114: Dental Financial Planning: Turning Chaos into Financial Freedom - Part 4

Welcome back everybody, to another episode of the Dental Boardroom podcast where we attempt to break down all things financial for a dental practice owner and help them structure a plan for financial independence, which is the theme of the series that I'm on right now, Financial Planning for Dental Practice Owners Turning chaos into financial freedom. And phase one was building out your sort of strategic team to create a master plan for wealth accumulation and for really healthy running of your dental practice. Then phase two was building a personal Financial plan for Financial independence where we talked about creating a long term financial plan, a short term financial plan, the long term being when do you want to retire and what does your future look like and and what costs are coming that come with that. And then the personal financial plan today is about your spending plan today and how and when you pull money out of the practice to support your personal needs today. And then finding a happy middle ground or an equilibrium between your future goals and what that's going to cost and your goals or spending needs today and what that costs so that you have is sustainable financial plan as a dentist and practice owner. Today we're going on to phase three, which is probably where most of the meat comes in, because as I've stated before, if we can get the cash flow and the financial condition of your practice to be extremely healthy, it's a lot easier then to translate that success in health into your personal financial life, to have that meaningful life that you have defined and specifically what aspects of that life have a financial aspect to them. So phase three, develop your business financial plan. Now, there are multiple phases or stages to do this, right? Let me enumerate them. Step one, organize your practice financial reports. Organize your practice financial reports. That's what we're going to talk about today. Step two is understand your breakevens. I've talked a little bit about breakevens in the prior episodes. We're going to talk about those a little bit more. I think it's critical to understand the nature of breakevens and the economics of it inside of a dental practice. And again, I'm not trying to make you.

An economic professional, but I do believe as the CEO of your business, there are certain financial concepts that you do need to understand. So that's two. Understand your breakevens. Number three is complete a tax plan. Number four is to determine your W2 level, your W2 payroll for the year, what should be on your W2 at the end of the year for what your goals are, your tax situation, your 401k situation, your tax planning, what should your W2 be. And then lastly, the fifth step in developing a business financial plan is to complete a cash flow projection. Look out on the future and determine what is going to happen to your bank account in the practice and then to allocate surplus capital. So I really want you to enumerate these. See these in your mind. Number one, organize your practice financial reports. Number two, understand your breakevens. Number three, complete a tax plan. Number four, determine your W2 payroll for the year. And number five, complete a cash flow projection and allocate surplus capital. These are the five steps I'm going to go through over the over the next few podcast episodes. These are intended to be done in sequential order and then each year you sort of go through this cycle again. Let's start off with step number one, organize your practice financial reports. I will tell you that in the same way I struggle to floss every night, dentists struggle to read their financial statements every month. It's not just you dentists, it's not just you. I mean, I look at mine regularly. But then again, I'm a CPA and a financial advisor. I'm a fractional cfo. So that's very natural for me to do it. Just like it's very natural for you to floss. You probably floss after every meal as a dentist. However, most small business owners, dentists included, don't necessarily do their financial flossing by reviewing their financial statements after each month. Now, we do our absolute best to finish these financial statements for our clients and deliver them as timely as possible. We do a lot of financial statements and oftentimes we lose connection to bank accounts or we have questions about specific transactions. So as much as I would love to have them all done by the first of the month for the prior month, that just is not realistic. We try to have them done by the 15th for most of our clients. Key thing though is that you have them monthly. It is very important to have them monthly and you review them monthly. Just like it is important to floss on a daily basis. Brush and floss Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a fragmented market. Many dentists selling their practice field discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them Zillow, Airbnb, Uber and Opentable just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features of Inside a Practice Orbit users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into the platform so.

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Practice owners will have a beautiful digital listing of their practice, like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be autonotified. When new listings come for sale, you can use the platform to introduce your listings to a targeted set of buyers. Additionally, and optionally, you can use the platform tools such as a built in NDA, a customizable loi, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system from listing the practice to NDA to loi, and finally to closing the deal. Create your free account today at www.practiceorbit.com.

So I'm going to spend some time talking about what is a good financial X ray. What are these practice financial reports? Now to start to start, I want to emphasize, I want to speak to the importance of financial reporting as financial X rays. Financial statements aren't necessarily just to give a person a historical set of numbers to look at or just to file a tax return. Too often for small businesses, the profit and loss statement and the balance sheet are used primarily and foremostly to file the corporate tax return, which is deeply unfortunate that that's the leading use. The leading use of these should be to tell a story. It should be used to tell an economic story about the financial health of this thing called your dental practice. And secondly it should then be used to file a tax return and if you do it in that order with those purposes, the number one, the first use of it Using it to tell a story will actually help you save taxes when you do. Number two, to enter the data from the financial statements into the tax software to file a tax return. You will save in taxes if you do number one right and consistently, which is use your financial statements to analyze the financial health and make key financial decisions. Now, as a dentist, you weren't trained in how to construct these financial statements. The format, the layout, how to use QuickBooks, how to reconcile the relationship between the P and L and the balance sheet. You aren't trained in all this and so you don't necessarily have to be. There are concepts of it that I absolutely want you to understand. And I've done a few podcast episodes. You could go and listen to them. 10 things, 10 questions to ask yourself every month when you review your financial statements and also 10 questions to ask your CPA when you meet. Those are separate podcasts. So I'm trying to educate you on how to sort of digest these financial statements to make healthy decisions, but you're not necessarily training it. That's why it is important that you have a good CPA or a good financial consultant who helps you structure these in a way that is specific to you. As a dental practice owner, you don't want one that's going to be specific to restaurants. You want a financial statement format that's specific to you and therefore be a lot easier to extract out the main themes and takeaways from those financial statements each month. So organizing your, your financial statements, let's, let's go back to. There was a time when businesses did not have financial statements. You got to go back a few hundred years and in, I think it was the 1500s or 1600s, double ledger accounting was invented where if in an, in a transaction, there's always two sides to a transaction. There was a debit and there was a credit. And yeah, we CPAs and accountants get made fun of for bean counting these debits and credits. And that's okay. But there was a time when this was discovered that it was groundbreaking. It was absolutely groundbreaking to business owners, entrepreneurs, to the financial sector. And what it did is it created this regular story where business owners could then extract out information about their practice to be more successful and also to prevent fraud and embezzlement and also of course, to minimize their, their, their, their taxes. Now, things back then were quite different than they are now. But it came out of Amsterdam, sort of the Netherlands area. It came out of there, this double ledger accounting. And it completely transformed the way that wealth who owned wealth. And it really moved it from sort of the, the, the royalty, and it transitioned a lot of wealth into the hands of private merchants. Accounting being one of the key reasons why. And out of that came the first stock exchange ever, which was the Amsterdam Stock Exchange. And the first public company was the East Indies Trading Company. And all this came out of what is really crystal clear reporting, which was underpinned by these inventions of accounting. Now, I love to elevate accounting as an accounting just to help myself feel positive every once in a while that I'm in a cool space. That said, accounting has sort of lost its luster over the years for sure. But I want to sort of reinvigorate that luster in your eyes to understand that it is still very important to understand the economic story of your practice, because just in the way that it revolutionized the way money was made and wealth was earned way back in the day, it can also do the same thing for you if you use it as a key tool to build your own wealth. All right, let's go into the format of financial statements again. As you know, I'm sharing my screen for those watching this on YouTube. I will narrate this for those of you listening to it on your phone. So step one, organize your practice financial reporting. When I get a prospect, I get their P and L and I look at it and I can immediately tell how well was this dental practice owner instituting an organized plan around their money, around saving taxes and around accumulating wealth, etc. Just by looking at the format of their financial statements. Because if the format of the financial statements doesn't tell you anything, then a lot of decisions, important decisions, are not being made. So here's what a common P and L looks like. It has the collections at the top and might have patient refunds under that. And then the net income, the total income, and then below that, it has all of the expenses in alphabetical order. So those of you on my screen see my screen. I'll. I'll narrate this. Under expenses, there's advertising and promotion, automobile expenses, bank service charges, computer expenses, continuing education, contract labor, credit card fees, dental and clinical supplies, doctor meals, doctor salary, interest, expense, lab services, license, medical services, office supplies, pension expense, rent, staff wages, travel and lodging, utilities. You add all that up, it's your total expense. So what's on the screen is a practice that's doing $1,400,000 $50,000 in patient refunds. So $1,350,000 is left. Then after all those expense items the expense items total $1.283 million. That leaves a net ordinary income of $67,000 on the bottom of the P and L. Now to clarify, the P and L stands for profit and loss statement because it can show a profit or a loss, the formal accounting term which, which will usually show up at the top of your P and L. And what we CPAs use is your statement of income and expenses. Your statement of income and expenses. But that is synonymous with your P and L, which is synonymous with your profit and loss statement. It's all the same thing. It's showing what money came in and what money went out the door for tax deductible expenses. And I want to emphasize tax deductible because you got money going out the door that is not on here because it's not tax deductible. When you transfer money to your personal account out of your business, that is not a, that's not an expense, that's not tax deductible. When you just do a transfer on your phone from one bank account, your business bank account to your personal checking account, that's not going to be on here. When you pay back the bank, the principal portion of the debt, that's not going to be on here. The interest is. Because that's the cost to get the money. That is a business tax deductible expense. But not paying back the debt. You're just paying back money. Money that somebody gave you that wasn't taxable when they gave it to you is the money that landed in your account. So when you pay it back, it's not a tax deduction. Does not show up on your P and L. So the P and L does not show all of your cash flow. It shows most of it, but. Or a lot of it at least. But it does not show exactly where your cash went. It is more used to itemize out what is tax deductible of the. Of the money that went out of your business. Checking out what is tax deductible, that's the main reason of a P and L. So it's a little bit unfortunate that the P and L was designed ultimately for the tax return. The reality is you need to take this and adjust it a little bit to be useful to tell your story economically, not just to get the tax return done. That's why if you're a client of practice cfo, what you have to do is you have to take this P and L, you got to make some adjustments to it to make it more of a cash flow statement to. So it accounts for everything coming in and going out, not just what the IRS wants to see as coming in, going out for tax calculations. That's important. How do you convert this into a true full end to end cash flow analysis? So what we do is we have, we have an Excel spreadsheet, we take the P and L and we bring it in there and then we bring in the debt, we bring in distributions out of the practice, we bring in everything and then from there we do a cash flow forecast which is step five of this business financial planning process, which I will get into later. But during this business financial planning process, you have to get to the underlying cash flow beginning to end. But the key starting point is your profit and loss statement. And so let's talk about how to structure this. Because this format of your income up at the top, your expenses down below in alphabetical order with a net ordinary income at the very bottom is not telling you much because this is saying business. This practice does $67,000 a year. So the question is, is this a healthy practice or not? Financially, when you look at this at first blush, it's very hard to tell whether or not this is a successful practice or not because a lot of the doctor's personal wealth building is embedded in various areas here on the P and L. And also the doctor's personal expenses are sort of weaved in and out a lot of these line items on here. And so when I see the $67,000 at the bottom, I don't know how much of their personal spending and their personal wealth building is baked into these other areas up above that are really maybe hybrid business, hybrid personal. So that's difficult. It's difficult to tell that. I know 1.4 million dollar practice is a good practice, but I don't know what the cash flow is going to look like at the very bottom to determine whether or not this is a healthy thing. So that's a figure out. How do you, how do you right size this, how do you reformat it? So going down to the next page, there are various items on here which are the culprits, the ones that are likely going to see a lot of personal stuff. For example, advertising and promotion. On this statement I see $20,000 for the year going to advertising and promotion. Well, maybe you did pay for a marketing company, roughly fifteen hundred dollars a month or so. Great. Or maybe you took a trip to Europe and called it a promotion just to sort of bury it inside there, which I've absolutely seen done Many, many times other ones. Automobile expenses. That's not a true business expense. You and I know it. Especially if you're buying an $80,000 car that, yeah, we are definitely toeing the line by getting tax deductions for that, and we recommend all of our clients have their car in the business. So when I, when I point these out, by the way, it's not that I'm disagreeing with running them through the business at all. Some of them may be a little more aggressive than I'm comfortable with. And if you're a client of practice, CFO, or with whatever CPA files your tax return, your CPA's name is on the bottom of that tax return that gets filed, so we have liability exposure as well. That, that is why I would never file a tax return if I felt something was outright fraudulent or what's called tax evasion. Tax evasion is illegal, and I will have no part to do with it. However, as I'm trying to help you build financial independence, I have to. I have to mitigate the massive friction of taxes. And the way to do that is to toe the line, which I'm a big believer of. So let's run through as much stuff of this that we think we can justify as having a business purpose in order to get our taxes down. I do it personally to advertising and promotions, automobile expense. Continuing education on here shows 40 grand. Maybe you took a big trip to Hawaii, and maybe you took a CE course while you were there. Who knows? But you're calling it all continuing education. That's very aggressive. But I do see that a lot. And if you're a buyer of a dental practice and you're looking at this P and L and you see continuing education for 40,000, you're going to want to ask, what is that? Is that something that I'm going to be paying for after I buy the practice or not? And by the way, on that note, this whole exercise, I want you to simulate in your head as if you were selling your practice tomorrow, you're selling your practice tomorrow, and you want to know what is the true profitability of this? So that you can tell a bank and you can highlight to a buyer, this is my true profitability. I know it says $60,000 at the bottom of my P and L, but that doesn't tell you the story. And so that's why doing this formatting or just changing the way that you lay out everything on your P and L to tell the story in a quick, easy, digestible way is so important. It will A, make you a better decision maker around your practice money and B, it will get you a higher value of your dental practice. So what other culprits are here in this list? Dr. Mills and Entertainment. 20 grand? Yep. Pretty much 100% of that needs to be added back to the profits. You're going to hear me use that term, add back. Add backs is when you take these expenses and you add them back to that profit number at the bottom, 67,000 in order to get to true profits. All right. Those are called add backs. All right. The next item is the doctor salary. Now you as a doctor, I've stated this many times. Sorry if I'm a broken record. But your W2 and your corporation should have no correlation to your production. None. It should be correlated entirely to your tax and financial planning. Your tax and your financial planning. And whether or not you have a 401k and or a defined benefit plan in the practice drives significantly whether your W2 should be high or whether it should be as high as high as possible, all the way up to about 350,000. You never want to go above, above that number. Right. I think this year in 2025 is 340,000. You never want to go above that because then you're just unnecessarily paying Medicare taxes of 2.9% on every dollar of W2 above that amount. You never want to go above that. But you may want to go as low as you can. You can. If you don't have a 401k, why? Or a defined benefit plan in order to avoid paying FICA taxes. Because FICA taxes at 15.3% are expensive. Some people pay more in FICA tax than they do an income tax. And so you want to get that low, you get it too low and the IRS going to come knock in. It's the number one reason for an audit of a dental practice is the practice owner doesn't pay themselves another enough W2. They pay themselves 10,000 bucks and then the profit of the corporation is 500,000 bucks. Yeah, buckle up. You're going to get audited. And if you're at zero, pretty much guarantee at some point the IRS is going to come sniffing around and they're going to want, they're, they're going to audit you. And then what they're going to do is not just bump up your W2 and make you pay FICA taxes, they're going to go through your whole books and records and it's going to take a year and then they're going to look at the next two years after that and next thing you know, you're two years into this, you've dropped 40 grand.

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And to a CPA or an attorney to help you through it. It's complete bust, a complete waste of time. So got to make sure you pay yourself a reasonable wage via W2 to avoid an IRS audit. Now if you don't have a 401k or DB plan though, you can get that pretty low. You can get that that pretty low. And different CPAs have very different thoughts on what is reasonable wage because the IRS doesn't exactly define it. One CPA will say, well you should pay yourself a W2 what you would pay yourself if you were a true associate. All right, I get that argument. Another will say don't pay yourself less than 50% of your total net profits. So if your practice is 2 million and your net profits before paying you anything is 500,000, then don't pay yourself anything less than as a W2 than 250,000 and then you take a K1 distribution of 250,000 for a total of 500,000. That's what some CPAs will say. What I will say is that most of the time if you pay yourself six figures, that is $100,000 as a W2, the understaffed IRS probably is never going to get around to auditing you. And then once the statute of limitations goes, it passes up, you know, three years, you're out of the woods, you're good, and you saved quite a bit of money in FICA taxes. All right, now you may say, well, Wes, don't I want to pay FICA taxes? Don't I want to pay my Social Security so I get Social Security later? Well, there's some truth to that. The more you pay in W2, the more you pay in FICA taxes. And the more you pay in FICA or Social Security tax, the more you get in Social Security tax when you turn 68 or 70 or whenever you start to take that money. That is true, but it is not a dollar for dollar sort of transfer, first of all. So the, the span of the amount of FICA tax, I mean, sorry, the span of amount of Social Security income that you're going to get is a fairly small bracket. So whether you pay yourself 100,000 a year or $350,000 a year, it actually doesn't make a huge difference in how much Social Security income you're going to get. It definitely makes some, but not a huge difference. I'd rather see you pay less in FICA tax in order to save that differential in an investment account, and then that will grow and compound over time, especially tax deferred if it's in a 401k or an IRA. And that's going to give you way more benefit than that extra little juice of Social Security when you, when you retire. The other thing is our Social Security trust in this country is pretty much gone. I mean, I think it's like five more years before this thing is completely eliminated and we got all these massive problems. Massive, massive debt. The one big beautiful bill is going to add just a massive amount more to that debt. It's projected to be 3.5, I guarantee you, 3.5 over 10 years. I guarantee you we will add more than 3.5 billion trillion to the national debt before the end of Donald Trump's term. I guarantee you he added 7 trillion the first time Biden came in, added 6 trillion. There is no way we are stopping that massive train, especially with the fact that both parties, no one is willing to restrain their spending right now. And so we're heading toward this debt cliff that ultimately is going to force us all to our knees to figure out how to come up with a hard solution to this. Somebody's going to pay for this at some point. And so we'll see where that goes. But my bottom line there is like Social Security being there in the future. I don't know if it's as reliable as we would like it to be. Now, if you're 65 right now, you're probably fine. If you're 35 right now, you're probably not going to get what is the stated amount that you would receive later unless some dramatic changes are made. So back to the W2 conversation. I would. If you do not have a 401k or DB, I'd probably bring you down to a hundred thousand unless you're a really profitable practice. And if you've got net income of 500,000 to a million, I'm probably going to pay you more than 100,000 because let's say your net income is 500,000. Before paying yourself anything, if you do 100,000 W2 and you have a $400,000 K1 equaling that 500,000 profits, remember it's a teeter totter. K1 on one side, W2 on the other. If you pay yourself more W2, you're going to get less K1. If you pay yourself less W2, you're going to have more. K1 is just a two year totter, but it's the same amount. And if you pay yourself $100,000 W2 and a $400,000 K1, that could start to be questioned by the IRS. For sure. For sure. But if your W2 is 100,000, your K1 is 200,000, you're going to be fine. You're going to be fine. Now you may get some IRS auditor that comes and tells you otherwise, but in my experience, having done this now for, I don't know, 20 years since coming into the CPA world, you're going to be just fine. There's. If you go under 100,000 and pay yourself say 50,000 W2, just make sure that's seen in context. If your practice is running a loss, so your K1 is zero and you're maybe a startup or just running on hard times. And if you pay yourself 50,000, you're probably fine. It's really that 50,000 relative to what is the K1 or the net income to the corporation. That relationship is very important. Okay, let's carry on. What are some of the other culprits on here? Interest expense at $22,000. Interest expense is the interest you're paying for getting a loan from the bank, as you know, and the Reason why I like to call that out is because that's not a true operating cost. If I bought your practice, I'm not paying your debt because it's an asset purchase. I'm buying your assets, I'm not assuming your debt. And you're going to have to take the sale of your practice proceeds and pay off your own debt. And so I like to call the interest expense down below the operating income because interest expense is not an operational item, it's a financing item like I've mentioned. So I call that out. Also office supplies, Amazon, Costco. So much baked in here. That's personal. You know it and I know it. And so I like to call that out a little bit separately where I can. Pension expense or 401k. If most of what you're putting in dollars out of your pocket into the 401k is going to you and, or a spouse, then I like to call that out because it's not necessarily a true operating expense. If I bought your practice, I'm not going to be paying perhaps that much. I'm not going to be funding your own retirement. And some doctors will get a defined benefit plan and put $400,000 a year into that. We do that with our really high rolling doctors who are a little bit older and it makes a tremendous sense. They cut their taxes off by 70% doing this thing. It's a little tricky. You gotta oversee it well. But if that, that $300,000 going into a defined benefit plan or what's on my screen for the 401k, a lot less. But a $40,000, I'm gonna want to move that around to a place that it doesn't cloud. What is the true profitability of this dental practice? Because in many ways that's not an operating expense, that's really a savings. That's a savings account is what is going on there. All right. Staff wages. I highlight that only because a lot of times we bake a spouse or kids in our wages in order to save taxes. I do this a lot. This is not a tax strategy web podcast right now, but every child you get on your t, on your, in your corporation, I wouldn't put them on there under say five or six years old. I wouldn't do that. But once they get to that age, if you put them on there and pay them, what is the annual standard deduction, you're essentially shifting that amount of income from your high tax bracket to a zero income tax bracket. Now there's some FICA taxes on it, but A zero income tax bracket. And that income shifting strategy can save around 2 to $3,000 per child per year. And that that adds up for sure. And so I want to know in those staff wages do we have any sort of fake wages which is just kids or a spouse who isn't really in the practice but but we put him or her on payroll in order to fund their 401k. I want to pull all that out so that way I know what are the true wages of the practice. Travel and lodging. Another big culprit as well for obvious reasons it's usually personal money. So that $40,000 probably doctor's trip for personal use. All right, now what should it look like? Well, I'm going to give you a sample of the practice CFO financial statements. Now these are actually outdated. We've now since moved to a different reporting software. However they're formatted very similar to what you're seeing on the screen. And let me narrate that for those of you that are just listening. I have various columns on my P and L and I call it, as I mentioned, the statement of income and expense. And on the left hand side I don't just have the income and all the expenses, but I categorize them into subcategories and then even under those I break them out into sub subcategories for income. I do show practice collections and refunds for a few clients. I will break that out and say collections for this doctor, Collections for this doctor. Collections for hygiene for some doctors, most doctors that's totally unnecessary. Sometimes when you have a multi specialty practice or some other for whatever reason we may do that. But I like to keep that fairly simple. Collections, refunds, net collections at the top. Then I break up my overhead into the following categories. Labor, supplies, lab facility and admin expenses. Now that's five categories of expenses. Since when I did this I've now added a new category for marketing. I actually call marketing out separately where it used to be baked into admin expenses. So there's really six categories. Labor, supplies, lab, facility, marketing and admin. And none of that is anything going to pay the doctor yet. Because I want to know what is coming out of this portion of the P and L called the operating income or income from operations because then I can compare that to what is a healthy practice before paying a doctor. And then the doctor's compensation, the doctor's perks like travel and lodging, that kind of stuff comes down below the operating income. So let me elaborate that as I go here. But the Other columns I have is I have a column for the month, I have a column year to date, so January through the end of the prior month. And then I have two percentages and what percentage is showing what is the financial planning percentage goal? In other words, what is our percent allocation of income that we want to pay to labor? And in this case it's 30%. It's in right next to the labor category in the P and L and it says 30%. And what that means is that 30% of your collections, we are budgeting 30% to go to paying your team, your assistant, your front office, your hygiene, payroll taxes, employee benefit plan, other indirect costs, associates, that kind of thing. And in this case, the doctor had actually allocate, actually spent 27% of their collections toward the employees. Now we had set a financial planning goal of 30%, so that's why I have the 30%. I can compare that right away. This is a great storytelling moment. My goal is 30% and for the month I did 23% and year to date I'm 27%. I am beating my goal. I'm spending less on staff cost than what was my target. But then I have a column for what is the industry standard for a general dentistry practice? And we, we of course will change that, modify that for specialists. An oral surgeon is going to have a lower than a GP allocation to staff costs. Primarily they don't have hygiene costs. So I have the industry averages as well. And then on the far right I show the prior year to date. So if we are in March, as this one is, it's showing three months this year in the year to date column, and then the same three months last year so that I have an apples to apples comparison. And then I show the change between the two. So that's how we format the profit and loss statement. We have better categories, we break out those categories. We show month, year to date, prior year to date and the change. And then we, and then we compare the actuals to what are the goals that we set as a financial planning goal and also compared to the industry standards. And that just gives you so much rich context to measure the health of your practice. So as I go down this P and L, eventually we get to the bottom and like I said, you get to your total overhead expenses before paying anything for the doctor. And in this case it's showing that the doctor, year to date through March, paid 53.7%. Now, I had dollar signs on here, of course, this was, in this case it's 253,865 was the total overhead for three months. And that was 53% of the collections, which were 473,116 for the, for the, for the year, and that's 53.7%. We set a goal of having 58% overhead with a profit margin of 42%. And the industry standard is 57% overhead with a 43% profit margin or operating income. And now we can see for the year, year to date, how are we doing relative to the total. Then we get down to what is the punchline of the P and L, and that's your operating income, what is left after your overhead, operating expenses. And so like I said, we set a goal here, 42%. The industry averaged 43% for a GP. About depends where you live in the country, but that's about what it is. And now this doctor, we can do a really good comparison against those things. Then this operating income, this punchline of the P and L shows you the amount that you have earned as a doctor to pay for your taxes, to pay for your debt, to pay for your perks like your meal and automobile expenses and kids on payroll and spouse on payroll. It pays those, those perks. It pays for your funding into your 401k and defined benefit plan, your savings, and it pays you for today. So this, in this case, this example doctor has 219,000 for the first three months. So that's like, I don't know, 70,000 or so each month of operating income. That's a healthy operating income. This, this healthy practice right here and that then if we go down to the bottom, I draw a line and I say everything below this is tax and financial planning. And that's where I have the doctor salary, the doctor family wages, automobile expenses, doctor payroll taxes, personal medical insurance payments, depreciation, amortization, interest, expense, all that is below the line because that all relates to tax and financial planning. And then at the very, very bottom, you get to a number called your net income and it's double underlined. And the only value in that is for taxes because that's the number that flows out on your K1 to your personal tax return and you pay taxes on that number. That is the structure or hierarchy layout of a healthy profit and loss statement for a dental practice. And if you structure it this way, and then you use my tool that I gave out in a prior podcast 10 Questions to Ask yourself when reviewing your P and L. Now you're starting to really, really think like a good business owner. Okay. Our takeaways are the following for this episode. Number one, reformat your financial statements and review them monthly. The resources I have are a sample chart of accounts and I will include these in the show notes, a sample profit and loss statement and then questions to ask yourself when reviewing your financial statements each month. And then also I have number four, 10 questions you can ask your CPA as well. So those are the resources that I give out whenever I do this lecture so that people can not just hear this and learn a few things, but actually go and get traction with their financial system. On the next episode, we're going to go into step two, which is understanding your breakevens. You can't define your breakevens in your practice until you have healthy, clear financial reporting. That's why these are sequential and I'm looking forward to doing that one. Until then, have a great one. We'll keep going on the series of financial planning for dental practice owners turning chaos into financial independence.