Planning to transition your practice? The strength of your financial documentation can significantly impact your practice's valuation. As we begin a new year, it's the perfect time to get your financial house in order, whether you're actively planning to sell or simply exploring your options.
Let's dive into the four essential financial reports you need to master, along with expert guidance from our diligence and transitions specialist, Cornelia Hinkle, on how to pull and interpret them effectively.
1. Quarterly Financial Close-Out
Start by generating your production and collection reports to send to your CPA, who will create your balance sheet and Profit & Loss Statement (P&L). Your CPA should verify that your reported revenue aligns with collections from both patients and insurance payments, as shown in your practice software.
Pro tip: Collections from patients and insurance should match the collection report from your dental software exactly.
2. Practice Management Reports
Understanding your collection and production metrics is crucial for demonstrating practice health. For in-network insurance practices, aim for a collection-to-production ratio of 96-98%. Fee-for-service practices should target 98-100%. These metrics showcase your practice's financial efficiency to potential buyers.
Remember that gross production represents your standard service fees, while adjustments reflect insurance company discounts. For example, if your fee schedule shows $100 for a service but Delta Dental reimburses $60, you'll have a $40 adjustment.
3. Accounts Receivable Analysis
Generate a standalone accounts receivable report from your practice management software. Focus on both insurance and patient balances, paying special attention to claims over 60 days old. For insurance claims, determine collectibility and take appropriate action – either following up with insurers or closing uncollectable claims. For patient balances, review for accuracy and initiate collection procedures when necessary.
4. Credit Balance Review
Pull a separate credit balance report to identify true patient credits versus prepaid treatments. Review each account carefully, considering any open claims for family members before issuing refunds. This clean-up demonstrates strong financial management to potential buyers.
Why Separate Reports Matter
Many practice owners struggle with generating these reports independently because practice management software often combines credits with existing balances. This mixing can obscure your true financial picture. Pulling standalone reports provides the clarity needed for accurate financial analysis.
Taking Action
If you're considering a practice transition in the next few years, start monitoring these reports regularly. Understanding your practice's financial metrics not only helps maximize your eventual sale price but also creates a more efficient transition process.
Don't worry if this seems overwhelming – many practice owners find these reports challenging at first. Our team at Practice Transitions Group specializes in helping owners understand and optimize their financial reporting systems. We're here to guide you through this process, ensuring you're well-positioned when you decide to list your practice.
By mastering these financial reports now, you're taking a crucial step toward maximizing your practice's value and ensuring a smooth transition when the time comes to sell.
