What Are the Common Cash Flow Mistakes Dentists Make?

When managing cash flow, dentists often make mistakes that can have serious financial consequences. Cash flow is a critical part of any business, and dental practices are no exception. 

Unfortunately, cash flow mistakes can be difficult to recover from and can even lead to a practice’s closure. 

What Are the Common Cash Flow Mistakes Dentists Make? 

Financial problems are common for dentists because they typically lack commercial and financial knowledge. One of the main contributors to these problems is poor cash flow management.

Any business depends on cash flow, and dentists are no different. You, as a dentist, need to be aware of the typical cash flow errors that could harm your practice. 

If cash flow problems are not addressed, they can cause financial difficulty and possibly bankruptcy.

Not getting money from patients upfront is one of dentists’ most frequent cash flow errors. Patients frequently fail to pay their fees, leaving the dentist to cover the costs. 

In the event that the dentist has the resources to meet the fees, this could result in severe financial hardship.

Another common mistake does not have an effective billing system in place. Without a proper billing system, keeping track of payments and ensuring patients are billed properly can be difficult.

But if you don’t know what to look for, how can you know what has to be corrected? Here are five challenges dentists typically encounter while attempting to increase their cash flow.

Distribution of Income and Business

You can address various other monetary difficulties by choosing the right company form and revenue schedule for yourself and your practice. 

An S-corporation is the ideal business structure since it enables a dentist to continue to own the company and receive a W-2 with taxes deducted from each paycheck.

However, an accountant for a dentist might recommend a sole proprietorship to lower tax responsibilities. 

Because 100% of your income from sole proprietorship distributions cannot be matched as frequently, it may be more difficult for you to save for retirement. You’ll lose a lot of money if you don’t think strategically.

Debt Handling 

Dentists avoid debt naturally, which sounds better than it is. They’re more likely to write a check than use financing for equipment that costs more than $30,000, which may completely deplete your checking account.

It will be tough to keep a consistent amount of cash in your accounts to address unforeseen needs if you pay for equipment and other planned expenses all at once. 

Debt may sound stressful, but compared to owing money on a tax bill due to that fancy new x-ray machine, it is significantly less stressful.

Paying Taxes 

How you pay your taxes depends on how your business is set up. Taxes are taken from your W-2 wages every time you get a paycheck, but a dentist cannot give you money. 

S-corps and sole proprietorship-run businesses must make extra tax payments to cover the debt incurred through distribution payments. 

However, if distributions are your sole proprietorship’s only source of revenue, you must use this method to pay all of your taxes. And these costs can accumulate.

Decision-Making

Having outside counsel is beneficial when making decisions about things like modest equipment purchases, staff pay hikes, or fee increases.

CPA for dentists is responsible for providing financial guidance and advice to their clients, which includes dentists. CPAs help dentists stay organized and manage their finances in a manner that is both efficient and effective. 

They are knowledgeable in accounting, auditing, taxation, and financial planning. 

Furthermore, they can provide timely and relevant advice that helps dentists make informed decisions. 

Conclusion 

Dentists are prone to make cash flow mistakes due to their lack of expertise in financial management. Common mistakes include not having a budget, not tracking cash flow, not collecting on accounts receivable, and not having a system for paying bills. To avoid these issues, dentists should hire dental accounting firms in MA to help them manage their finances. 

Ash Dental CPA provides accounting for dental and healthcare professionals. Speak with a CPA for dentists today!