AUTHOR: The Dental CFO
March 23, 2023
After dental school and years of practice, you’ve obtained a library’s worth of dental terminology. But financial terms? Well, they’re not exactly covered during the three years when you’re learning to fill cavities and identify gum disease.
As a dental practice owner, you’ll want to be familiar with a whole new set of financial terms and definitions. You don’t need to be a financial expert, but knowing a bit about the language of finance will help you make sound decisions and be a better business owner. Plus, when you sit down with your accountant or a financial advisor, you’ll better understand the topics they cover.
Below, we’ve compiled a guide to the most common financial terms and definitions. It’s a great starting point as you learn more about the financial side of your practice.
Basic Financial Terms
These financial terms are the foundation of your practice’s accounting and bookkeeping. They’re the building blocks for understanding more complex financial terms and concepts.
Assets
Assets are the things in your practice that hold economic value. Your practice has many assets, from the chairs in your waiting room to the value of the business itself. Assets are typically classified into four categories:
- Current assets
- Fixed assets
- Financial assets
- Intangible assets
Current assets are things like cash, inventory, and accounts receivable. Think of current assets in the short term. For example, if you’ve billed a patient and expect that payment in the next 30-60 days, you can consider that a current asset in your accounts receivable.
Fixed assets are long-term. This category includes the equipment you purchase for patient care and procedures. If you own your building, it’s also a fixed asset. Fixed assets can be depreciated over time as they age.
If your practice has investments in securities, like stocks or bonds, those are classified as financial assets. Their value varies on market conditions.
Your business also has assets not defined physically or based on financial value — intangibles like intellectual property, goodwill, patents, or trademarks. If you’ve built a great practice and you’re well-regarded in your market, there’s value in that reputation.
Liabilities
A liability is something you owe. Liabilities include any kind of debt your practice has on the books, like a loan from a bank. Your accounts payable are also liabilities, such as payments you owe to vendors or other parties. On the balance sheet (which we’ll cover later), liabilities oppose assets.
There are two primary forms of liabilities: current or near-term liabilities and long-term liabilities.
Current liabilities are debts you’ll pay out in a short time frame. Examples are your payroll or wages payable. If you have interest-bearing credit accounts, the interest is also a near-term liability.
Non-current or long-term liabilities are typically paid in 12 months or more. A typical long-term liability is bonds payable. For example, you may issue a bond to help fund operations at your dental practice. The issue and maturity dates affect how long that bond is outstanding.
Another example is post-employment benefits. If an employee retires from your practice and receives benefits at that time, it’s typically categorized as a long-term liability as it accrues.
Income
In your dental practice, income represents the money your practice receives for services performed. There are several income categories, but most commonly, it’s defined as gross income and net income.
Gross income is your total income, which is normally all of the money you’re paid for the dental services you provide.
Net income is your income after expenses and taxes. It represents what’s left over after you’ve paid for the costs of operating your business and your tax obligations.
Expenses
Your expenses are all the costs of running your business. Expenses include the salary you pay employees, the rent or mortgage for your office, and the purchase of supplies, and equipment such as computers and clinical equipment you use to treat patients.
Many expenses can be deducted from taxes to ease the amount you owe. Expense deductions are essential to business ownership, so working with an accountant who understands the dental industry can help you take advantage of all your deductions.
Investment Terms
In the glossary of financial terms, investment terms are important to understand.
Stocks
The word “stocks” usually brings images of the New York Stock Exchange and large publicly traded companies. But stocks can play an essential role in a dental practice as well.
Most dental practices have one or a few owners and aren’t publicly traded companies. These owners control the company and are responsible for its success or failure. In certain situations, it may be beneficial to take on additional owners in the business.
In that case, you could issue shares based on the percentage of ownership someone is taking on. This could be beneficial if you want to expand the practice and raise cash, or if you want to transition out of the business and bring on new leadership.
Bonds
Bonds are like an IOU. Businesses issue bonds to raise money without giving up control of their company. Unlike stocks, a bond purchaser doesn’t receive a stake in the company when they buy a bond. Instead, the bond issuer is making a promise that they’ll pay back the money with some interest.
It’s an effective vessel for a company to leverage capital without taking shareholders or taking out high-interest loans.
Mutual Funds
A mutual fund is an investment tool that mixes a variety of investable assets, including stocks and bonds. They’re managed by a financial professional who aims to earn a positive return on your investment.
Mutual funds earn returns through dividends, capital gains through the sale of funds, and selling shares at a higher price than when purchased.
Dividends
Dividends are the portion of a company's profits paid to shareholders. It’s typically a process for publicly traded companies, but if you’ve issued private stock through private equity, those shareholders may also receive dividends based on their investment.
Financial Reporting Terms
To run a successful business, you have to understand your numbers. The following financial accounting terms are related to the organization and assessment of your business's most important financial details.
General Ledger
A general ledger is your practice’s primary record for business transactions. It gives a detailed report of what’s coming and going out of your business. It’s a vital financial term because all of your financial statements will be created from the general ledger.
It’s a cornerstone to having insight into your dental practice’s financial health.
Balance Sheet
The balance sheet is like a picture of your dental business’s finances. It only represents a moment in time and gives information on your practice’s assets and liabilities. It’s a tool for seeing how much equity is in your business because it shows how much you own versus how much you owe.
Income Statement
An income statement shows your business's income and expenses. Sometimes it’s called a Profit & Loss (P&L) statement.
This report shows how much revenue your business is earning and what you’re spending. It’s a great way to see how your business functions, how much you’re spending, and areas to improve.
Performance Analysis
A performance analysis reviews and evaluates your practice’s financial performance. It’s a valuable tool because it looks at the entire picture of your business, from your assets and liabilities to financial functions like pricing, billing, and bookkeeping.
Tax Terms
Some of the most critical business financial terms are tax-related. Understanding these terms will help you and your accountant create an advantageous tax strategy for your practice.
Property Tax Listings
If you own property, like the building or office where you practice, you’ll likely be charged property taxes (depending on your state). A property tax listing can show you the historical tax cost and how your local government assessed the value of your property.
1099 Forms
A 1099-MISC form is used if you pay anyone (excluding payroll employees) more than $600 during a calendar year. These are payments on which you don’t withhold taxes.
If you hire a freelance web designer to help with your website or pay an individual to run your social media accounts, you’ll likely need to issue a 1099 for them at the end of the year for tax purposes.
It may also be needed if you utilize a temporary hygienist or office worker to support your business and don’t hire them as an employee.
Sales and Use Tax Returns
Sales and use tax returns report the sales tax you recorded to the state.
Sales taxes are collected on tangible goods, so you won’t collect or report them on your dental services. But if you sell products like teeth whitening strips and mouthwash, sales tax must be collected at the time of sale and reported with a sales and use tax return.
We’re Your Guide to Running a Financially Sound Practice
This glossary of financial terms can be a lot to take in. After all, you went to dental school — you’re not an accountant or financial advisor. But knowing these terms can give you a deeper understanding of your practice’s finances, and it makes conversations with financial experts easier.
Our team specializes in working with dental practices, so these financial terms and how they apply to your business are second nature to us. We can work alongside you to create a financially sound practice. We’ll determine where you need support and create a plan to help you meet your goals.
Request a free consultation to learn more and find out what it’s like to partner with The Dental CFO.
