Key performance indicators for your dental practice: X-rays of your cash flow management.

In today’s fast-paced world, tracking your practice’s financial health is increasingly important. Key performance indicators, or KPIs, are essential tools that give you a clear picture of where your practice stands. This article will explore how tracking KPIs, such as cash flow ratios, can help you stay proactive and make informed decisions for your practice’s financial future.

KPIs serve as valuable tools for your practice. They provide insights into performance, highlight areas for potential improvement and can help you identify growth opportunities. By comparing your KPIs to industry benchmarks, you can set realistic goals and track progress over time. But remember — benchmarks evolve, and no two practices are identical. Be sure to consult your CPA or dental practice consultant for specific targets that align with your practice’s needs.

Let’s start with two important KPIs for cash flow management:

• Quick ratio
• Days of cash on hand

The quick ratio measures your practice’s ability to meet short-term obligations with liquid assets. To calculate it, divide your liquid assets and accounts receivable by your total current liabilities. A higher ratio means better financial health. While this number shouldn’t be used in isolation, it’s a useful tool for understanding your short-term cash flow needs and setting improvement goals.

The other key metric is days of cash on hand, which tells you how many days your practice can operate without additional income. To calculate this, divide your current cash position by your average daily operating expenses. Start by subtracting non-cash expenses, like depreciation or amortization, from your annual operating expenses. Then divide by 365. Knowing this number can help you set clear goals and track progress over time.

Of course, KPIs aren’t limited to cash flow ratios. Let’s look at how tracking your practice’s overhead can provide deeper insights.

Practice overhead is a foundational KPI. For general practices, many experts suggest an ideal overhead target of around 65%, although the median range is closer to 75%. Please note, specific targets will vary based on practice type and financial goals and you should consult your CPA for tailored guidance. To calculate your overhead, divide your monthly expenses by your monthly collections. Employee costs, variable costs, facility expenses, and discretionary spending all contribute to this number, so understanding how each category compares to benchmarks can help you identify areas to adjust.

Tracking KPIs isn’t just about monitoring where you are today — it’s about setting goals for where you want to be tomorrow. To get the most from your KPIs, start with your revenue or collections, since these numbers form the foundation for all other financial metrics. From there, create a budget and develop a cash flow forecast. Practice financial management is circular — you can’t improve what you don’t track, and tracking leads to better decision-making. By tracking KPIs like cash flow ratios, overhead, and collections, you’re taking a proactive approach to your practice’s financial health.

Remember, no single KPI tells the whole story. Work with your financial advisors to build a complete picture of your practice’s health. The better your understanding, the better your decisions, and the more prepared you’ll be for the future. If you’re ready to start tracking KPIs or need help interpreting your financial data, contact your CPA or a Commerce Bank representative opens in a new window today to explore how we can support your practice’s financial success. With the right tools and insights, you can better navigate challenges and work toward building a thriving, sustainable practice.