You made it through the long, grueling days of dental school and even opened your own practice. The hardest part is behind you, right? Well, not entirely. Opening your own dental practice is a great first step, but setting yourself up to have a successful business is a journey all its own.
For many dentists, their expertise lies in patient care and begins to fall short on running the business side of their practice. To bridge this gap, many dentists hire someone in-house to handle all the bookkeeping for the practice. However, I want to shed light on several common bookkeeping mistakes made in dental practices today.
1. Categorizing All Incoming Money as Income
The common school of thought is that all money flowing into your practice's bank account should be classified as income. However, this is not the case. You can have several various reasons for incoming funds that aren't classified as profits, such as the sale of equipment or supplies and even reimbursements to your practice. The key takeaway is to remember that you will pay taxes on your profits. Misplacing incoming money as profits falsely inflates your profit percentages, ultimately leading to an increased tax bill.
2. Categorizing All Outgoing Money as an Expense
Similar to incoming money, not all outgoing money is an expense to your practice. Incorrectly categorizing outgoing money as expenses can lower your profit totals and ultimately affect your tax bill at the end of the year. Understanding which costs can be categorized as a business expense is vital to accurate reporting.
3. Misunderstanding Cash Flow and Profit
It is imperative that there you have a clear understanding about the difference between cash flow and profit. While they sound similar, the two are quite different. At first glance, profit numbers can be misunderstood as available cash. The truth is, available cash is not simply a restatement of profits. Profits are calculated by taking your revenue and deducting your expenses, while cash flow is simply the money flowing in and out of your account from month to month. Simple oversights like these can turn out to be very costly for dental practices.
4. Recording Transactions in the Wrong Period
This mistake is actually more common than you might think. Because most practices don't close their books to verify their accounts and prepare monthly statements, errors can go unnoticed for long periods of time. One remedy for this common mistake is to monthly close and reconcile your books. This gives you a chance to verify the month's transactions, thus providing you the time to make any needed corrections before you get too deep into the year. Trying to settle your books at the end of the year can be a costly, time-consuming risk that could result in misrepresentation of cash or harsh penalties from the IRS.
5. Not Working with an Experienced Dental Accountant
While this might feel like a perk or an unnecessary expense, hiring a CPA with dental experience is an invaluable asset to your practice and strongly advised. Bookkeeping is not a simple data entry position, and hiring someone without the right experience could turn out to be a costly move. Dental accounting requires a deep understanding of Generally Accepted Accounting Principles and IRS guidelines, as well as dental industry standards and practices. Mistakes could cost you in the form of unnecessary tax bills, theft due to a lack of internal controls, incorrect cash reconciliation or an inaccurate, faulty accounting system. Don't gamble with the health of your business. An experienced dental CPA can not only save time and money, but can also help track dental tax deductions while providing effective operating systems. Contact GPP to help with all of your bookkeeping and tax needs in your practice.