Mistakes are expensive. However, when it comes to dental clinics managing their own accounts, these mistakes have compounding impact that renumerate for months, even years. The Journal of Healthcare Finance echoed this statement about the high volume of accounting and administrative errors.
As per the study, dental accounting mistakes reduce a practice’s annual revenue by roughly 5% to 10%. For an average clinic, this amounts to $50,000 to $100,000, leaving clinics at risk to sever financial setbacks and the severity of insolvency.
The first step is to assess the potential mistakes that are likely to be made and take corrective actions to ensure that the mistakes don’t repeat in the future.
This blog is a must read for dental care providers to catch these risky mistakes they are prone to make and how to rectify them.
Common Accounting Mistakes Dental Practices Make
Dental practices must identify the specialized errors they are likely to make in their field to avoid them. The following section lists the common dental accounting mistakes made by dental practices:
Poor Management of Accounts Receivable (AR)
One of the most common areas where focus is lost in the accounting pipeline is when they do not know where the cash is coming from. Without following up with the appropriate insurance provider or patient to collect payment, they risk significant cash-flow shortages. A lack of diligence in following up on outstanding “aging” insurance claims. Failure to collect co-payments and remaining balances after procedures severely damages the financial health of dental practices.
How to Rectify: Mismanagement of ARs can be mitigated by implementing automation tools. By automating accounts receivable, it saves time and resources while reducing human error. Additionally, automating accounts receivable not only improves efficiency but also enhances the entire accounting pipeline. This leads to benefits such as receiving accurate, transparent, and always-updated transaction reports.
Neglecting to Utilize Specialized Dental-Specific Accounting Charts
Accountant Charts are the essential blueprint of the accounting pipeline for any business. They help record, categorize, and report financial transactions in their general ledgers. Since dental healthcare providers operate in a specialized industry with unique revenue streams and expenses. Using generic accounting charts makes it nearly impossible to analyze the profitability of specific procedures or accurately track the cost involved in complex dental procedures.
By neglecting to use dental-specific categories, owners cannot effectively benchmark their performance against industry standards. Therefore, making it difficult to identify areas where costs are too high or where revenue could be optimized.
How to Rectify: Incorporating the use of customized accounting charts that have been created specifically to track revenue and expenses is a must for dental practices. This specialization approach can be taken further by specific dental practices. The dental-specific accounting chart can further be customized to match the rhythm or the operating style of the specific dental practice.
Failing Monthly Reconciliations
A number of dental offices do not perform regular account reconciliations because they’re often postponed. However, bypassing account reconciliations risks means that you are missing out on some necessary financial oversight. Account reconciliations are a crucial component of any dental office. Without completing a reconciliation on a monthly basis, your office is essentially flying blind. This could lead to potential fraudulent behavior and errors in the accounting system. Such issues can cause problems in accounting, leading to tax liabilities or financial inaccuracies.
How to Rectify: For dental practice to participate in regular monthly reconciliation, one approach is to segregate internal control duties. This means that dental practices can create specialized teams dedicated to ensuring accuracy and transparency during the reconciliation process.
Incorrectly Categorizing Expenses
Expense categorization is an important step in ensuring that you are keeping personal and business expenses separate. If you don’t categorize your dental supplies and lab fees correctly, or mix up your employee expenses, it can negatively affect the way you make decisions about how to improve your operations.
Additionally, classifying your expenses could lead to paying too much in taxes or being flagged for an audit for inconsistent reporting by the tax agency.
How to Rectify: Hire specialized experts who are familiar with the average expense rates in the dental industry. By bringing in a seasoned professional, dental practices can ensure not only accurate expense categorization but also a thorough review of cash outflows.
Neglecting regular financial reviews
One mistake that dental offices commonly make is forgetting to perform financial reviews because they are mostly concerned with taking good care of their patients. Financial reviews are essential to the accounting process because they are used to find and fix mistakes. Financial reviews not only find mistakes but also help the practice determine how financially healthy it is performing. If there is no routine financial review, a practice will miss out on the opportunity to change its operational strategies and experience continued, avoidable losses and the possibility of being financially unstable.
How to Rectify: Establish a routine of regular financial reviews by implementing mandatory Key Performance Indicators (KPIs) that are digitally tracked. This approach ensures continuous monitoring, early detection of issues, and informed decision-making to promote the financial stability of the practice.
Confusing Cash Flow with Profit and Cash Outflow with Loss
One mistake that many people make is equating bank balance, high cash flow, and high profit. For example, just because a dentist has a large bank balance does not mean that the money is theirs; if they have to pay a vendor, laboratory, or another doctor, so those funds are not profits. In addition, when dentists make large capital expenditures, such as purchasing a new piece of equipment that cost $100,000, they will expense out the purchase and then falsely believe that they had a loss when in fact they made a long-term investment that will generate future income. Failing to distinguish between cash holdings and genuine profit can lead to unwise financial choices.
How to Rectify: Using the accrual method of accounting is essential to prevent repeating the same mistakes as those who make the above errors. The vast majority of dental accounting mistakes result from using the cash method of accounting, where transactions aren’t recorded until cash is received or paid, leaving a distorted view of the practice’s financial health.
Misclassifying Tax Obligations for Contractually Associated Dentists
Misclassification of any dental associates, hygienists or specialists as independent contractors (1099) instead of employees (W-2) is a very common mistake. It can lead to huge liabilities for the practice because of penalties, interest and back taxes that need to be paid if the IRS or State Tax Authority audit the practice.
Therefore, to keep your clinic out of trouble financially and liability wise, you should understand the difference between being classified as an employee versus an independent contractor.
How to Rectify: The way to begin to rectify the above issue is to review the 1099 agreements you have with each associate, hygienist and specialist to ensure compliance with IRS (“Common Law”) Rules governing misclassification and will need to pay special attention to behavioral control. Factors like scheduling, working, managing finances, and developing relationships over time help you establish a comprehensive structure. This will enable you to determine whether they meet the criteria to be classified as an independent contractor rather than an employee.
Conclusion
Dental practice accounting requires careful attention to avoid costly errors that could threaten the financial stability of the practice. Practitioners need specialized expertise in dental industry operations. This knowledge helps them identify and prevent mistakes in their accounting processes that could negatively affect their financial health.
Implementing a comprehensive solution to prevent common dental accounting errors involves integrating clinical activities with financial management processes. This integration helps ensure accuracy and consistency across operations. It should be done in close collaboration with a dedicated and experienced accounting service. They should understand the specific income and expense types relevant to the dental industry. This ensures accurate, timely, and customized accounting tailored to your needs.
