5 ways to optimize your Dental Chart of Accounts for dental overhead benchmarks.
Optimize your Dental Chart of Accounts, so you can easily compare your dental practice overhead to dental industry benchmarks by following these 5 simple tips below:
Keep the accounts simplified
Add Gross Pay expense accounts by department
Separate Associate expenses
Separate Owner's expenses
Track outsourced services that replace staff
What is a Dental Chart of Accounts?
The Chart of Accounts is the combination of all the accounts listed on both your practice's Balance Sheet and Profit & Loss reports. For the purpose of dental overhead benchmarking, we are going to focus on the income and expense accounts listed on your practice's Profit & Loss report (not the Balance Sheet). These accounts are what I'm referring to as the "Dental Chart of Accounts."
The sooner you correct your Dental Chart of Accounts, the better!
If you don't set up your dental practice's Chart of Accounts correctly for dental overhead benchmarking, you're missing out on years of valuable data that you could be using to improve your practice.
For example, the graph below is using a rolling 12 month average for income, total overhead, and total team costs. These averages over time signify if you're maintaining overhead costs as your practice grows or if you have a "leaky bucket". If your average income (purple line) is going up, while your average overhead expense as a percent of that income (blue line) is staying the same or going down, then you're in good shape.
Even if you don't plan to do dental benchmark analysis right now, you won't be able to go back into previous years and correct how the transactions were recorded. Therefore, it would be super beneficial to optimize the Dental Chart of Accounts correctly for benchmarks now, then you will have years of trends to look over later, when you need it, like the example chart shown above.
Adjust your Dental Chart of Accounts using my tips below, and you'll have an optimized Dental Chart of Accounts for easy dental practice overhead benchmarking.
1. Keep your Dental Chart of Accounts simple:
The biggest mistake I see often with many Dental Chart of Accounts is how complicated they make the accounts. It doesn't need to be so complicated for either tax returns or dental benchmarks. Your Profit & Loss report should have a maximum of 90-100 accounts. Less is more, as long as you have the correct accounts. Maintaining a complicated Dental Chart of Accounts is going to make maintaining dental benchmark analysis more difficult long-term. Keep it simple!
2. Separate your practice payroll by department:
One change you can make to your Dental Chart of Accounts that will make the biggest impact for dental overhead benchmarking is to categorize the gross pay/wages by department each pay period. Gross pay is the payroll expense before any taxes or deductions are taken out.
Separating the gross pay by departments per pay period will allow you to benchmark your Personnel (Team) Costs with industry averages, apples to apples, without the owner, owner's family, and other doctors in the mix. You also get to break down benchmarks even more, so you can compare each department to industry averages (our Practice Overhead™ application shows example department benchmarks in the screenshot below 👇).
The payroll department expense accounts should look something like this on your practice's Profit & Loss Report (Dental Chart of Accounts):
Gross Pay - Owner
Gross Pay - Office/Admin
Gross Pay - Dental Assistants
Gross Pay - Hygiene
Gross Pay - Associates/Doctors
Gross Pay - Spouse/Children
Payroll Taxes - Owner (employer portion only)
Payroll Taxes - Staff (employer portion only)
Payroll Taxes - Associates/Doctors (employer portion only)
Payroll Taxes - Spouse/Children (employer portion only)
Note: There is no reason to break the departments down even more like front desk, back office, office manager, sterilization techs, etc. You can't compare apples to apples that way, so it doesn't provide any real value and becomes redundant. Remember what I said before; keep it simple!
3. Create accounts for Associate's costs:
A mistake I see often when dentists are trying to determine their dental practice overhead percentage, is they include the associates in the expenses. The associates costs should be treated like owner's costs for the purpose of comparing the overhead expenses against industry averages, so it's important to keep the associates expense separate. You'll need to maintain a different expense account for the big ticket associate expense items like the list I have below.
Below are the associate expense accounts that you should include in your Dental Chart of Accounts:
Gross Pay - Associates
Payroll Taxes - Associates
Health insurance - Associates
Pension Matching - Associates
Contractors - Doctors (paid 1099)
4. Separate the owner's costs:
Just like what I explained above about separating the associates, we need to separate the owner's compensation too. The total of owner and associate expense is not included in the overhead and gets benchmarked separately outside of overhead at about 35-40% of income.
Below are the owner accounts that you should include in your Dental Chart of Accounts:
Gross Pay - Owner
Gross Pay - Spouse/Children
Payroll Taxes - Owner
Payroll Taxes - Spouse/Children
Health Insurance - Owner/Family
Pension Matching - Owner
Pension Matching - Spouse/Children
Life Insurance - Owner
Disability Insurance - Owner
Note about Spouse/Family expenses: The spouse/children of the owner are usually included in the owner's expenses and not included in the practice overhead because they aren't often working in the practice, and it's more for a tax advantage.
However, if the spouse is truly providing a role that would have to be replaced for a similar amount in payroll if they stopped working in that role, then the spouse should be included in the Personnel (Team) costs of the practice overhead benchmarks.
Separating the Spouse and Family expenses in the Dental Chart of Accounts gives you the ability to be flexible with where you include these expenses in your dental benchmark categories depending on their activity in the practice.
5. Track these specific costs that replace staff:
To be able to compare a wide range of practices, apples to apples, our team watches out for differences in the outsourced expenses vs. in-house staff expenses that might skew the dental benchmarks.
For example, if you utilize an outsourced billing service vs. having an accounts receivable person in-house doing this role, we want to have those expenses in the same place to compare apples to apples.
So in the Personnel (Team) costs of the overhead benchmarks, we put expenses that are commonly provided by staff in the practice, but occasionally outsourced.
You'll want to track the specific outsourced services that replace staff in their own expense accounts such as these below:
Answering Services/Scheduling Services
Note: Don't go crazy with this and start tracking specific software applications in separate expense accounts because you consider that replacing staff. I'm just talking about the common big ticket items you'd see staff doing in the average practice; usually scheduling and billing services.
When you optimize the Dental Chart of Accounts in your bookkeeping special for dental benchmarks with the various pieces that I have detailed above, you will have the overhead expense percentages ready when you need to see how you compare to others and if you have a "leaky bucket." Getting this done correctly starting now will make your practice overhead analysis more valuable in the future with years worth of correctly done trends and data at your fingertips.
Dental specialty bookkeeping with us:
You can get automated Practice Overhead benchmarks through our dental bookkeeping service. With access to our online benchmark platform, you can compare your practice overhead to the live average of our clients currently in the application.
You will also have total peace of mind as your dental bookkeeper on our team keeps your bookkeeping updated every few days like clock-work. You never have to stress about updating bookkeeping during the year again, and you can monitor your dental practice overhead percentages against industry averages for a "leaky bucket." You just pay your practice bills, and run your payroll as usual, then we do the rest.
We understand tight patient schedules make it hard to schedule a call with us. Instead, you can just fill out a simple online form, and we'll contact you by email with our pricing and next steps. Click here to get started.
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Sona Wegner, MBA ❤
Founder, Bookkeeping for Dentists™