Business Finance

A Practical Guide To Dentist Accounting

Jul 22, 2022 • 9 min read
Young woman checking expenses
Table of Contents

      Opening your dental practice is exciting, but it comes with a significant increase in accounting responsibilities. Most dentists prefer to focus on client work rather than business management, but you can’t afford to neglect the function.

      Here’s what you should know about dentist accounting to stay on top of your financial obligations, including what it involves, the most common mistakes to avoid, and some best practices that can help your system run smoothly.

      What Is Dental Practice Accounting?

      Dental schools are great at teaching prospective dentists how to care for their patients’ oral health. However, they don’t share the knowledge dentists need to be effective small business owners.

      When you open your dental practice, you become responsible for your dental practice accounting. That refers to everything necessary to keep your finances organized, make intelligent business decisions, and comply with tax laws.

      More specifically, dental practice accounting involves:

      • Maintaining records of your day-to-day transactions
      • Turning bookkeeping data into accurate financial statements and reports
      • Paying your calculated tax obligations and filing tax returns to stay in compliance
      • Analyzing your financial statements to inform business decisions and tax strategies

      The unique aspects of running a dental practice can complicate these processes. For example, accounting for your revenues properly despite the complexities of insurance billing can be one of the most significant challenges.

      Even if you switch to a fee-for-service model, multiple moving parts in the dental payment process can quickly lead to messy financial records.

      Problems can also arise when a dental practice owner plans to sell their business at the end of their career. While that’s a long-term financial goal, it creates many accounting challenges regarding practice valuation and retirement planning.

      Best Practices For Dentist Accounting

      Not only do busy dentists enjoy reducing their time doing accounting, but focusing on your craft is in your business’s best interest. Maximizing the hours you spend on your core competency is highly beneficial to your profitability.

      Here are some best practices you should follow to minimize the interference of your dental accounting responsibilities in your day-to-day working life.

      Invest In Cloud-Based Software

      Bookkeeping can be one of the most time-consuming aspects of small business accounting when you do things by hand. Fortunately, modern cloud-based software has made that entirely unnecessary.

      Nowadays, all dental professionals should connect their business bank accounts and credit cards to solutions that can track their transactions and generate financial statements.

      Fortunately, you can automate those functions with accounting software.

      Of course, software can make many other aspects of your finances more efficient. For example, dental practice management and payroll service software are essential tools for many dentists.

      Ideally, you want to create a tech stack that integrates seamlessly. While this can be costly, consider treating it as an investment, just like your practice’s equipment.

      Business owners have multiple legal entity options, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. In some industries, all of them are viable, but that’s usually not the case for dentists. 

      That’s because litigation is one of the most significant risks in the healthcare industry, and you can’t afford to leave yourself exposed. As a result, dentists generally must choose from corporate and LLC structures.

      However, even those options have vastly different impacts on your taxes and accounting, and there’s no one-size-fits-all answer regarding the best choice. As a result, it’s a good idea to consult a tax or legal expert to help you make this decision.

      Consider Your Billing Structure Carefully

      Dental practices have multiple options when it comes to determining their billing structures, and they have a significant effect on your overall business strategy and accounting processes.

      First, dental practices can go with the traditional route of being a participating provider. That means you’re in-network with a dental benefit plan and usually involves collecting payments from insurance companies and patients.

      Generally, this favors a quantity-over-quality approach. Dentists accept the lower prices insurance companies set for their services in exchange for the consistency of capitation payments and increased patient volume due to insurance referrals.

      Alternatively, dentists can switch to a fee-for-service approach, which involves setting your prices for services and collecting payment in full from patients upfront. You or the patient can still submit a claim to their insurer for reimbursement if there is one.

      Typically, choosing the fee-for-service approach implies a shift to a quality-over-quantity strategy. You’ll likely have fewer patients, but your profit margins for each one should increase.

      Your billing strategy is another hugely impactful decision you’ll need to make before you start doing business, and it’s best to ask an expert for help with all of the implications for your financial management and tax reduction planning.

      Delegate As Much As Possible

      Providing care to your dental patients is a full-time job, and every additional hour you can dedicate to your core competency increases the efficiency and profitability of your business.

      As a result, dentists benefit more than most from delegating their financial responsibilities. It’s often worth paying for help with your bookkeeping processes and the more complex dental accounting services. 

      In many cases, it makes sense to bring the bookkeeping process in-house. It’s usually straightforward enough to have one staff member handle it with other administrative tasks like scheduling.

      However, few practices need to hire a full-time dental accountant for their financial planning. Instead, you’re often better off paying for outsourced accounting and tax services from a Certified Public Accountant (CPA) firm.

      They can provide all the dental practice accounting services you need at a much lower cost, including strategic tax planning, new business advisory, and tax preparation.

      Just be sure you choose one who’s had clients like you before, so they understand the nuances of accounting service for the dental industry.

      Common Mistakes

      Because dental education doesn’t prioritize financial management, it’s easy for new practice owners to make unforced errors. Fortunately, many of them are easily avoidable when you know about them in advance.

      To help you set yourself up for success, here are some common pitfalls dentists fall into that you should know to avoid.

      Failing To Separate Business Activities

      Failing to open a separate business bank account for your practice’s transactions is one of the most common ways dentists cause accounting problems for themselves. It makes it surprisingly difficult to distinguish which activities belong in which category later.

      Many businesses recognize this issue after their first few months or year of operations, but the damage is done by then. To avoid unnecessary accounting work, open separate business accounts before transitioning to practice ownership. 

      Neglecting Financial Analysis

      Dentists are rarely excited by the prospect of financial concerns interfering with their craft, but you can’t afford to ignore that aspect of your responsibilities. Dental practices are businesses, so you must understand the monetary aspects to run them well.

      That means you should take the time to explore your financial statements and look for ways to improve your profitability, cash flows, or operational efficiency.

      For example, debt is one of the primary budgetary challenges for dental practice owners. Not only do dentists carry sizable student loans, but they also usually have to take out business loans to afford the equipment they need.

      As a result, you’ll likely have high fixed costs, and you must be careful to avoid cash flow issues.

      Choosing A Generalist Accounting Advisor

      Every business is subject to the same fundamental accounting principles, but their applications vary significantly due to the nuances of each industry. As a result, choosing a generalist accounting advisor is often a mistake for dentists.

      When shopping for a dental CPA firm, review their accountant websites carefully and take advantage of free consultation options. Make sure you choose one with extensive dental business consulting.

      They’ll need it to help you navigate the unique aspects of dentist accounting, like dental insurance and selling your practice.

      *The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

      About the author
      Nick Gallo, CPA

      Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.

      Share Article:

      Business insights right to your inbox

      Subscribe to our weekly newsletter for industry news and business strategies and tips

      Subscribe to the newsletter

      Subscribe to our weekly newsletter for industry news and business strategies and tips.