Is your dental clinic ready for the next phase of expansion? If the answer is yes, it’s important to know several factors that play a part in its expansion. During this expansion process, your clinic will encounter several questions and queries, such as what is the cost of that expansion? How will the tax situation change? After expansion, what will the cash flow look like?
To answer these questions and make the overall transition less unpredictable, clinics need to create a blueprint that outlines every phase of the expansion. Having a blueprint not only helps them navigate the expansion process but also offers them a sense of direction. This as a result gives them an upper hand when avoiding common mistakes when investing in their next big expansion project.
This blog presents a blueprint helping clinics prepare for the dental practice expansion planning process in a 3-phase manner.
How Dentists Can Plan for Practice Expansion
Dentists can plan for practice expansion by understanding that their practice’s current financial and accounting model must accommodate the new scale of services. Before the clinic takes action on its expansion goals, it must first establish the accounting workflow. This workflow needs to have the capacity to handle the increasing complexity often associated with higher production levels. Additionally, expansion brings along the complexity of the new financial management, which increases with expansion. The following section outlines a 3-phase strategy to help clinics navigate the entire transition process seamlessly:
Phase 1: Foundational and Financial Analysis (Pre-Expansion)
Phase 1 of the expansion is preparing a clean slate for the expansion process. This gives the practice a solid, forward-looking foundation. Along with that, it prevents backlogs from previous quarters from overlapping in subsequent analysis.
Clean Up Financials
Before seeking funding, dental clinics must ensure their financial statements are “lender-ready” by removing personal expenses that have been mixed in. They should also correct any incorrect classifications. This can be achieved by reconciling all financial records and ensuring that the Profit & Loss statement accurately reflects the clinic’s financial performance. Clean financials reduce perceived risk for lenders, often resulting in lower interest rates and more favourable loan terms.
Analyze Key Ratios
Measurements like EBITDA, overheads, and staff costs as a percentage of collections are essential for assessing the health of the system. A good practice will typically maintain overhead in a range of 60% to 70%. Examining these ratios will help determine whether the current scale supports the additional site’s debt and management burden efficiently.
Set Up Segmented Accounting
To support their dental practice expansion planning efforts, dental clinics will need to implement some form of classification-based accounting or reporting system. This should be integrated within their automated processes. This allows them to produce individual profit and loss reports for each new site while still maintaining a comprehensive overview of all their operations. A segmented approach to financial reporting will also offer valuable insights into where the company has succeeded in its expansion and areas facing challenges. It will also reveal how resources are distributed across its growing network.
Calculate Debt Capacity
Determine the ability of a practice to have money lent against it by calculating its Debt Service Coverage Ratio (DSCR). Lenders’ criteria for lending money to businesses have typically been a minimum DSCR of 1.25, indicating that the business produces 25% more cash flow than is necessary to repay its debts. Knowing how much money a practice can borrow allows you to avoid overextending the practice’s borrowing limits and risking the liquidity of the original practice.
Phase 2: Funding and Execution (Active Expansion)
Phase 2 is the actionable stage of expansion, which is also a resource-building and resource allocation stage. This phase is about collecting resources and allocating them in a strategic manner.
Secure Funding
Securing a line of credit and a term loan will help ensure that you have enough capital for the first year of operation. Dental practice expansion planning costs may increase during construction due to unforeseen conditions at the site. Changes made to the construction project that were not originally accounted for can also contribute to higher expenses.
Budget Allocation
To adequately establish a budgetary estimate for the expansion project, the clinic must develop a realistic and accurate budget. This will determine how much money needs to be spent. The clinic must ensure that they track every dollar spent as part of this process. This is necessary so that their ability to use operating capital from the existing practice will not be impacted until they reach their expansion goals.
Centralize Revenue Cycle Management (RCM)
As clinics increase their operations, they should not do billings and collections in a fragmented manner. By centralizing revenue cycle management (RCM), all the offices can use the same method for insurance verification, claim submission, and patient billings. Centralizing RCM will result in reduced administrative costs, fewer mistakes on billings, and maintaining a low “Days Sales Outstanding” (DSO).
Phase 3: Integration and Monitoring (Post-Expansion)
Phase 3 is about maintaining structure that has been built overtime. This involves incorporating practices within the workflow that help sustain it over the long-term.
Benchmarking Performance
When assessing the dental practice expansion planning, KPIs (Key Performance Indicators) should be developed. These include new patients per month, appointments scheduled per hour, and the acceptance rates of treatment among new patients. These KPIs can be measured against the KPI performance of the existing operatives as well as against peer practices that are expanding. Benchmarking data should be compiled on a regular basis. This allows for the identification of operational differences that can be addressed with corrective measures to ensure compliance with the averages. The corrective measures could include providing staff training on the areas where production is below the average.
Unified Accounting & Tax Planning
As a dental clinic grows, there will be additional layers of complexity in meeting tax obligations due to new operational and financial considerations becoming necessary. To better manage increasing complexity, a dental clinic should consider hiring a CPA or tax planning professional. They can help develop a corporate structure that includes appropriate asset protection measures and reduces overall tax liability. Proper tax planning will also allow the dental clinic to properly utilize all types and forms of deductions, such as Section 179, related to acquiring new equipment. This strategy helps keep significant cash within their business to facilitate continued growth.
Monitor Cash Flow
When the dental clinic has reached its current dental practice expansion planning goals, it will have significant debts as well as other expenses, such as payroll. Create weekly cash flow forecasts so that you can determine how quickly the company will be using cash and how much cash is being collected. By carefully monitoring this information, you will be able to see that there will be adequate amounts of cash available to pay for all fixed costs and expenses. This will occur while waiting for a new facility to grow to its intended capacity after opening.
Review Fee Schedules
As dental clinics expand and develop greater negotiating power with insurers due to growth, they can leverage their increased patient base. Additionally, with the expansion, they are better positioned to renegotiate fee schedules. By routinely reviewing and updating their pricing, they can ensure that their rates remain aligned with inflation and the higher operational costs associated with a larger business.
Conclusion
When dental clinics plan to expand, the decision is usually based on consistent stability over a certain period of time. However, the transition period leads them towards a temporary, high-stress phase of operational instability, reduced profitability, and increased financial risk. This is why following a strategic pathway, as one laid out above, is important to ensure that the clinic doesn’t stray from its expansion path. This helps to avoid common mistakes along the way and to invest in the financial foundation of the clinic’s long-term growth.
Clinics can effectively handle the inevitable challenges of dental practice expansion planning, such as increased patient demand, staff recruitment and retention, and operational complexities. They do this by developing a clearly defined plan for how they will grow. By taking the time to plan and think strategically about expansion, clinics will maintain high-quality levels of patient care throughout the entire process of growth. This approach helps create a more successful and resilient clinic in the long term.
