Want to compare your dental practice overhead to industry averages? Then, you need an optimized Dental Chart of Accounts in your bookkeeping. In this Percentology post, you will learn five simple steps (with a downloadable Chart of Accounts template) to optimize your Dental Chart of Accounts for dental overhead benchmarking.
Steps to optimize your dental practice Chart of Accounts:
Separate payroll accounts by department
Track outsourced services that replace staff
Make Patient Refunds an income account
Don't use sub-accounts
Simplify your Chart of Accounts
What is a Chart of Accounts?
All right, let's start with the basics. What is a Chart of Accounts? Simply put, a Chart of Accounts combines all the accounts used and listed on your practice financial reports. It includes accounts such as expense accounts, income accounts, fixed asset accounts, and so on.
You can call it your list of accounts, but in the accounting world, it's formally a "Chart of Accounts." All businesses use a Chart of Accounts in their accounting software to do their bookkeeping. You can't generate your financial reports or do proper bookkeeping without it.
Focus on the Profit & Loss accounts:
To optimize your Dental Practice Chart of Accounts for dental overhead benchmarking, we will only focus on the income and expense accounts listed on your dental practice's Profit & Loss report, not the Balance Sheet.
That is because you only use the Profit & Loss report accounts when benchmarking dental overhead percentages.
What makes it a Dental Practice Chart of Accounts?
A Dental Chart of Accounts differs from a standard Chart of Accounts because the Dental Chart of Accounts is designed especially for a dental practice to monitor key performance indicators from the Financial Reports. To be more specific, it's specially designed for dental overhead benchmarking.
What is Dental Practice Overhead Benchmarking?
Dental overhead benchmarking is our expertise here at Percentology. Every dental practice can organize the expenses on your Profit & Loss report into the same six overhead categories and then compare your overhead against the average of other practices to see where you stand. Knowing where you stand gives you key insight into your practice performance.
Now that we have all of those explanations out of the way, it's time to adjust your Dental Chart of Accounts using my tips below. You'll have an optimized Chart of Accounts for easy dental practice overhead benchmarking moving forward.
Separate payroll accounts by department:
One change you can make to your Dental Chart of Accounts that will make the biggest impact on dental overhead benchmarking is categorizing the gross pay/wages by department each pay period.
Departments for dental overhead benchmarks:
Owner
Associates
Dental Assistants
Hygienists
Office/Admin
Owner's Spouse
Owner's Family
Separating the gross pay by departments per pay period will allow you to benchmark your team costs against industry averages, apples to apples.
👇 The payroll department expense accounts should look something like this on your practice's Profit & Loss Report (Dental Chart of Accounts):
Payroll accounts on the Dental Chart of Accounts:
Gross Pay - Owner
Gross Pay - Office/Admin
Gross Pay - Dental Assistants
Gross Pay - Hygiene
Gross Pay - Associates/Doctors
Gross Pay - Spouse/Children
Payroll Taxes - Owner (employer portion only)
Payroll Taxes - Staff (employer portion only)
Payroll Taxes - Associates/Doctors (employer portion only)
Payroll Taxes - Spouse/Children (employer portion only)
Health Insurance - Owner/Family
Health Insurance - Staff
Health insurance - Associates
Pension Matching - Owner
Pension Matching - Spouse/Children
Pension Matching - Associates
Contractors - Doctors (paid 1099)
Contractors - Temps (paid 1099)
Optimization Suggestion:
There is no reason to break the departments down even more, like front office, back office, office manager, sterilization techs, etc. You can't compare apples to apples that way, so it doesn't provide any real value and becomes redundant. Keep it just to the essentials.
Common Mistakes:
I often see dentists make the mistake of including the associates in personnel (team) expenses when calculating their dental practice overhead percentage. Don't do that. Associates are part of the "Owner's compensation" category.
The associates' costs should be treated like the owner's costs to compare the overhead expenses against industry averages apples to apples, so it's important to track associate compensation in separate expense accounts from the rest of the team on your Dental Chart of Accounts.
Note about Spouse/Family payroll:
Separating Spouse and Family expenses in the Dental Chart of Accounts allows you to be flexible about including them in your dental benchmark categories based on their activity in the office.
If the spouse is truly providing a role that would have to be replaced for a similar amount in payroll if they stopped working in that role, then the spouse should be included in the Personnel (Team) costs of the practice overhead benchmarks.
Track outsourced services that replace staff:
To be able to compare a wide range of practices, apples to apples, our team watches out for differences in the outsourced expenses vs. in-house staff expenses that might skew the dental benchmarks.
For example, if you utilize an outsourced billing service instead of having an accounts receivable person in-house doing this role, we want to have those expenses in the same place as you'd have the in-house person to compare apples to apples with other practices. That's because most practices use an in-house employee for their billing/collections.
So, in the Personnel (Team) category of the practice overhead benchmarks, we put expenses commonly provided by staff in the practice but occasionally outsourced.
You'll want to track the specific outsourced services that replace staff in their own expense accounts, such as the below:
Answering Services/Scheduling Services
Collection/Billing Services
Note: Don't go crazy with this and start including software applications because you consider those expenses to be replacing staff. I'm just talking about the common big-ticket items you'd see staff doing in the average practice, usually scheduling and billing services.
Make 'Patient Refunds' an income account:
Calculating practice overhead percentages is based on the percentage of income. So if your total income isn't correct at the top of your Profit and loss report, then none of your overhead as a percentage of that total income will be correct either.
Patient refunds (including insurance refunds) should be an 'Income' type account on your Dental Chart of Accounts. That's because it's a return of collections that were never meant to be counted as income, so you'll want your total income reduced by the patient refunds. Then your overhead expenses, as a percent of your true income after refunds are subtracted, will be accurate.
When we get a new set of books to clean up, it's very common to find the patient refunds in the expense accounts, not an income account. So, all you have to do is go into your QuickBooks Chart of Accounts and edit the account type to reflect a primary income account.
Patient Refunds to Credit Cards:
When you have patient refunds that go back to the patient's credit card, it will sometimes appear in your bank transactions as an expense. So, those will mistakenly be recorded in the merchant fee expense account. However, those credit card refunds should be in the Patient Refunds income account.
Care Credit Income:
Some patient financing companies, like Care Credit, will deduct their fees right from your deposits instead of separately charging their fees. Then, when you record the deposit, your total income is lower due to those fees.
Therefore, you must add those fees back to your deposits in the Patient Fee Income account on your Profit and Loss report. Merchant services or financing fees shouldn't lower your income.
Adding the fees back to income will show the true income before the fees were taken out, which is the income for which you want to calculate overhead percentages. At the same time, you will be moving the fees to the Merchant Fees expense account on the Chart of Accounts.
Don't use sub-accounts:
Sub-accounts being super overused on the Dental Chart of Accounts is probably one of the biggest reasons we find a lot of mistakes in bookkeeping, and then the quality of the dental overhead benchmarking plummets.
When you record transactions while using sub-accounts, it becomes increasingly difficult to know if you are recording those transactions in the correct sub-account under the 'Parent' account' because the sub-accounts create chaos and are easily confused. If you are familiar with dental bookkeeping in QuickBooks Online, then you already know what I'm talking about.
Not only are the mistakes negatively impacting sub-account usage, but when it comes time to review your financial reports, they are like a Monet painting. Far away, it looks okay, but up close, it's a big old mess. (Quote from the movie Clueless 😂)
Exception for sub-accounts:
The only exception to using sub-accounts on your Chart of Accounts is for the Gross payroll and employer portion of payroll taxes.
Since we recommend splitting the payroll expenses by department, the sub-accounts help keep it all together so you can cross-check the total gross pay and employer taxes with your YTD payroll reports.
Payroll expenses are recorded differently than other expenses. We put payroll transactions into one account called "Payroll Clearing," and then we use an adjusting journal entry to split the payroll transactions into departments, all sub-accounts.
We don't run into any trouble with sub-accounts because we don't record the transactions the way everything else gets recorded. So, sub-accounts for payroll accounts are okay in this instance.
Simplify the number of accounts:
The biggest mistake I often see with many Dental Chart of Accounts is how complicated dental practices make it (this also includes the sub-accounts issue above). Your Chart of Accounts doesn't need to be so complicated for tax returns or dental benchmarks.
A dental practice's Profit & Loss report should have a maximum of 90-100 accounts. Less is more, as long as you have the essential accounts for overhead benchmarking and tax records.
Maintaining a complicated Dental Chart of Accounts will make maintaining dental benchmark analysis more difficult in the long term. Keep it simple! I promise you'll be happy you did! 🙌
Recap:
Phew! That was a lot of good information. If you set up your dental practice's Chart of Accounts correctly from the start, you will have a super easy time with your dental office bookkeeping, dental benchmarking, and tax returns. Heed my advice above, and you'll thank me later! 😉
Here is everything you learned above:
How to separate payroll expenses by department, and what departments to use, because this is vital for benchmarking.
Tracking outsourced services in their own accounts because they are replacing staff and should be categorized as such during dental overhead benchmarking.
Why patient refunds should be an income account, not an expense.
Use sub-accounts only for gross payroll and the employer portion of payroll taxes; don't use sub-accounts for anything else, or benchmarking will be a headache.
Simplify the number of accounts used to only the essential accounts for benchmarks and tax records. Anything beyond that, and you are just giving yourself more work with no real value added.
Download our Dental Practice Chart of Accounts Template:
For over 10 years, we have used one Dental Chart of Accounts template for all 150+ dental practices utilizing our dental bookkeeping service.
Minor adjustments have been made to keep it modern, but overall, our Dental Chart of Accounts template doesn't change. It's the perfect setup for any dental practice.
If you want to download our Dental Chart of Accounts template, click the link below, and we will send it to your email. I'll even add some more valuable tips when using our Dental Chart of Accounts to help you get more value from your bookkeeping.
