This blog is the second in our 3-part series dedicated to helping you gain more insight into the financial inner workings of your dental practice. Specifically, we’re diving into the three most important financial statements that every dental practice owner should be comfortable with (and actually use!) on a regular basis.
In part 1, we discussed the basics of the balance sheet. If you missed it, you can link to it here: What Financial Statements Are MOST Important for Dental Practices? Part 1: The Balance Sheet.
In this post, we turn our attention to The Income Statement.
The Income Statement: What Is It and How to Read It.
The Income statement will reveal whether your business is generating a profit, breaking even, or losing money. It shows you how much money your business has earned, and how much it spent, over a specific timeframe. That lets you calculate your net profit—the bottom line.
If the number on the bottom line is positive, you’re making money. If it’s zero, you’re breaking even. If it’s negative, you’re losing money.
We’ll take a look at two income statements.
The first is an example of a PLLC or an LLC, which most of you have for your personal businesses.
This is a very basic income statement and is always on a Cash Basis of accounting –
it typically contains one or two top line revenue items:
- Production Revenue – the money received for a percentage of collections earned from a dental practice.
- Distributions received – this will only be there if your PLLC has ownership in another business which pays distributions.
Then there are various expenses – auto lease, business meals, dues, professional fees, professional liability insurance, phone, uniforms, and if you’re an S-Corp, there will be a Salary/Wages and payroll taxes.
Lastly, the bottom line is Net Operating Income (this is what you will be taxed on – federal and state)
The second example of an income statement is for an Oral Surgery office.
Each bookkeeper will structure it differently based on who’s looking at the information. Here is a basic layout which is structured so individuals outside the business can understand the daily costs of an oral surgery office. Using the same data, we can restructure the format to show more management-focused reports like direct costs, indirect costs, which can help them target expenses to reduce while not compromising patient care.
Let’s dive into each section of the statement (you can refer to the sample statement below).
Patient Deposits – This is the top line revenue. This is the actual cash received in the bank from patient procedures.
Refunds – This is the amount of refunds given to patients/insurance. Depending on how the office collects for procedures, this line can range from 3% to 9% of patient deposits. The higher the percentage the more alarming it can be as there is always potential for employee theft.
We then move to Administrative costs – bank, merchant and care credit fees, dues, office supplies, phone, professional fees, training, travel. These are typically costs that can be controlled to help keep the business profitable.
NOTE: Advertising & Marketing should be viewed as an investment even though it’s captured as an expense on the income statement. Meaning that when you make an investment, you expect to get a return on that investment. When the business invests in a marketing campaign, you should know how to measure what improved as a result. For oral surgery, most of the money is spent on referral gifts since that is a metric which is easily tracked. Spending 2%-4% of revenue on marketing efforts is reasonable. Just make sure you’re measuring the return on that investment.
Occupancy costs are rent, utilities, building repairs, taxes, and insurance. These can run between 5% – 8% of revenue.
Production costs are directly tied to providing patient care – supplies, implants, instruments, lab fees, waste. These will be your second highest batch of costs on the income statement. Medical Supplies and Implant costs are the largest portions. The total production expense group can run between 9% – 15% of revenue.
Then we get to the last and highest costs on the income statement – Staff Expenses. This is where the associate doctor fees, employee wages, payroll taxes and employee benefit costs reside. These costs can range between 55% – 65% of revenue.
The Net Operating Income (or EBITDA—Expenses Before Interest, Taxes, Depreciation, and Amortization) is the bottom-line number management should focus on monthly (ideally we’d like to see this at or above 10% for an oral surgery practice).
The final section of the income statement will show costs for interest, franchise tax expense and at year end you’ll see expenses for Amortization and Depreciation (some accountants present estimated numbers monthly). This leaves you with Net profit. It’s the total amount the business has earned, after taking all expenses into account, including tax and interest.
As you can see, there are significant inputs that create the income statement for a typical oral surgery or dental practice. However, we hope you can also appreciate how well the income statement isolates the key financial drivers of your practice, and clearly provides insight into your profitability.
In the next post, I’ll focus on the final of our three core financial statements, the cashflow statement.
Until then, don’t hesitate to reach out if you have any questions. As a Greater Houston-based team focused exclusively on the needs of dental practices, we’re uniquely positioned to help you grow your practice while increasing profitability! To learn more, visit us at https://stacbiz.com or call us at 844-424-9637.
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7 Key Financial Practices That Separate Thriving, Growing Practices From The Rest.
There’s no denying it. Creating a thriving practice is about much more than practicing medicine!
Topping the list of “other” priorities is your practice’s financial management. In this short guide, the experts at STAC Bizness Solutions outline 7 financial best practices that differentiate struggling practices from those which are highly profitable and experiencing healthy levels of growth.