Dental practice bookkeeping: production vs collections

Dental practice bookkeeping has to report two revenue numbers every month, not one: production, the value of the work performed at the practice's fee schedule, and collections, the cash that actually arrived. The gap between them is insurance write-downs, courtesy adjustments, and patient balances that haven't been paid, and it's the number the dentist needs to see. The books deliver it by posting production and adjustments separately, matching every deposit to the practice-management system's collection report rather than just to the bank, and tagging hygiene and restorative as service lines.

We run an accounting firm with dental clients, and the books that arrive from a generalist bookkeeper almost always show one revenue line, booked from the bank deposits. Here's what that hides and how we set it up instead.

Why revenue alone hides the gap

A practice produces $95,000 in a month and collects $84,000. Books built from deposits show $84,000 of revenue and a decent month. What they can't show is that $6,000 was written down to insurance contracted fees, $2,000 was adjusted as courtesy or family discounts, and $3,000 is sitting in patient accounts receivable, some of it from the front desk not collecting the copay at checkout.

Each of those is a different problem. A growing insurance write-down means the payer mix is shifting toward lower-reimbursing plans, which is a decision about which plans to stay in. Growing courtesy adjustments means the front desk is discounting without a policy. Growing patient AR means collection at checkout is slipping. The dentist can fix all three, but only if the books separate them, and books built from the bank can't.

The practice-management system (Dentrix, Eaglesoft, Open Dental, and the others) already knows all of this. The bookkeeping's job is to bring it into the ledger in a form the P&L can report.

Insurance write-downs and patient balances

The monthly entry from the practice-management reports:

• Gross production at the fee schedule, as revenue, by provider and by service line.
• Insurance adjustments: the contracted write-downs, as a contra-revenue line, so net production is visible on the P&L as gross minus adjustments.
• Other adjustments: courtesy, family, prompt-pay, and bad-debt write-offs, each on its own contra line, because they answer different questions.
• Patient and insurance receivables: the change in outstanding balances, so the balance sheet carries what's owed to the practice.

Collections then arrive as deposits, and here the second discipline matters. Each deposit is matched to the collection report from the practice-management system, not only to the bank statement. Insurance EFTs, patient card payments through the merchant processor, and cash and checks at the front desk each have a report line, and the deposit has to tie to it. When the merchant deposit is $412 short of the card collections report, the difference is the processing fee, booked as an expense. When an insurance EFT doesn't match any claim, it's a payment posted to the wrong patient, and the front desk needs to know.

The result is a P&L that reads: gross production, less adjustments by type, equals net production; and a balance sheet with receivables that reconcile to the aging in the practice-management system. Collection rate, net production collected as a percentage, becomes a number the dentist can watch monthly, and the write-down rate by payer becomes the input for the participation decision.

Hygiene versus restorative as service lines

A dental practice has two businesses in one building. Hygiene is recurring, predictable, staffed by hygienists on wages, and the source of the exams that lead to restorative work. Restorative (fillings, crowns, implants, and the rest) is where the dentist's production is, with higher fees, lab costs, and supply costs per procedure.

Tagging both as service lines on every revenue and direct-cost transaction produces a margin per line. Hygiene revenue minus hygienist wages and hygiene supplies. Restorative revenue minus associate compensation, lab fees, and restorative supplies. Overhead (rent, front desk, software, the dentist's own compensation) stays out of both and is covered by the total.

The finding is usually one of two. Hygiene is running at a thin margin because hygienist wages have risen faster than the fee schedule, and the fix is fees, scheduling density, or the mix of procedures in the hygiene chair. Or restorative margin is compressed by lab costs at a single lab, and the fix is a lab conversation. Neither is visible on a one-line P&L. Both are worth more than the annual advisory fee.

Some practices add a third line for specialty work or for a second location. The method is the same: lines on every line item, costs tagged where they belong, overhead left alone.

Payroll and associate comp by line

Payroll is the largest expense and the one most likely to be posted as a lump. For the service-line margin to be real, the payroll journal has to post by line: hygienists to Hygiene, assistants and associates to Restorative, front desk and office manager to Overhead. The payroll provider's department setup does this once, and every run posts the same way.

Associate compensation is the complicated case. Associates paid a percentage of their production or collections are a direct cost of the restorative line, and the accrual has to match the production month, not the payment month, or the margin swings with the pay calendar. The practice-management system's production-by-provider report gives the base; the payroll journal accrues the compensation against it.

The owner-dentist's compensation is the other judgment. For an S corporation practice, reasonable compensation through payroll is required before distributions, and it belongs in overhead rather than in restorative cost, or the restorative margin will look worse than it is. For the pricing and staffing decisions, the useful view is margin before owner comp; for the tax return, owner comp has to be real and on a W-2.

The monthly report the owner reads

One page, monthly, from closed books:

• Gross production, adjustments by type, net production, and collections, with collection rate and write-down rate by payer.
• Margin by service line: hygiene and restorative, revenue less direct costs, with the percentage.
• Overhead as a percentage of net production, against the prior three months.
• Receivables: patient and insurance, aged, with the over-90 total.
• The one thing that moved and what the dentist should do about it.

That last line is the advisory. The report shows the write-down rate at the largest PPO climbed two points; the advice is to model dropping the plan against the patients it brings. The report shows hygiene margin fell; the advice is a fee schedule review. Delivered monthly with a fifteen-minute call, it's the CFO tier for dental, and it renews, because the dentist can point to the thing they pay for. We wrote about building that tier in margin by service line as a CFO report.

Where the platform comes in

Woven is our product, and dental practices use it the way this article describes: service lines as classes on every revenue and direct-cost line, a payroll journal template that posts by department each run, deposits matched to the collection report with processor fees split out as they clear the merchant account, and the monthly production-versus-collections report and margin-by-line report run as scheduled packages off closed books. Statement import ties the operating account to the bank's own PDF so nothing is missing before the report goes out. To see the dental package on live books, book a demo.