Although it may be easy for owners of dental practices to assume that once a tax return has been filed, there is little else that can be done to steer their business in a more profitable direction, this isn’t in fact, the case.
The reality is that a tax return is really only good for answering the question of what is owed once the year has ended, and does precious little to help practice owners understand the performance of their business financially, while decisions are ongoing.
In essence, all a tax return does is give you a summary of the past. And although solid dentist tax planning can certainly help you reduce your tax liability, it can’t give you a window into the present while also offering you a glimpse into the future, as good financial reporting can.
What is missed in a tax return
Tax returns consolidate income and expenses in a way that conforms with IRS rules, but the details that really matter to a dental practice owner, are often blurred. Timing of cashflow, monthly performance trends and margin pressure often get lost on a return that has been finalized months after the end of the year.
Unfortunately, this often accounts for dentists feeling busy and therefore assuming that their practice is profitable, when in reality, they can’t be sure whether their financial position is improving or not. A tax document simply can’t provide them with the information they need to grow their practice, and enjoy sustainable growth.
What role financial reporting can play in a practices fortunes
When profit-and-loss statements are regularly reviewed, along with balance sheets, practice owners can get a much clearer picture of how their revenue is being translated into profit, see if expenses are appropriately scaling, and better understand how cash is being moved through the practice over the course of time.
With visibility like this all year round, decisions surrounding the buying of equipment, hiring of employees, and expansion, are better supported and made with careful planning, rather than as a kneejerk reaction to year-end results. Should adjustments be needed throughout the year, practice owners can go ahead and make them with confidence, before they have a chance to negatively impact year-end results.
The difference financial reporting can make to others, too
From lenders and buyers, to potential partners, the prevalence of clean and consistent financial statements is of great significance; helping them to accurately evaluate the practice’s stability, risk and value. While tax returns must of course be completed, they are of little use to people outside of the practice itself.
Inconsistent or unclear financial reporting quickly raises questions and can add a layer of unnecessary complication to financing, as well as increase the time it takes for transactions to be completed.
Even if you aren’t planning to sell your dental practice in the near future, accounting for dental practices can help you maintain robust reporting, which in turn, can be helpful should a financial opportunity or challenge arise.
There’s no escaping tax returns: they will always be necessary. But financial reporting that is accurate, timely and consistently reviewed, is guaranteed to give you a much clearer and more insightful window into the finances of your practice.
