Generally, purchases of items that will be used over a long term will be classified as fixed assets. Most often, this will consist of the purchase of orthodontic equipment by our purchasing department (Cathy Feagin’s department). The total of the equipment purchased (not the supplies purchased) are added to the cost of office equipment. As a rule of thumb, total monthly equipment purchases in excess of $300 will be included in fixed assets and purchases less than $300 will be treated as a normal expense of doing business. Information on expenditures for any month is available instantly from the PennyLane system's Items Purchased Distribution Report.

Other fixed assets purchased will include the building of shelves, cabinets or other permanent structures in an office (leasehold improvements), computers and computer related products (including Visa/Mastercard machines), chairs, desks, copiers, fax machines, etc.

Most importantly, regardless of whether a purchase is treated as a fixed asset purchase or as a regular expense of doing business, it has the exact same impact on the amount of cash available to you at the end of the quarter. Like paying employees, the cost of fixed assets represent the payment of the cash of the business for something of value, and thus, they have the same impact on your operation.

While the cost of furniture & fixtures and equipment are usually fairly consistent (they may vary due to the size of the office or the specific preferences of the doctor), the cost of building out the new space (i.e. leasehold improvements) can vary significantly. The cost of construction will certainly depend on the size and location of the facility. In addition, the ease of conversion to an OCA style office will affect the cost. Obviously, space that was previously occupied by a dentist or orthodontist will be substantially cheaper to build out than space previously used for retail purposes. Finally, the total cost will be affected by the arrangement that our leasing and construction department strikes with the landlord. In some cases, the landlord may pay for part of the cost of construction (a.k.a a tenant improvement allowance) and add that amount into the monthly rent resulting in higher monthly rent payments (in exchange for a lower total construction cost). On the other hand, the landlord may not assume any of the construction cost in exchange for a lower total rent. The arrangement that the leasing and construction department is able to reach will depend on the market, location and desirability of space contemplated.

On the balance sheet, look at the Liabilities section. In that section, you will usually find two line items - "Cash Advances from Orthodontic Centers" and "Accrued Interest on Cash Advances." The Cash Advances from Orthodontic Centers represents the total debt on the practice as a result of construction costs and startup losses. The Accrued Interest on Cash Advances represents the interest cost that has accumulated on these startup losses (interest is assessed at a rate of 1.5% over the prime rate of interest on the average outstanding balance of the Cash Advances from Orthodontic Centers). Add these two amounts together to get the total debt outstanding plus interest.

Then, multiply that amount by the percentage interest you have in the profit of the practice. Most doctors have an economic interest (interest in the profit) of 50% of the practice. The resulting amount is the total amount that you are responsible for.

When the office generates enough profit to make payments on the debt, these two amounts will be combined and the total amount will be repayed over 5 years.

Every payment on debt consists of two portions: a principal portion and an interest portion. The principal portion reduces your outstanding balance in Cash Advances from Orthodontic Centers. The interest portion shows up on your income statement as interest expense. If nothing else affects interest expense, adding the change in Cash Advances from Orthodontic Centers from last quarter to this one and interest expense for the current quarter will add up to the total quarterly payment.

No. These financial statements do not include the most valuable part of the practice: your patient contracts. These balances ensure that you will have patients in future months who will pay you and generate profit. Herein lies the true value of your practice. Thus, if you are ever in a position to sell an office or your entire practice, the value of these contracts must be included in making that computation.

The main cause for this difference is timing differences. In the long run, these amounts will tie out, but from month to month and quarter to quarter, these timing issues will cause the two numbers to differ.

The most prominent example is NSF (not sufficient funds) checks. At the end of each month, OCA notifies each office of the checks returned. If the checks were returned in March, OCA will record the NSF checks for March. However, since the office doesn’t receive the list of NSF checks until April, the transaction will be recorded at the office in the month of April. The amounts are the same but they are recorded in different months. Any transaction that OCA records in one month that the office records in another month will be subject to these timing differences. In addition to NSF’s, these include corrections of deposit errors and any bank issues that need to be resolved.

Also, the orthodontic revenue number on the income statement represents revenue after refunds paid during the period while Meoware reports do not include refunds.

The financial statements that we prepare for you must conform to the matching principle. This principle states that the cost incurred in a certain period must be matched with the revenue for that period. In other words, if we record a full quarter’s worth of collections, we must also record a full quarter of expense.

For example, in the first quarter of the year, the quarter ends on March 31. Now, assume that the last pay period in March ends on March 25. In the month of March, we have 31 days worth of collections, but only 25 days worth of doctor and staff costs. This would violate the matching principle. Even though we do not make a payment for the 26^th-31^st, we must still record (accrue) the cost for that period even though you won’t receive any payments for the days you worked from the 26^th-31^st until the month of April. In the following month, that accrued cost is reversed so that the net effect of this accrual from March to April is 0. The accrued cost was recorded in order to get the cost into the proper period.

Problems with high employee costs can be evaluated in 2 ways. First, look at the collections per hour on the monthly production statistics. For an office more than two years old, this should be about $650-$700 per hour (under normal circumstances -- if you are still experiencing a growth spurt, this number will be lower). For offices, that are less than 2 years old, you should see a steady increase in this number from month to month regardless of the speed of growth. If the numbers do not meet these criteria, there are either holes in the schedule (times during which certain staff persons are not productive due to DNS patients or inefficient scheduling) or patients are being seen who are not paying (they have either completed paying and are still in treatment or just aren’t paying). Review your schedule to make sure that as many paying patients as possible fill the daily schedule and that no excess days have been scheduled.

Second, review the biweekly payrolls that are submitted to the Metairie corporate office. Other than the non patient day receptionist, there should be no individuals who record substantially more hours than the doctor. This has been a major cause of abnormally high employee costs. In addition, the use of staff that will result in the lowest possible employee cost is the staffing currently prescribed by OCA for new patient, production and non-patient days. We are currently developing a report to include with these quarterly reports that summarizes this information. We hope to have this developed by the second quarter of 1997.

Of course, wages must also be reasonable given the productivity level of each individual staff person. If none of these sources produce meaningful results for you, contact your operations representative. They can provide a more detailed analysis and solutions.

OCA’s standard policy is that an office will spend 7% of its collections on advertising. This percentage may be higher if the office is located in a large media market. Also, a minimum amount may need to be spent on a market to have an effective advertising campaign. These factors may cause the cost to exceed 7%. If an office has not yet reached maturity, the marketing department will extrapolate what revenue in a mature situation would be for the office based on the new contracts signed by the office.

The billing done by most advertisers is very slow and inefficient. As a result, you will not be billed for advertising costs until a month, or sometimes two months, after the ad actually ran. Thus, a number of charges do not appear until later quarters because the advertisers do not have the actual amount of charges and do not bill these charges until substantially after the ad ran. As a result, these charges generally will not appear on your statements until a later quarter. We are currently working with our systems and our advertisers to get costs into the month that they were actually incurred.

Information on expenditures is available instantly for any month from the PennyLane system's Items Purchased Distribution Report. You can compare these lists to the actual items that you received. Please report any discrepancies to the purchasing department.

No. Other operating costs represent the costs for your office to do business that are not included in the expense categories listed above it. The specific items included in other operating costs are listed on the explanation of financial statement sheets included with these quarterly results. OCA’s corporate allocation typically represents less than 20% of the total other operating costs that you see on the income statement.

Your employee costs, rent and a majority of your other operating costs include a cost for the corporate office’s expense. Generally, a greater portion of the costs are allocated to the offices that require more attention due to the number of transactions, specific problems, etc. We constantly strive to maintain a lean operation that will pass as little cost on as possible to you while providing a high level of service.

On you detailed statement of operations, you may see that you are charged for an item for a cost that you do not incur. For example, a charge may appear for equipment rental when you did not rent any equipment during the period. The amount that appears represents the corporate cost for equipment rental that was allocated to your office.

The specific method of allocation is dictated by each doctors' business service agreement or comparable agreement."

OCA records depreciation on the fixed assets on your balance sheet equally over a period of 10 years. If you have $140,000 of fixed assets on the balance sheet, depreciation will be $14,000 per year. For every dollar of depreciation expense, accumulated depreciation on the balance sheet becomes a larger negative number by an equal amount.

Please note that depreciation expense is an accounting adjustment only and does not affect the amount of cash that is available for distribution to you. The net income on your income statement is a number that has been reduced by depreciation expense. This net income number is the starting point for the Statement of Cash Flows. The first thing that we always do on the Statement of Cash Flows is add depreciation expense for the quarter to increase the available cash. Since the ending amount of cash on the Statement of Cash Flows is used to determine the distribution amount, you can be assured that depreciation expense does not have a negative effect on your quarterly distribution.

Offices affiliated with OCA for a period of 24 months generally have the following expense percentages: Doctor compensation - 14%; Employee costs - 23%; Advertising - 8% (depending on size of market); Orthodontic Supplies - 6.5%; Lab expense - 2.0%; Other operating costs - 9.0%. Rent expense is a fixed number and doesn’t have a standard percentage.

With questions, please contact Brian Piglia and Howard Mason at 888-OCA-SMILE. Because the phones frequently get tied up at the end of the quarter, for the best response please e-mail us at bpiglia@orthodon.com or hmason@orthodon.com. If you e-mail us, please let us know whether or not your e-mail system supports attachments.