Consider a dental practice expanding from a single location to a second one, perhaps with one in California and another in New York. While this growth promises higher revenue, it introduces a new set of complex accounting challenges. For example, during tax season or even during routine monthly closing, the two entities often show disparate general ledger amounts, complicating profit analysis and tax liability calculations.
Such a situation raises several questions: How should revenue be allocated per location? What are the tax liabilities for each state? How do we handle inter-office expenses? These are just a few of the complex scenarios that arise and require specialized guidance on consistent accounting procedures.
To address these challenges and understand the multi-location dental accounting, the first step is to become familiar with the dos & don’ts of managing such practices. This is to ensure a clear foundation for an effective management style that practices can rely on, alongside providing patient care.
This blog provides a breakdown of best practices that must be enforced, along with actions to avoid when managing multi-location dental accounting.
How to Manage Multi-Location Dental Accounting
To understand the accounting procedure, there are two major considerations at the beginning: the entity type and its nexus in its respective location. Depending on the type of entity, the methodology or scale of accounting procedures can change. This depends on whether the dental practice qualifies as a sole proprietorship, C-Corporation, or S-Corporation.
As for the nexus, it refers to the practice’s taxable presence in the non-native location. Depending on the nexus, the accounting procedure can be simplified or spread across multiple dimensions to address the relevant financial complexity. The following section lists the major actionable insights into how practices should go about managing their offices across different locations:
Unified Accounting System for Dental Practices
Utilizing the same general ledger and chart of accounts across all dental offices is vital for comparing performance. This uniformity enables accurate consolidated reporting and simplifies financial management, helping practices operate more efficiently.
Centralized Revenue Cycle Management (RCM)
It is preferable that a single central organization handle administrative duties related to billing, insurance verification, and collections, and that revenue data be divided by location for reconciliation purposes. By segmenting revenue data by location, practices can reconcile payments (cash, checks, cards, and/or insurance) for each location, enabling them to effectively measure performance at each location.
Fractional CFO/Industry Expert
As dental practices expand, the need for an expert who understands industry standards and multi-state tax & compliance becomes increasingly important. Such an expert will have the necessary knowledge and resources to help coordinate compliance between jurisdictions and maximize profits for dental practice groups.
Monthly Reconciliations
Although daily or weekly financial routines can be handled locally, closing the books for all dental locations simultaneously is essential. This ensures accurate and consistent monthly financial reporting. It allows for a thorough analysis of EBITDA and overall practice performance.
Cloud-Based Software for Dental Practice
Implementing cloud-based software has become essential for multi-location dental accounting. It provides real-time access to financial data from any location and eliminates the need for costly, separate on-premises servers at each office. This enhances data security and ultimately streamlines operations across the board.
What to avoid in multi-location dental accounting?
Research indicates that dental accounting errors reduce annual revenue in a dental practice by about 5-10%. An average clinic can see a revenue decline of between $50,000 and $100,000; therefore, clinics risk major financial difficulties and ultimately going out of business if these mistakes continue. Many dental offices experience similar accounting errors due to similar circumstances. In almost all cases, dental practices could easily prevent these accounting mistakes by simply implementing a few common accounting error-prevention measures listed below.
Poor Inter-Connected Cost Allocation
The inability to appropriately allocate a cost to a specific location is perhaps the most significant failure of an overallocation program for multiple locations. This includes sharing the costs of supplies, marketing, or administrative staff salaries without a method to document the criteria for sharing these expenses fairly and appropriately. If overhead costs are not allocated appropriately, it will not be possible to determine whether a particular location is generating a true profit, resulting in cross-subsidization, as a site that has generated a profit may appear to support a site that has generated a loss.
Mixing financial information with different locations
Treating multiple locations as a single entity in the general ledger prevents owners from seeing which office is actually performing well. Combining bank accounts and mixing income and expenses across sites can distort the view of financial health. It also makes it difficult to assess ROI on expansion and severely complicates tax compliance and audits.
Lack of individualized P&L Statements
The corporate reconciliation process does not include a unique profit and loss (P&L) statement generated at the head office for each site. Significant errors are made when no unique P&L statement exists for each business unit/location. The owner will have no way to identify operational inefficiencies without an accurate P&L statement for that location, such as a high employee turnover ratio at one location or very low production per provider at another, leaving management unable to make improvements based on specific areas of concern.
Failure to Centralize Data
Reporting silos arise from the use of separate or decentralized systems that rely on multiple software applications or spreadsheets at each location. This causes delays and inconsistencies in reporting. Using a cloud-based practice management system provides real-time access to consistent reports. It offers some standardization and helps determine how each location competes relative to the others within the group.
Misinterpretation of Cashflow
Numerous practices tend to wrongly assume that having a large bank balance equates to a profit being made. They often misunderstand cash flow versus real profit, especially when large equipment purchases are involved for new locations. When dental practices provide services but must wait to be paid by insurance companies, using a cash basis rather than an accrual basis can create the illusion of a loss. This occurs because an expense for a large capital investment is booked in one month, even though it will generate income over several years.
Improper Tax Classification
When a dental practice incorrectly classifies its employees – for example, an associate, hygienist, or specialist – as independent contractors (1099) instead of as employees (W-2), it is a frequent and sometimes costly mistake. This misclassification, combined with the inability to track state-specific regulations across multiple locations, can result in significant liabilities for the practice. This can happen as a result of penalties, interest charges, and back taxes due to an IRS or state audit.
Conclusion
It is essential to create a single, holistic accounting structure across many sites, as mentioned above, but this can be difficult due to the fragmented nature of the RCM process, which can cause clinics to have a fragmented view of their financials. To successfully accomplish these goals, dental clinics will need to perform centralized accounting, thereby creating a more efficient and organized accounting structure. To accomplish this, there are two major steps that dental clinics can take: automating their accounting processes and using CPA services that specialize in the applicable regulatory framework for dental practices.
Both of these can be found through AcoSpark, an AI-driven platform created to streamline accounting and finance operations, specializing in the healthcare industry. AcoBloom’s accounting expertise in the US Healthcare industry helps their clients seamlessly navigate accounting obligations. This ensures that these obligations do not interfere with their patient care services.
