA, CFE

Whisenant, Stewart, Watrous, & Associates, PLLC 1801 West End Avenue, Suite 800 Nashville, TN 37203 615-312-9050 www.wswcpas.com

Dental Renovation: When and Why It Makes Financial Sense to Update Your Practice Office

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tep into your patients’ shoes for a moment. They stroll into your office and what do they see?

Staff members squinting under inadequate lighting. Hoses and wiring twisting across the floor. Bulky cabinetry and old equipment in need of repair. A dentist rubbing aching shoulders after contorting over an antique dental chair.

It might sound like the horror-movie version of a patient experience, but it’s not far off from some dental offices I’ve visited. Outdated offices and equipment are a lot more common than you might think. They also do far more damage to your ability to sustain and expand your practice.

As a Dental CPA, the two most common questions I get are: 1. How do I save on taxes?

2. How do I grow my practice to take home more money?

Oftentimes, the answer to both these questions involves making changes to your practice environment. I don’t hesitate to recommend dentists invest in newer equipment and renovations to their offices for one simple reason: You can’t afford not to change. The financial, physical and emotional rewards associated with improving practice conditions typically far exceed the dollars invested.

Before Ensure your dental office compels clients to perceive your practice as trustworthy, valuable and professional.

After

More Inside:

2 What Does Your Office Say About You? 3 Acquistion Factor 4 Tax Benefits 5 Construct for Comfort 6 A Winning Trio Accounting Considerations 8 Renovation Increases Revenue

Before Perception is Reality: What Does Your Office Say About You?

Patients judge the skills of the dentist by the appearance of the office and age of the equipment.

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Let’s face it, perception is reality in the eyes of your patients. Regardless of your professional abilities, patients judge the skills of the dentist by the appearance of the office and age of the equipment. When the patient sees an office that’s dingy, outdated and lacking new technology, that reflects on you. In the eyes of the patient, you appear unequipped to meet the challenges of modern dentistry. Whether it’s true or not, perception is reality.

“Coming from a dull, open office with dated technology to a modern office with privacy and comfort made all the difference,” said Dr. Michael Reardon of Scenic City Dentistry in Chattanooga, Tennessee. “I don’t think patients were comfortable getting cosmetic, comprehensive or complex treatment in our previous location. We just didn’t look the part. It was amazing, and fortunate, how quick we were able to escape that stereotype.”

Patients come to your office because they want to feel better about themselves. They want healthier teeth and improved appearances. For the patient reticent to accept treatment, the dentist must instill confidence and trust. Your

office environment must help the patient believe in the benefits of treatment and feel comfortable moving forward with a plan or procedure.

“The greatest impact I noticed was an increase in case acceptance. After the renovation, existing patients were more inclined to have treatment rendered. The same patients we spoke to about cosmetic issues suddenly wanted to schedule treatment,” said Dr. Reardon. “Gross collections increased almost 25 percent the first year, and we have been working two hours less per week.”

Removing the shag carpeting, dark paneling or medieval dental technology will help you build a bigger patient base that perceives your practice (and you) as confident, professional and cutting edge. As a result, your reputation as a trusted builder of better personal appearances will grow and expand in your community.

Creating a Space That Establishes Confidence Let’s jump outside your office for a moment and look at this another way. Let’s say you’re attending a formal dinner to accept an important award from your peers. It’s a big moment. You want to appear successful and confident—with a

After style that fits the occasion and your personality.

You want to look the part. So you go to a highly recommended custom clothing store to get the perfect look. You open the doors and head inside.

That’s when your jaw drops.

You find the entire place resembles a 1970s renovated dry cleaner. The curtains are a dusty gold with bright orange tassels. The door facings are scuffed. The furniture in the lobby is shaky at best. Magazines are outdated. The wall décor couldn’t be sold at the best of yard sales. Out walks the “clothing professional” who says he understands current styles and knows exactly how to fit you. Does your perception of the business trigger a sense of trust in the tailor who will fit you for your evening of honor?

Even though this professional won’t be decorating your house, you are instantly filled with apprehension and uncertainty. You question this individual’s skill level. Their stock drops in your eyes. Maybe you even mutter an excuse and beeline for the door. Whether or not we accept the premise, we are judged by our appearances.

Ensure your dental office compels clients to perceive your practice as trustworthy, valuable and professional. Make sure your practice looks like it’s worth the price of admission.

Accounting for the Dental Profession

Don’t Forget the Acquisition Factor In addition to the perception of patients, consider the perception of potential practice acquirers. If you are planning to make a practice transition in the next few years, appearance can make a massive difference. Selling a practice or office building that requires the buyer to immediately invest in current technology or renovate does not typically support the asking price.

In showing a practice during a recent transition, the buyer exclaimed after viewing the real estate: “This is exactly the feel I want to achieve!”

The buyer was also of an age that deemed technology to be important. He was enthralled at the presence of milling equipment. Moving the individual toward a “buy” decision was easier because of the appearance of the office. I wonder how the negotiation process would have gone if the physical condition of the practice were different or the technology absent?

Plan for your transition well in advance to ensure you receive a good return on the investment for any renovations and technology.

Doing so just before a transition will most likely

Plan for your transition well in advance to ensure you receive a good return on the investment for any renovations and technology.

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not allow for recovery of your investment. But if you do it at the right time, renovating and reequipping your office can add significant value to your asking price.

Prepare to Marathon: Equip Your Practice for Continued Success

Consider your daily income enhanced by ergonomically designed equipment versus no income because you are physically unable to practice.

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Kent Prince of A-dec, a dental equipment manufacturer, often poses the question: “Have you ever met a dentist who didn’t struggle with shoulder or back pain?” A visit last year to a dental office brought great humor when the dentist pointed out the manufacture date on the dental chairs was identical to her birth month and year. Not quite as humorous was the fact that the chairs wouldn’t raise or tilt to her comfort, causing her severe neck and shoulder pain.

A common concern among senior dentists is that physical ailments will lead to the inability to practice dentistry. When it comes to dental equipment ergonomics, I subscribe to the philosophy “it’s all about you”. Clients often argue that buying new equipment will negatively impact their income.

My response to this concern: Consider your daily income enhanced by ergonomically designed equipment versus no income because you are physically unable to practice. That’s simple math to me.

“A dental career is a marathon, not a sprint,” said Dr. Chad Edwards of the Tennessee Centers for Laser Dentistry. “Ergonomically proper equipment is one of those things in life—like eating right—that when you don’t feel like you need to do it the damage is being done. By the time you realize it, it could be too late to fix the problem altogether.”

In recent years, extreme improvements have been made in how dental equipment is designed and built for the simple purpose of improving the life span of a dentist’s career and the physical performance of the dentist during procedures.

Tax Benefits of Purchasing New Equipment As a Dental CPA, my role is to not only account for my client’s income but also to protect my client’s income. I always advise clients to invest appropriately in dental equipment that maximizes their professional skills while minimizing the physical impact on their bodies. It’s an investment that will reap significant rewards in the long term.

From a tax perspective, savings can be gained from the purchase of qualifying dental equipment—such as operatory chairs, digital radiography or milling equipment. The deduction for the equipment is gained through Internal Revenue Code Section 179. This particular tax code section allows for the immediate expensing of equipment in an amount not to exceed $500,000 for the year 2013 against taxable income. The result of expensing new equipment could reduce your federal tax obligation by as much as approximately $198,000, depending on your specific circumstances.

The impact of such tax savings allows the purchasing dentist to offset the possible debt

Before

incurred when acquiring the equipment by the cash saved in reduced income tax payments (whether individual or corporate). Accounting for these acquisitions and appropriately timing your Section 179 expense are critical to your ultimate return on investment from the new equipment. Dentists should be aware that Section 179 is a generous tax-saving method allowed

by Congress and is always subject to possible elimination from the tax code.

In reference to the commonly asked question: How do I save on taxes? Consider investing in current dental technology and equipment.

Construct for Comfort: Harnessing the Power of Supportive Design Not only has dental equipment and technology changed, dental office designs have changed as well. These days, people expect healthcare

facilities to provide maximum comfort and have an easy, intuitive patient flow. Giselle Newman, an architect at STG Design in Nashville, Tennessee, works extensively with dentists in developing plans to renovate and design offices. Newman agrees with the philosophy “it’s all about you” when designing offices to reduce stress for dentists and staff.

In her research on the Theory of Supportive Design, Newman comments: “An environment can either support or hinder the activity taking place within. When designing, the environment must treat the whole person—body, mind and spirit—by activating the senses and reducing stress to promote healing and create an uplifting experience.”

Considering that most dental professionals practice in environments that are stressful for patients and staff alike, the building or renovation of your office should focus on creating a supportive design.

“The environment must treat the whole person—body, mind and spirit—by activating the senses and reducing stress to promote healing and create an uplifting experience.”

After

Accounting for the Dental Profession

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Positive feelings toward the workplace helps reduce stress.

Three Principles to Promote Positive Outlooks Consider this example: A 2,300-square-foot dental office could contain a waiting room, four to five operatories, a mechanical room, staff break room, personal dentist office, supply storage and possible data server room. Assuming there are 2,500 active patients and six employees, on a daily basis approximately 128 individuals must effectively serve or comfortably be served in a space that is smaller than the average home for a family of five.

In designing an office that maximizes dentist and staff production, Newman weaves the three principles of supportive design into her work: sense of control, social support, and positive distractions. Newman notes that with the fears many patients have of visiting the dentist—which often result in irregular or missed office visits (and lost income for the dentist)—providing positive distractions to patients with surroundings such as artwork, lighting, color and windows to promote moderate positive stimulation can change a patient’s views of dentistry entirely.

Newman also reminds her dental design clients that employees often spend more time during the day at the office than with their families—and in conditions that produce recurring stress. Creating an environment for employees that satisfies both the human need for control of physical and social surroundings will generate positive feelings toward the workplace and help to reduce stress.

Combining Efforts of Dentist, Architect, and Builder Todd Keeter, a Texas-based dental practice management consultant, notes he has observed offices in which staff physically compensated

Accounting Considerations Before Updating Your Office

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hen you are considering a construction, renovation or re-equipping project for your dental office, it’s important to know what you’re getting into. You want to execute your project intelligently and strategically so it will yield the best results. Essentially, you have to plan. You have to explore all aspects of your business and, most importantly, have a clear idea of your financial obligations and projected income. Here are a couple exercises to help you get started.

• Should your practice physically relocate?

When considering an office update, sit down and answer the following questions:

• What is the current financial condition of your practice?

Solvent?

• How old are you? How many years do you desire to continue in practice?

• Can your current staff service patient growth?

• Do your current practice demographics support patient growth?

• Does your current physical location allow for renovation or expansion?

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• Does your current lease allow for improvements?

• Can the financial condition and cash flow of your practice support the project?

• Do you have a practice transition plan? If so, how would a proposed renovation project impact the transition plan?

• What is the source of new patients for your current practice? What is your rate of growth for new patients?

• What is your patients’ expected standard of care when it comes to technology?

• Should internal training or processes be developed to maximize your staff ’s skills in conjunction with the project?

for office inefficiencies and poor design by as much as 30 to 35 percent of their daily energy exerted. Keeter said no one realized how poorly the office functioned physically until an efficient office design was implemented and profitability increased accordingly.

According to Newman, redecorating will often address many of the concerns within an office—but sometimes full-scale renovations are necessary. Whether redecorating, renovating or planning for new construction, it’s important to choose an architect/builder team that understands the unique aspects of dentistry design. An experienced architect/builder team will help you maximize your office space and control your construction costs.

Peyton Smith, owner of Thomas Constructors in Nashville, Tennessee, expresses to clients that an office renovation or new construction should not create chaos in the life of the dentist. Before a single nail is hammered, the dentist, architect and builder should all work together to develop a clear understanding of the project destination and objectives. Smith notes that using an experienced dental design and construction team can ultimately save a practice money by reducing

the need for additional renovations or alterations down the road.

Reckless Spender vs.

Status Quo: Two Common Practice Mindsets From the perspective of a CPA who works with dentists throughout various stages of their professional careers and dental practices in transition, I see two common—but opposing—mindsets of dentists who are considering a renovation, redesign or new construction.

The first dentist has his foot on the gas before the light turns green. This dentist runs deep into excessive and uncalculated debt without consideration for all the factors involved (like financial obligations to the bank). On the other side of the spectrum, the second dentist convinces herself any change in office structure, technology or physical appearance will not have

After you answer those questions, perform the following steps in the stated order:

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Obtain an estimate on the cost to fully equip the practice based on a specific list of desired equipment.

Involve an experienced equipment sales professional who can make recommendations on products and technology. Add 10% to the estimate.

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Develop a project budget based on estimates obtained in steps 1 and 2.

Retain a Dental CPA to project the cash flows of the current practice in the new facility. Determine the required level of financing to complete the project AND the

Accounting for the Dental Profession

always be looking for ways to provide better patient experiences.

level of financing the practice can service.

A Dental CPA can also calculate the potential tax ramifications of the project, which will impact your cash flow.

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Obtain an estimate on the cost of building or renovation from an experienced dentistry design and construction team. Add 20% to the estimate.

You should

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Meet with an experienced dental banker to obtain terms of proposed financing for both the real estate and equipment.

After obtaining the construction and equipment estimates, completing a project budget, determining the level of required financing and obtaining terms of dental financing, meet with your team of professional advisors to determine the next steps in your decision process.

Assessing your practice goals, costs and expectations in advance will help you develop a solid strategy for moving forward with your construction, renovation or re-equipping project.

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a return on investment or will cause patients to become fee sensitive. This dentist refuses to budge even after the light turns green.

Both extremes are dangerous for the long-term financial health of the dentist. The first extreme creates possible financial chaos (and you never want the words “financial” and “chaos” in the same sentence). The second extreme leads to missed opportunities for patient growth and financial rewards. Based on my experience, dentists rarely—if ever—regret making the decision to move forward with a renovation or re-equipping. The biggest regrets are usually that the project wasn’t done sooner or wasn’t planned out better.

Like most things in life, the key is avoiding the extremes and finding a good balance. You need to be smart and strategic before you start your renovation project. You need to review the numbers and have realistic financial expectations.

On the flip side of that coin: If you want your practice to grow and flourish, you simply cannot remain status quo. You should always be looking for ways to provide better patient experiences, so you can increase referrals and draw in new business.

You have to remember throughout the renovation process that you are working to improve your practice—something that will benefit you, your staff and your patients on a daily basis.

Crunching the Numbers: How Renovation Will Increase Your Revenue I mentioned earlier the second common question I get from dentists: How do I grow my practice to take home more money? This question is the reason you may be considering updating your office. It’s probably why you’re reading this article right now. You want to know when and how renovation will increase your revenue. Mathematically, the question must be raised whether the equipment investment, lower stress, higher employee efficiency and improved ergonomics will have a financial impact. Let’s crunch some quick numbers.

For simplicity, let’s assume your investment will lead to an increase of one hygiene patient a day, each day of a four-day week (assuming 8

the practice is open four weeks a month during a twelve-month year). Let’s also assume the equipment and renovations have a life of 15 years. Net increase in hygiene revenue over the assumed period of time then is $360,000. Let’s assume the cost to equip a hygiene operatory fully is $40,000 and the cost of build is $10,000.

In simple terms, that is a rate of return of 620 percent on the hygiene income alone and does not consider future revenue from dental procedures performed.

Now imagine your practice also added one full new hygiene room which took two years to fill to capacity on a schedule of seeing eight patients a day. Over the 15-year period, you will have created gross hygiene collections in excess of $2.5 million. If you raise the question: Can I afford to change my office? My response to you will be: Can you afford not to change?

One Last Thing…

Step back into your patients’ shoes again.

This time, walk into your newly renovated office.

What do you see? Smiling, relaxed staff members greeting you. A well-lit private space with soothing views and interesting artwork. Polished and streamlined new equipment and comfortable chairs. An energetic and confident dentist ready to assess your treatment needs.

The right office environment will instill your patients with confidence. It will inspire trust and reflect the value of your patients’ dental dollars.

Most importantly, it will increase case acceptance, encourage patient referrals, and enable you to grow your business for years to come. That’s the transformative power updating your office can have on your dental practice.

Contact Us!

Whisenant, Stewart, Watrous, & Associates, PLLC

Trenton D. Watrous, CPA, CVA, CFE CPA to the Dental Profession twatrous@wswcpas.com 615-312-9022

Alysha Cook

Dental Services Relationship Coordinator acook@wswcpas.com 615-312-9018

About the Au thor Trenton D. Watrous is a Dental CPA at Whisenant, Stewart, Watrous & Associates (WSW) in Nashville, Tennessee.

With 20 years of accounting experience, Trent serves dental clients in roles ranging from oversight of startups and transitions to growth management within dental practices. Learn more about Trent and how he can assist your dental practice at wswcpas.com.