10 Questions to Ask Yourself When Reviewing Your Monthly Financial Statements

Welcome back to The Dental Boardroom Podcast with Wes Read.

In this follow-up to our previous episode on structuring your Profit & Loss (P&L) statement with Wes Read CPA, CFP, we dive deeper into the how of using your financials strategically.

This episode walks you through 10 essential questions—or rather, areas of focus—to ask each month when reviewing your financial statements. These questions will help you uncover trends, evaluate performance, and guide your practice toward long-term financial health.

Wes also breaks down how to align your collections with personal financial goals like retirement and financial independence. He shares real-world advice on navigating fluctuations in revenue and expenses.
Whether you're a seasoned practice owner or new to analyzing financials, this episode is packed with actionable insights that will help you become a more financially empowered business owner.

Key Points:
How to read your P&L like a narrative, not just a spreadsheet
Monthly collection tracking: comparing last month, YTD, and last year
How to know if you hit your goals-based breakeven point
Strategies for consistent collection growth through marketing and operations
Identifying outlier expenses and validating through the general ledger
Why your practice financials should align with your life vision
Question 1: What were my collections last month and year-to-date (YTD), and how do they compare to last year?
Understanding variations in collections and what they indicate
Question 2: Did I reach my goals-based breakeven point for the month and year?
The importance of setting and measuring against personal financial goals
Question 3: How can I grow my collections consistently?
The role of marketing, operations, and planning in revenue growth
Question 4: Do any expense categories look too high or too low?
How to review the general ledger to validate expenses
Mindset: Be intentional about aligning your practice’s performance with your life goals.

DentalBoardroomPodcast #WesRead #DentalFinance #ProfitAndLoss #DentalPracticeManagement #FinancialPlanning #PracticeOrbit #DentalBusiness #DentalCFO #CollectionsGoals #DentalGrowth #PlanAndProfit #FinancialIndependence #DentistLife

Transcript:

Wes Read: [00:00:00] Welcome everybody to another episode of the Dental Boardroom podcast. In my last episode, I gave an overview on how to structure your profit and loss statement to teach you a story to tell you about the economics of your business and to make good decisions as a business owner. I hope you found it helpful.

Well, this episode is a follow-up to that one. It's like an addendum. It is. 10 questions to ask yourself when reviewing your financial statements each month. You can write these down and then you can use them as a guide to walk you through the analysis of your profit and loss statement. If your profit and loss statement doesn't give you the information to ask these questions.

Then you need to talk with your accountant, bookkeeper, or CPA to structure your financial statements to give you an answer for these, and ideally give you an answer really at a glance [00:01:00] so you don't have to do a lot of due diligence or analysis or additions, subtractions, et cetera, to arrive in an answer to these questions.

It should just be stated. Now I love, I love the visuals. I love the bar charts. I love the line graphs. I love comparison of the actual to the budgets or goals that I set. That way it's really easy to not only see how you did for the most recent period, like the most recent month, but really how you're trending over time, and that sometimes is the most valuable observation to make in your practice financial trends.

Okay. Here are the 10 questions. Number one, what were my collections last month, year to date, and how do those compare to the same periods last year? And what explains the variation? Alright, now I said 10 questions. You know what? It's actually 10 [00:02:00] sort of areas of focus. So that obviously is more than one question, but it's all related in the same sort of main question.

What is the health of my collections and collections is your revenue. And you'll hear people like me oftentimes label that or call that your top line. Your top line is the money that landed in the bank from patients and insurance companies. The bottom line is how much of that is left after all of your overhead?

Bottom line, top line. They're both. Relevant. At the end of the day though, it is the bottom line that takes care of you, that feeds you, that pays your taxes, debt funds, your future self, et cetera. So the bottom line matters. I would much rather have a million dollar practice with a bottom line of 400,000.

Then a $2 million practice with a bottom line of four of, of 400,000 because in the second scenario, I'm probably running a more complicated practice. That's probably requiring more of my time, more HR stuff, [00:03:00] more operational stuff, more vendors, just more stuff going on than the $1 million practice, and I would prefer to have the same income on therefore, in other words, I'd prefer the simpler model for that 400,000.

Now, if I could get 800,000 on the $2 million practice and I'm not working twice as much, I would probably go with the $2 million. $800,000 practice. $2 million collections, $800,000 practice. Alright, so this first question though, what were my collections last month? And if you recall for my explanation of the p and l, it showed one column for the month, the most recent month.

Ideally, you're getting these by around the 15th, plus or minus. For the month, year to date. So if you're right now we're in April, so January through March. And how do those two compare to the same period last year. So how did your March compare of this year, 2024? How did that compare to [00:04:00] last year, 2023.

And how did the first three months of this year compared to the first three months of last year, and what's the variation and why? Why is there a variation? If it's a marginal difference, well then it doesn't really matter. It's just life is moving forward as normal in your practice. Now, I generally don't care as much about the month.

I care more about the year to date because I like to see a longer period of time because that gives me a more reliable indicator of how I'm I'm doing. But if there is a big variation, let's say you're in. August, and you have financials through July. That's seven months, over half the year. If you compare that to the prior year, and let's say you're down by 23%, you wanna know why?

I know you're filling it, your bank account is probably lower. You're taking home probably less, but you really need to know why. Is it because I don't know. [00:05:00] Dental practice opened up down the street and just marketing like crazy. Is there a fallout in some of your staff? Maybe some hygienists have left, or associate has left.

Why? What's going on here? And that's where you make key decisions. That will target getting your collections back up and let's say your 23% over last year. I also think that's really important to know why you have an increase in your collections as well. Keep doing whatever you're doing now. In a minute I'm gonna get down to.

What is your profit as well, if your collections went up 23%, but your profit stayed the same, that's no good. That right there just means more work for the same income. So that's a different question you're gonna ask here. That's number one. What were my collections last month, year to date? How does that compare to last year, the same period?

And why the variation? Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a [00:06:00] fragmented market with transaction costs so high, many dentists selling their practice feel discouraged.

That's why I built practice orbit.com. Practice orbit is modernizing how dental practices are sold. It's an online marketplace platform and it brings together buyers, sellers, and their teams to smoothly navigate a transition. When you list your practice for sale on practice orbit, you'll present a detailed and polished profile of your practice.

You a large pool of potential buyers. Think of it like a Zillow home profile, but for your practice, and importantly, that profile will remain anonymous. Which means you can showcase your practice without worrying about the public or team members. Finding out only after an interested buyer signs an NDA will that buyer see your name, address, and practice pictures.

And at Practice orbit, we have a team deeply experienced in dental practice sales. Our broker and support team will hold your hand each [00:07:00] step of the way when you combine the power of Marketplace technology with the highly qualified team at Practice Orbit. The result is a maximized sale price and a smooth transition timeline.

And hey, buyers, you can search for practices. Submit NDAs and tender offer letters directly within the platform. You can even create saved searches and be auto notified when a new practice comes for sale in your market. If you're thinking about buying or selling a dental practice, create your free account today@www.practiceorbit.com.

Number two, did I reach my goals based break even for the month and am I reaching that goal for the year? Now, I've talked about this a lot as a financial planner. We at practice, CFO, will do personal goal setting with our clients. For example, when do you want to stop working? You may not stop working, but when you want to be able to stop working, that is the [00:08:00] day at which we define you are financially independent.

You can live off the income from your assets, maybe coupled with some social security income in there. When is the day that you have enough income from stocks, bonds, real estate, et cetera, such that you can stop working if you want to. We define that and then we back into today to say, okay, in order to build those assets, in order to fund that 401k, in order to buy that real estate property, in order to fund the DB plan, et cetera, to fund the IS the Education 5 29 account for kids in order to meet those goals.

How much do you need to collect today, each month on average in your practice, such that a after overhead taxes, debt. Et cetera. You are on track for that future in the financial independence goal. Now, there's no way that you're really gonna be able to determine that goals-based break even. Let's say that's a, let's say that's 150,000 in monthly [00:09:00] collections.

There's no way you're gonna be able to define that unless you take the deliberate effort and be intentional about this. But the deliberate effort to meet with the financial planner. Or possibly if you're savvy enough with sort of some free online tools or Excel spreadsheets to run some forecasts, factor in inflation, investment returns, et cetera.

Most of my clients would prefer to delegate that one to a financial planner. But you've gotta, you've gotta be intentional about doing that exercise, talking with your spouse if you're married, or just thinking internally if you're not, what is my game plan for financial independence? What do I want my money to accomplish for me in my life such that my life has meaning to it?

How do I make sure that that my money enhances my happiness and it doesn't eclipse it by creating problems? And so you define this goal space break even, and now you have truly a reason to go into work today. Not just to pay [00:10:00] your, your, your debt off or to pay yourself today to live, but also to fund that future goal that we all aspire to of financial independence.

So what is that financial, that goals-based break even? And then this second question is reviewing your financial statements and saying, am I averaging for the year my averaging? My goals base break even. And if you are not there, then you gotta make the hard decision to go back to your financial plan and say, do I reduce the amount I'm gonna live on in retirement or when I'm financially independent, or do I push out the day that I'm financially independent?

So instead of becoming financially independent 55, I push that out to 60. Or maybe I don't fund as much for my kids' education, or maybe I don't buy as big of a house, but. There's, there's these, this interplay between what you're, you're collecting in your practice and your ability to meet those personal financial goals.

[00:11:00] And sometimes you have to find a middle ground that is realistic, realistic of what you can collect today based on what your goals are for the future. And as long as you have that map. Then you are properly motivated to make decisions that will meet your life goals, and you're being intentional about those goals.

And you may say, no, no, I'm not gonna back up my retirement to age 65. I'm not gonna back up my age of financial freedom to 65. It is going to be 55 period. If that means I need to grow my collections from $60,000 a month to $120,000 a month, then I'm gonna lean in. I'm gonna look at marketing, I'm gonna look at operations.

I'm gonna look at the way to do this, and I'm gonna get my collections up to 120,000 a month because I have that goal and I'm gonna make it happen. I'm gonna, I'm gonna come up with that business plan. So that's up to you. That's a little bit of horse trading. I call between your future self and yourself today on what, how hard you wanna work, how much [00:12:00] you wanna spend a day, and how much you're.

Capable of saving for that future time. So second question is, did I reach my goals based break even for the month and for the year? Number three, how can I grow my collections? Now here at Practice CFO, we are the external chief financial officer. Chief financial officers or CFOs typically don't get involved in the conversation of how do we grow revenue?

That's really the CEO, the chief marketing team, the sales and marketing department of these big companies. Well, in a dental office. Usually you'll have a marketing company that you hire to help you grow your collections or, and, or you have a practice management consultant who helps you do that. Now, here at Practice CFO, we openly and assertively claim we are not practice management consultants.

We don't compete with them. However, we'll do some basic things like run a UCR analysis to see where your fees line up. That's easy. [00:13:00] We subscribe to a resource that lets us do that pretty quickly. And, uh, we can talk about some basic things around fee for service. Uh, run some math around going fee for service, things like that.

But in your p and l, as you look at your top line collections, I do every month want you to ask, how can I increase my collections? The more that you increase your collections, the more you're able to meet those personal financial goals. So ask yourself that. Number four. Do any expense categories look too high or too low?

If so, review the transaction details in the general ledger. What I mean by this is if you're looking at your p and l and you're looking at like your dental supplies, and your dental supplies are at 15% of your revenue year to date. So let's say your revenue year to date is a million dollars and you paid $150,000 to Patterson and Shine and the like, that's [00:14:00] 15%.

Dental supplies should be way lower. They should be closer to somewhere around five to maybe seven or 8%. That's where they should be. And now there are variations of that depending on what type of specialty you are and whatnot. And I talked about this in my last podcast. You should look at where you are and if any of these categories, like your labor, like your supplies, like your labs, like your admin, if these things are too high or too low, but especially if they're too high, then what you wanna do is you want to go to the general ledger.

What's the general ledger, Wes? Well, I'm the CFO trying to educate you as the CEO. There are certain basic accounting and tax terms that I think every business owner, including dental practice owners should know. General Ledger is one of them. The general ledger is an addendum to your financial statements that shows every transaction, meaning every dollar that hit your income through your bank account, and every [00:15:00] expense that came outta your checking account or your credit card account will be listed on your general ledger.

For example, if your dental supplies, going back to my example for the year, were 150,000, and you go to your general ledger and you go down to the the dental supplies section, you'll see as of January one going through to the end of the most recent month, a list of every payment that was categorized as a supply expense.

So every payment that goes to Patterson, every payment that goes to Henry Shank. Spur card, Nobel, there's a lot more you. You all know those. Those all will be listed in that list and you can see then, okay, it is 150,000. That actually makes sense. That actually makes sense. And now really the decision is, can I bring that down because that is remarkably high.

Now, if you're at seven or 8%, I think you're probably good. You can still go check it out. And I do recommend you go down your entire general ledger just to be familiar with the transactions, make sure [00:16:00] your CPA is categorizing them accurately, but always look at where you are over spending. Now in this example, in this example, it's possible that you bought a new dental chair from Henry Schein.

A dental chair is not a supply, but maybe your CPA saw. Henry Schein and automatically categorized it to supplies that should be removed out of supplies, and that should be categorized as what's called a fixed asset, which is an asset that goes on your balance sheet as a, as a thing you own that's worth value that you could sell, and then it gets depreciated on your profit and loss statement.

It's really important that you make sure that these equipment, or what are called capital expenditures, do not show up as expenses on the p and l directly. Okay, so the only way to know whether your categories are too high or too low is to know what percentage of that expense category it is of your revenue and how that stacks up relative to industry standards.

[00:17:00] Which goes on to my next question. Number five, how were my expense ratios relative to industry standards? Ask yourself that question. So as you go through those different categories. Of labor lab supplies, facility marketing and admin, there should be a target there. Based on your specialty. If you're an orthodontist, you should know what your expected target is for your labor, for your admin costs, for your facility costs, and you want to compare yourself to what those standards are.

And this isn't a, I want to compare myself to the Joneses down the street. It's not that. It's not that at all. It's that in your industry there is universally accepted. At least by sort of consultants and CPAs and the like. There is a universally accepted. Range or budget in these various categories that are indicators or [00:18:00] markers of a healthy practice of a healthy financial structure.

Better said. And so your CPA, if you're with a general CPA, they're not gonna know this. They're not gonna know how much you should be spending on labor as an endodontist. They're just not used. You essentially have to go to specialists or you've gotta research this online. Chachi PET could probably help you out, give that to your CPA, and then ideally they can build in a report that just does that automatically, or if your financial statements are structured.

Like I presented in my last podcast, you get those from your CPA and then you can compare it to a separate sort of reference sheet that you have, which literally could be a sticky note to compare how you did against the industry standards. So that's, that's one of the most important questions right there, that tells you whether or not you have a healthy overhead.

Number six, where could I reduce my expenses more? Now building wealth and creating a strong cash flow. Out of your practice to fund your [00:19:00] personal life is a function of two basic things. At the end of the day, your collections and your expenses. Now, most of the time that a doctor is struggling with cash flow, they oftentimes or constantly just don't feel like they have enough.

It's usually not because your overhead is too high, it's usually not 'cause you're overpaying your front office or your hygienist. That may be the case, but I would say most of the time it's because you're not getting enough production. Out of your team and your facility, if you can say, increase your production from, let's say, a million dollars a year in collections to $1.3 million a year in collections.

Your overhead is mostly the same. That added 300,000 may come with an extra, let's say, $50,000 of expenses probably from supplies and labs, and so the extra 250,000 goes straight to your bottom line. So right there, in that example, you grew your revenue by 30%, but you probably grew your bottom line profit [00:20:00] by 70%.

That's the nature of having a business where most of your costs are fixed every month and you only have a few variable costs. So that's why most of the time the cashflow struggles relate to not getting enough production outta your team. This is where you gotta meet with your team. Set goals, maybe give a little bit of bonuses if certain goals are met.

That's very common. It can be very helpful if done right and uh, and using your ops. Getting people in the chair, marketing effectively, having a good practice management consultant, you gotta get that revenue up because then it's a lot easier to have net cash flow to do a lot of good things within your life.

That said, sometimes your overhead is just too high. I do see that a lot. You may be overpaying your team, not necessarily as a percentage, but most hygienists, let's say in San Diego, are getting paid $63 an hour if you're paying your hygienist. $75 an hour, probably overpaying that hygienist. [00:21:00] And are they that good?

Are they producing that much? Well, if they're producing 2.5 times what you're paying them, it's probably okay, but you need to dive into those and talk with your CPA consultant about these expense categories. If you're with practice CFO. In your CFO meetings to really go down the p and l and assess where you might be overpaying.

Do you ever feel lost in your practice finances, and how about your personal finances? Ever wonder where your hard earned money goes and why you're not seeing the financial progress you've worked so hard for? If so, listen up. As a dental CPA and financial planner, I created our company practice, CFO. Just for you.

With almost two decades of experience, practice CFO integrates great CPA services like accounting and tax with customized financial planning, both business and personal. Think of it this way, our dental focused CPA services. Give us the x-rays we need to clinically plan your global [00:22:00] finances and be effective financial planners.

It's a highly customized approach we call the CFO model. Historically, having a CFO or Chief Financial Officer was an advantage of large corporations only. But today, practice CFO gives that same advantage to private dental practice owners. As a client of practice CFO, you'll be assigned one of our dedicated CFO advisors.

You'll receive insightful financial reports each month. Have regular financial review meetings, reduce taxes, grow your wealth, and feel more in charge of your numbers. Because we believe that in the competitive landscape of dental practice ownership today, you have to be an effective business owner, not just a capable clinician.

Reach out to learn more@www.practicecfo.com. Okay, on to number seven. Are my personal fringe benefits all listed where they should be below the operating income. What are these fringe [00:23:00] benefits? Sometimes we call 'em perks. I call 'em sometimes your slush expenses, but these are the personal expenses that we run through the business, attaching them to the business, even if it's a little aggressive in order to get the tax deduction.

Examples are family, sometimes family wages, like spouse or kids on payroll to get some tax savings or to make additional 401k contributions, a personal travel. Where while you're traveling, you're doing a meeting with a dental friend, calling it a dental travel. Now, uh, as a CPA, my license requires me to say there are rules around all that, what you can deduct and what you can't deduct.

But typically we tend to be a little aggressive on that. Same thing with automobiles and meals. Those kinds of things. Amazons, Costco, all of those things. Those are called fringe benefits or perks. Those should go below what is called the operating income [00:24:00] and just listen again to my podcast from last time to know what the operating income is.

But those should all be pushed below so they don't cloud. What is the true operating profit of your practice, thereby allowing you to compare yourself to industry health standards as a dental practice. So are my fringe benefits all listed where they should be. The other thing on that that I will say is a lot of times CPAs are very conservative.

Y'all know my philosophy here at Practice CFO, it's tow the line, don't cross the line. 'cause we have dual mandate save you in taxes and avoid an IRS audit. And, but a lot of CPAs are very conservative. I'm, I'm definitely much more liberal as a CPA. Hopefully the IRS isn't listening to this podcast. But I'm much more liberal as a CP on this kind of stuff.

A lot of CPAs are just naturally very conservative. It's just in their nature and they wanna be very letter of the law and words gray. They would prefer to err on the side of conservatism, which basically means they're gonna pay more taxes. [00:25:00] So one of the things they do is when they see a payment to, let's say, PF Chang's, or they see a payment to Amazon.

Or they see some travel costs or a hotel, they don't classify that as a deductible expense on your profit and loss statement. Instead, they classify that as a draw or a distribution because what they're saying is, Hey, doc, you should have paid that outta your personal checking account. That's my judgment as your CPA or bookkeeper, and so I'm not gonna let you take a tax deduction.

I'm gonna call that a draw as if you paid it personally. Draws are never tax deductible Draws are simply you transferring money from your per, from your business checking account over to your personal checking account outside of payroll. That's just a draw and the, and so by classifying a payment to say Marriott as a draw, that is treating it as if you [00:26:00] took the money outta your business checking account, put it in your personal checking account, and then paid Marriott.

And that is not tax deductible. And you may be thinking as you listen to me, well, I don't want my CPA being the one who has full autonomy to decide how aggressive I am on my taxes. Now, some CPAs are gonna be very liberal. They're gonna say, it's up to you. It's up to you whether you want to call that as a business or personal expense.

Other CPAs, they'll fire you as a client. They're just that conservative. So. My point here with question number seven is to also, when you, when you check out your general ledger, look at everything that's classified as a draw. Now a another term for draw is a distribution. Those are the same thing. It's not a dividend.

Sometimes people call it a dividend. Dividend is what comes out of a C corporation, and most of you dentists are not C corporations. Your S corporations, S corporations do not issue dividends. S corporations simply [00:27:00] you. You draw money outta your business, checking to put in your personal checking account.

That is a draw or a distribution. So make sure that there aren't expenses, that are business expenses that you should get a tax deduction for. Make sure those are not included in your draw or distribution accounts on your general ledger. So if you get your general ledger every month, which we do here at Practice CFO.

Go to the draw section or the distribution sections, usually more near the top and review every single transaction in that list. And if it's truly a business expense that you think should be tax deductible, you gotta go back to your bookkeeper, CPA accountant and say, Hey, reclass, that as a deductible expense.

Now they may fight you over that. They may want you to write an explanation, which we do sometimes. If you make a three week trip to Europe and you're trying to deduct $50,000, I am gonna ask you to write a little explanation for us. How it was business related. That way if the IRS comes and audits, I [00:28:00] as a CPA with my name on your tax return, I could get in trouble.

And if I get in trouble, well guess what? They'll go through all my client list. That's why, uh, there's a line I can't cross there because I don't wanna put all my clients at risk for somebody else's actions. Hope, hopefully you follow me on that. So if it's that egregious or that aggressive. I feel like you maybe shouldn't do that and you're adamant on doing it.

At least I'm gonna get a narrative from you so I have it documented in my records. I'm gonna CYA myself a little bit if you want to. If you wanna do what I, what I believe is crossing the line, generally speaking to me, that's not enough for me to break up with the client. We do so much globally for our clients on the CPA and the personal financial planning side.

These are very personal. Relationships, usually. I, I, I just wanna get documentation on that. So number seven, make sure that all of your fringe benefits are in the right place on the p and LIE below the operating income, and that they are not classified as distributions or draws. Number eight, [00:29:00] why did my cash balance go up or down?

Now, I get this a lot, I get this, I, over the many years, I've got this a lot. Wes, where did my cash go? I made, on the bottom of my p and l, it says a hundred thousand dollars. That's a lot. Let me get a more standard example. It says, it says $30,000 of net profit for the month. Why isn't my bank account $30,000 higher?

Well, for a lot of reasons, your debt is not tax deductible. So when you make your debt payment, that's not showing up on your p and l, so that's a cash outflow that is not included on your p and l. Now, the interest portion is yes, but not the principle portion said that many times on the show. Also, if you take a draw or a distribution outta your practice.

Your cash balance is gonna go down, and that doesn't show up on your p and l as well. So there's a lot of reasons. Those are just a couple, but there's a lot of reasons why your proven loss statement is not a cash ballot, a cash change statement. So what you have to do is you do look at your p and l, and [00:30:00] of course, if it has a strong income and your cash balance went down for the month, which by the way, you can say on your balance sheet or just your bank statements, then you should ask yourself why.

That's where you should go look at your distributions. You should ask your CPA. Why is my cash balance going down when I feel like I'm collecting good income? So that's important. Now, your CPA, if they're good, they could look at your financials, they could look at your general ledger, they could look at your balance sheet.

They can look at this stuff and they can then. Package a story to you explaining why your cash balance went up or down. If you're with practice CFO and we meet every three or four months, we will always do a cash flow forecast and we always explain why your cash is what it is. In fact, you get a monthly report called the CFO Analysis, which sort of tracks your cash change over time in a very graphical format, which is helpful.

Alright, let's now go on to number nine. How much did I pay down on my debt last month? [00:31:00] I love that because even though debt is an enhancer when used correctly, 'cause you're using, as they say, other people's money, you're using the bank's money in order to grow your practice. That is, uh, that's generally good debt then.

I'm not opposed to having debt. That said, as a financial planner, it still feels great to see your debt get paid down. It just, it just does. And as opposed to going up. Now I understand it's not a perfectly smooth trend year after year after year, because you take out debt to, let's say buy a CAD cam or something like that, or build out another operatory, yada yada.

And so it's gonna tick back up at the moment that you take out more financing, or sometimes you're just so low on cash. You take an equity loan, essentially it's called an equity cash out loan on your practice, sort of like a, like a HELOC on your home. You're just taking cash outta the equity and then you're using that for whatever reasons.

That's a debt that will increase your, your, your debt on your balance sheet as well. [00:32:00] At practice CFO, we deliver every month a report that will show how your debt is getting paid down over time, and I just love to see that get paid down and it is a beautiful moment when your acquisition debt is paid off and suddenly that 4,000, 10,000, $15,000 monthly payment.

Is gone and you know, you know why that's so beautiful? Try to follow me on this. When you are paying your debt every month, the amount that goes to principle and the amount that goes to interest, that apportionment between those two changes in the very first month of making your payment, assuming it's not an interest only period, as soon as you make that payment in what's called an amortizing loan, which is where a portion goes to interest and a portion goes to principle most.

In that first payment, it's, it's the time when the least amount of that payment goes to paying down the principle and the most amount of that payment goes to paying interest. And the next month, a little bit more, let's say 10 or [00:33:00] $15 more goes to paying down principle, and 10 or $15 less goes toward the interest.

And month after month, year after year, you get near the end of the term of that debt. Most of what you're paying. Goes towards principle and in that last few payments, barely anything is going to interest. It's almost all going to principle. Now, banks do this 'cause they're smart. They wanna get paid their interest first.

That's definitely self-serving. They get paid their interest first, and over time, as the principle gets paid down, they get less. Now here's an important feature on this though. As you paint on debt, what portion between the principle and the interest is tax deductible and which portion is not? I've said this many times on my podcasts, it's only the interest that's tax deductible.

It's only the interest that's gonna show on your profit and loss statement. So when you're on your profit and loss statement and you're, you're looking on it and you go down near, somewhere near the bottom and it shows interest expense, [00:34:00] just know that that interest expense, that's not your full payment.

You may have paid $10,000 of the bank, but that's only showing $4,000 'cause that's the interest expense and only that is deductible. The $6,000 repayment back. The loan is not tax deductible, like I said on my last podcast, because you didn't recognize as income, the loan from the bank, the money you got from the loan.

So when you pay it back, you don't get a tax deduction. Only the interest is tax deductible. So that's why it gets difficult as you get near the end of the term of that debt. It gets more and more difficult because you're making the same payments month in a month out, but you're getting less and less tax deduction.

Because the interest gets less and less and less, and the interest is tax deductible. So think about it, in that first year on a 10 year loan, million dollar term, I'm just using round numbers here, it's a $10,000 a month payment, and let's say in that first year, you ended up paying. [00:35:00] $50,000 in interest and it's $10,000 a month, $120,000 for the year.

So $70,000 went to principle. $50,000 went to interest. You just got a $50,000 tax deduction for the interest. Fast forward to the last year, and in the last year, you again, you paid the same amount, $120,000, but let's say only 10,000 of that was interest. You only got to deduct 10,000. So you're getting a lot less tax deduction later in the term of that debt, 10,000 versus the 50,000.

So on that $40,000, you might be paying an extra $15,000 in taxes, and yet you were paying the same monthly loan payment. So in other words, it gets harder and harder and harder to pay your debt as time goes on because you get less tax deduction. When you do pay it off, the beautiful thing is because at the time when you pay it off, you were [00:36:00] virtually getting no tax benefit for those monthly payments.

Suddenly, suddenly, you now get $10,000 a month back in your pocket 'cause you paid off the loan. And that is not taxable. Meaning that it's not a, it's not a new tax that suddenly you're having to pay by having that extra $10,000 in your pocket. Hopefully you follow me on that. The analogy I love to use is like you're hiking Mount Everest, or I don't know, you're hiking Mount Whitney or some mountain, and as you're getting higher, the altitude in the altitude, the oxygen level is lower and it gets harder and harder and harder.

And every lap, every, every switchback gets more difficult. But finally you make it to the top, AKA, you paid off your debt, you make it to the top and you summit it, and now you just have this beautiful panoramic view. You're breathing just fine now, and you've accomplished that and it's such a beautiful moment.

Paying off debt is a little bit like that. All right. [00:37:00] Question number nine. How much did I pay down in my debt last month? Number 10, did I take on any new debt and or purchase any new equipment that I should relay to my accountant? The accountant will need to know the specific purchase amount and loan details.

I've been doing my, my, my accounting department does a lot of accounting. We do. Probably 600 reconciliations every month between our, our dentists as corporations and business accounts partnerships, and maybe they're building LLCs or whatnot. We do a lot of that. Now, the one of the areas that's most challenging for us is knowing when an expense to say Henry is for supplies or whether it's for that dental chair.

Following up on my earlier example, we just see an outflow to Henry s Shine. And so a lot of times you'll make a payment to Henry Schein for 15, $20,000, 30, $40,000 for just [00:38:00] straight up supplies. And so if we see a payment, you bought a dental chair for let's say $15,000, it's gonna be really hard for us to know that.

And so that's why, that's why one of two things, you can set up sort of a sub account with your credit card and have one account for equipment and one account for supplies. And then that way we know when we're pulling in. Those transaction details from your bank or you just send an email or text, whatever to your CPA account or bookkeeper saying, Hey, keep your eyes out for this $15,000 transaction.

It wasn't supplies, it was a dental chair. So if you bought, if you bought a car, if you bought a, a CAD cam machine. If you, if you bought some, some new, yeah, some new dental chairs, some office furniture. If you put on a new roof on your building, if you built out a new operatory, all of these things are not expenses.

These are assets. These are what are called capital improvements or capital [00:39:00] expenditures, and those have to be accounted for differently. And it's important that your accountant know this so that they can do it right, and so notify them. Now, a lot of that stuff, if not most of it comes with debt.

Generally dentists are financing the purchase of that laser, of that CAD cam of that cone beam of that build out. They're financing it. And so from the business checking and credit card account, a lot of times we accountants, we don't see the full content of that transaction. If you financed it entirely, we won't see anything until the payment starts coming through.

And sometimes for us, that's the indicator when suddenly we see a consistent payment to a bank every month and we're like, okay, what does that loan relate to? We ask the doctor, oh yeah, I bought a sero cone beam last. Three months ago, and that's my loan payment. Okay, great. Well, we know now, but it would be nice to know in the month of when you buy these big equipment, these big purchase items, and [00:40:00] any debt that you take out, please notify your accountant because it's just not often clear when that occurs.

And please send them the loan detail, the term, the interest rate, yada yada, on the loan. Everybody there are sure many more questions you could be asking yourself on your profit and loss statement, but there are 10 questions you can ask yourself when reviewing your profit and loss statement every month.

Hope you found it helpful.