Keep Things Simple: Avoiding Common Accounting Pitfalls

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello, and welcome. This is Casey Hyers, back at the Millionaire Dentist Podcast, in studio with co-host Jared Bridgman.

Jarrod Bridgeman:
Casey, I want to thank you for coming into my office and helping me get rejuvenated for this Friday afternoon that we're recording this. I was getting a little sleepy. I had a big lunch, and just your bright, cheery face is really helping me out.

Casey Hiers:
I accept all compliments. You are welcome.

Jarrod Bridgeman:
Today we've got one of our favorite guests in here, our special guest. His name is Kevin Wharton. He is a CPA. He's an MBA. He's-

Casey Hiers:
Dr. CPA.

Jarrod Bridgeman:
Dr, CPA. He's the QB of QBs, the QuickBooks quarterback. Kevin, how are you?

Kevin Rhoton:
I'm doing great. Great to be here.

Jarrod Bridgeman:
I heard you're going to smoke some pork butt this weekend?

Kevin Rhoton:
I am.

Jarrod Bridgeman:
How much are you doing?

Kevin Rhoton:
Four of them.

Jarrod Bridgeman:
Oh, you going to bring some in for me on Monday?

Kevin Rhoton:
No, actually, I'm not.

Jarrod Bridgeman:
Okay. I really thought you were going to say yes.

Casey Hiers:
What's in it for me?

Jarrod Bridgeman:
I feel bad now. I don't want to talk about it anymore.

Kevin Rhoton:
No, they're already spoken for, sorry. They're not even for me.

Jarrod Bridgeman:
Kevin, you're one of our onboarding specialists here.

Kevin Rhoton:
Yeah.

Jarrod Bridgeman:
You work every day with a lot of the newer people that come to our company, so you really get to see their books, their QuickBooks, and all that kind of stuff. Is there a trend that you've noticed with practice owners out there and their QuickBooks?

Kevin Rhoton:
Yeah, and a majority of the practice owners that come to us do operate with QuickBooks, whether it's QuickBooks online, QuickBooks desktop version. There are other financial programs out there, but-

Jarrod Bridgeman:
For just a blanket general statement, we'll say QuickBooks.

Kevin Rhoton:
Yeah, QuickBooks, we will definitely use that. But it really applies to anyone that uses any type of financial program. But a lot of times when we take a look at their financials, they're usually on one side or the other, as far as how well they keep their QuickBooks files reconciled, keep information in there. Sometimes they-

Casey Hiers:
Kevin, did you play dominoes when you were a kid?

Kevin Rhoton:
I did not.

Casey Hiers:
You did not play dominoes.

Kevin Rhoton:
I did you not.

Casey Hiers:
Are you familiar with dominoes?

Kevin Rhoton:
Barely.

Casey Hiers:
Like if you sit them up, and you tip the first one, and they're lined up, all the dominoes fall. Right?

Kevin Rhoton:
Yes. Yes. Yes.

Casey Hiers:
You're looking at QuickBooks, you're looking at profit and loss statements, balance sheets, taxes, both personal and business taxes, you're looking at incredible amount of data. And we were talking earlier, QuickBooks is almost that first domino sometimes, right?

Kevin Rhoton:
It is. It's the foundation.

Casey Hiers:
Bad information in, bad information out. So when you start to analyze a practice and all their data and documents, what's the first thing you look at? Is it QuickBooks, or is it taxes? Or what's that process look like for you?

Kevin Rhoton:
Yeah, you're exactly right. First thing we start looking at is QuickBooks, because that is the foundation, how the accounts are reconciled, how the transactions are recorded. That builds the financial statements, and then the financial statements build the tax returns. So yeah, definitely.

Casey Hiers:
Most, some people have a bookkeeper, some people, their CPA firm does it for them. Others, the dentist or specialist will dabble and do it themselves. Is it like third, third, third, or what do you see the most?

Kevin Rhoton:
I see the most of them trying to do it themselves. And after hours.

Casey Hiers:
I know from my end I'll hear frustration with, my Sunday afternoons are dedicated once a month to doing QuickBooks and I hate it. Or after hours, a fair amount of time doing QuickBooks. Typically, first two to five years as an owner, it's kind of fun. Then you throw in a spouse, and kids, and your life gets more complicated. People don't love doing those. But whether they do or they don't, or who completes them, when you look at them, is it rare that they're accurate?

Kevin Rhoton:
Very rare. Most of the time when we see a practice owner use an outside service, they do look a little bit better. But most of the time, yeah, when the practice owners that do come to us, when they're doing it on their own, it's just... And no fault to them, they studied to be dentists or in the dental industry, they didn't study to know debits, and credits, and how to reconcile financial statements. And that's okay. But they're trying to do it, and nothing's reconciling, nothing's tying out. It doesn't give them good information at all to make any financial decisions.

Jarrod Bridgeman:
It's one of these things where they feel like they're saving money by not paying an outside firm or source, but that could cost them more than tenfold in the long run.

Casey Hiers:
Beyond just time consumption that it takes, or if they pay for it, my goodness. So when you look at QuickBooks and they... Does it affect taxes?

Kevin Rhoton:
So some of the things that I see when practice owners come in and ask us to take a look, and take a look under the hood, so to speak, we'll see on both sides of it, sometimes, like I was saying, they don't do the basic needed steps in keeping accurate financials.
And then on the other side, we see them spending way too much time, like putting in all the deposits, all the adjustments, one-by-one, singling out, maybe using the bill pay. And sometimes that's useful. I don't want to negate using that.

But a lot of times the practice owners will try to start, kind of like you were saying, Casey, try to start using those modules or those beneficial things with QuickBooks, but it's so hard to keep up with it and making sure everything's reconciled. Then AP, if the bill pay feature isn't used correctly, then your-

Casey Hiers:
Accounts payable.

Kevin Rhoton:
Accounts payable, yeah, thank you. Your accounts payable balance gets out of whack. And what's due, and what's owed, and things like that. And then they just start sinking, start drowning. Well, now I don't know what's what, and they abandon ship on that. So yeah, there is a balance to it, and a lot of times the practice owners just get frustrated, start drowning, of what do I need to do in QuickBooks? What am I doing that's too much?

Casey Hiers:
Sometimes they don't even know that they're as out of whack as they are. Sometimes they do. But man, if your QuickBooks do not tie or align with your tax returns for a period of time, it becomes more than just a frustration on the time it takes. That can be a red flag to the IRS. That's a huge problem. And then you've heard me say this many times, but what's worse than incomplete or incorrect data? Making decisions in your practice with incorrect and incomplete data. And so often we see that, again, QuickBooks are three, four, five months behind. They're not accurate. It really is the kiss of death.

Jarrod Bridgeman:
Kevin, what is a telltale sign to look out for, to know that your books may not be accurate?

Casey Hiers:
I'm going to give an example that I heard recently, and then I'm sure this will spark. Somebody has X amount of money in their practice account balances, but they're QuickBooks show that they're minus 200,000.

Jarrod Bridgeman:
Gotcha.

Casey Hiers:
It's like big time off, right?

Jarrod Bridgeman:
Right, right, right.

Casey Hiers:
Or it shows their overheads 130%, and we know that it's not. Those are probably the egregious ones.

Kevin Rhoton:
Yeah, along that line, when we see QuickBooks files come in, and doctors are like, "I've never reconciled my checking account." Checking account's, never been reconciled, crazy amounts. Just looking, especially at the balance sheet, because that will show you a snowball effect of years and years of not making correct adjustments to their financials.

And sometimes have negative liabilities, where a loan that they've already paid off, or it shows a negative balance, things like that. Something that we do for our clients is we reconcile their checking counts to their bank statements. We reconcile their loan balances to their loan statements, making sure principal and interest is allocated correctly. A lot of times we'll see, again, when doctors are doing things on their own, they will code a loan payment straight to loan payments on the profit and loss, whereas that needs to be allocated between principal and interest.
So we go through and reconcile, making sure that the balances on the balance sheet match the documents, whether it's loan statements, checking account, savings account, balances, investment balances, things like that.

Casey Hiers:
Over the years, we've seen a lot of these. And it's rare that they're clean, I would say. But beyond, this is a time consumer, and it can be really challenging, it can put you on the radar with the IRS, with all those things. We're an exclusive firm. We can't help everybody.

Our business model is not a quantity shop. We're in the results business, we want to drive results. So what would you tell people if, either they know that their QuickBooks are incorrect or behind, what are some tips or things you would tell our listeners about QuickBooks? Or how to better navigate those?
My guess is the first one is have a good accounting specialist do them. But what are some other tips that you could give, generally? I guess the first one is, if they don't align, there's your sign you need to do something.

Kevin Rhoton:
That shouldn't be acceptable to them, to have inaccurate incomplete financials. Because they are, like you were saying, trying to make decisions, financial decisions, whether it's buying pieces of equipment, or we talk about overhead, I know you guys talk about overhead on a lot of the podcasts. Trying to trim overhead, percentage points here and there. And the financials, if done correctly, can show you what's really hurting you, as far as the overhead percentages.

And then looking at industry averages, looking at benchmarks, things like that. And being able to see, okay, if I can shave a couple percentage points here, a few here, it's really important to at least start balancing your checkbook, so to speak. Balancing the checking account and getting your... Balance sheet isn't really all that complicated, but if you make sure-

Casey Hiers:
Well, not to Dr. CPA, it isn't.

Kevin Rhoton:
Ah, yes. But make sure you accurately reconcile your checking account. That's a big [inaudible 00:11:59]-

Jarrod Bridgeman:
What if I just use a wall of post-it notes to keep track of my stuff?

Kevin Rhoton:
Well, I wouldn't-

Jarrod Bridgeman:
Should probably start with a software of some type?

Kevin Rhoton:
Yeah, I would not recommend that.

Jarrod Bridgeman:
Okay. Yeah, yeah. So really, all this stuff can be complicated. Different people have different mindsets, in terms of what they're able to handle on their own, if they're good at numbers, if they're not good at numbers, and stuff like that. But really, ideally, what we're getting at is this is a tough thing to handle sometimes for a practice owner, especially when you've had... Not only do you have your patients, you've got your staff, you've got your family, you've got your children.

And you don't have time at their practice to do this. Do you really want to take the time away from seeing your son's basketball game? Do you want to take time away from any of that kind of stuff? What's that worth to you, compared to what you think you're saving? And not only you're not saving money, you're doing it wrong.

Kevin Rhoton:
Yeah, that's well put.

Jarrod Bridgeman:
Thank you.

Kevin Rhoton:
It's one of those things where, yeah, in your day-to-day, whether your QuickBooks is updated does not affect you, necessarily day-to-day, of here it is Friday, I didn't do anything in QuickBooks. Well, I can still operate come Monday. But then two, three months down the line when, okay, now it's time to redo my line of credit with the bank, or I'm looking to purchase a SERC scanner, wonder, should I take a loan out on that? Should I do financing? Do I have enough cash on hand to foot that? Just those big decisions, when they come up, well, now my QuickBooks is three months behind. I have no idea really where I stand at a profit and loss standpoint.

Casey Hiers:
Yeah, I talked to a lot of practice owners. Their rationalization for doing their own QuickBooks is because they like to know everything that's going on in the practice. But again, if it's incorrect, what you're learning is actually not good.

The best way to do it is to have a very high level standard of care with accounting, where your CPA firm are doing your QuickBooks for you, but here's the thing, you can then be more of a CEO. You can view the completeness and review it yourself. You don't have to be the worker bee. You want it done well, and then you can look at it and still be involved, versus, well, I like doing it because I really feel like I'm in touch with my practice. But then we go look at them and they're a mess.
And it's also unfortunate, there's times where accounting firms do them and they're better typically, but half the time they still don't tie to taxes and there's glaring problems.

Kevin Rhoton:
Yeah, because a lot of times they get all the information, the incorrect QuickBooks file at the end of the year, or beginning of the next year, getting ready for tax returns. And they're trying to make heads or tails of a year's worth of inaccurate transactions, unreconciled balances. We got to hurry and get these "cleaned up" to their acceptable level, and then try to glean some tax returns off of them.
We take care of financials month-to-month, making sure they're reconciled to give practice owners those financial statements to see, okay, here's what I did for this past month. Here's what I'm looking at year to date, so they can be in touch with the financial standing of their practice, how their practice is doing.

Casey Hiers:
Here's a question for you. What's worse, doing the QuickBooks, and they're behind and they're incomplete, and they don't tie to your taxes, but you've put work in and you've got something? Or just not doing it, but just not having them? Is that even an option?

Jarrod Bridgeman:
Mind pretzel?

Kevin Rhoton:
It is. They definitely have to have something.

Casey Hiers:
Some sort of tracking, yeah.

Kevin Rhoton:
Some sort of tracking, especially to do the tax returns. We don't see that with the practice owners that come to us. They at least have some sort of financial tracking. If you don't, by the time you get time to file your taxes, after your first year of ownership, and they're like, "Okay, we need to know your income, your expenses." "Okay, here's my bank statements," well, you're going to get a pretty hefty bill for an accountant to have to try to sift through all that, and a lot of headaches, and a lot of questions.

Casey Hiers:
Well, what I've heard is, if they're not done correctly, or timely, don't settle for that. Don't kick the can down the road. You need to take some action and do something about it. And in my opinion, spending three to five hours every month doing it's probably the least attractive option out there. Fair?

Kevin Rhoton:
That's definitely fair.

Casey Hiers:
Thank you, Dr. CPA.

Kevin Rhoton:
Man, you guys are coming up with great points on your own.

Jarrod Bridgeman:
Yeah.

Kevin Rhoton:
I guess I'm-

Jarrod Bridgeman:
We sit, we listen, and we learn from you.

Kevin Rhoton:
Yeah. I guess I'm rubbing off on you guys.

Jarrod Bridgeman:
That's right. Kevin, I want to thank you so much for being here. Is there anything else you wanted to say as we wrap up this episode?

Kevin Rhoton:
Be better at QuickBooks.

Jarrod Bridgeman:
Yeah.

Kevin Rhoton:
Get your shit in order.

Jarrod Bridgeman:
Kevin, thank you so much for being on here. Casey, we got a couple of events coming up over the next couple of months. It's going to be really exciting times. We're going to be in the Washington D.C. area, right outside of that, with Tyson's, Virginia, and then Chevy Chase, Maryland. After that, we're going to be in Huntington Beach in Calabasas, California. We're going to be in the San Francisco area. We're going to be in some hot new places. And are you excited to go?

Casey Hiers:
Yeah. I'm going to some of them. Other people are going to some of them. We've actually, some Seattle study clubs, some large study clubs, they've reached out and said, "Hey, would you come and present to our members?"

Jarrod Bridgeman:
That's awesome.

Casey Hiers:
And so we'll try to plug those in around our schedule, because we've got, as you know, 50, 60 events a year. But yeah, it's nice. As the subject matter is spreading, people are reaching out more and more for us to come talk.

Jarrod Bridgeman:
We're like a good virus.

Casey Hiers:
What?

Kevin Rhoton:
You know? It's spreading.

Jarrod Bridgeman:
People want... We want to spread ourselves.

Casey Hiers:
Okay.

Jarrod Bridgeman:
That came off so badly.

Kevin Rhoton:
You should have stopped with the good virus.

Jarrod Bridgeman:
I know I should have. I'll cut that part out. But Casey, thank you so much for joining me as well today, and being the apple of my eye. You know? Yeah.

Kevin Rhoton:
So sweet.

Casey Hiers:
Thanks, guys.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.