41: Your Practice in Numbers: Mastering the Profit & Loss Statement

Hey, listeners, welcome to another episode of the Dental Boardroom podcast. This episode is on the subject of your practice financial statements. These are the statements that tell the story financially about the economic health of this thing we call your dental practice. Every business has this or should have this, especially dental practice owners who are competing in a relatively small, competitive marketplace. And those who truly understand their economics in their business typically are going to do better. Now, this episode also relates to, I believe, a seller of a dental practice sale. So I'm going to post this also on my second podcast called the Dental Practice Sale that touches on all things around buying and selling a dental practice. The reason why I think this is probably one of the most important podcast episodes I will ever do here at Practice CFO is because your financial statements are the outcome of so much effort that has gone into your dental practice. And there's no better way to measure your performance of all those efforts than through this report that's oftentimes neglected, not delivered on time, structured wrong, and not helpful. Called your P and L or profit and loss statement. I believe doctors in general don't put enough emphasis on getting this right and using it as a key tool to make financial decisions in their practice. All right, so what I want to do is I want to provide some education from top to bottom how to structure, format, and read your financial statements. There are two types of reports that you will generally get from your cpa, accountant or bookkeeper. The first one is called your P and L, profit and loss. The second one is called your balance sheet. Now, those are the informal terms or titles for these actual, actually formal titles, which are your statement of income and expenses and your statement of assets and liabilities. Now, those are the formal accounting terms that are going to be in the textbook. But I'm going to stick with what we've all typically heard, which is just your P and L. But those two statements constitute what we generally will call, in my world, your financial statements. And the second one I'm not going to cover today, the balance sheet. I may or may not do that one later. That one is actually a critical statement, so I probably should. But. But the one that I really want doctors to be much more tuned in on a month by month basis is your P and L. Now, really quickly, from a high level, the difference between your profit and loss statement and your balance sheet is that your profit and loss statement shows money coming in and money going out and what's the profit at the end of the month? Now, it's not exactly a cash flow statement. And I'll explain that why here in a little bit. It is a statement of income and expenses. Your balance sheet is showing everything you own and everything you owe that is debt. And the difference between those two things, called your book equity and the balance sheet, is incredibly important when it comes to understanding your debt, understanding how leveraged you are relative to your, to your practice value, which means how much debt do you have relative to what is the value of your dental practice? And it's a little bit more complicated to explain, so I'm going to punt that. And let's just focus right now on your income statement, your statement of income and expenses, your P and L, all three of those titles really is the same thing. Now, at Practice cfo, if you're a client of Practice cfo, we meet every generally three months or so, three or four months, and, and we do a deep dive into your financial statements and we use those as our financial X rays to then project out where you are headed financially to make key financial decisions as your outsourced chief financial officer or CFO for your practice and for you personally. Now, you don't have to be a client of practice CFO to get some really good financial statements and to make some general takeaways each month from those financial statements. Now, if you're not reviewing your financial statements every month, I'm going to say step it up, docs. We need to do this. Your business owners as much as your clinicians. And a lot of times you may not do it simply because you're not getting it in time or you're not getting it every month, or you simply don't know how to read it. So first order of business is to speak with your CPA accountant or bookkeeper and just make sure you're getting these things. Generally try to get it by the 15th, 20th of the following month. The sooner the better for timeliness. And then have a list of sort of questions, or I would say a checklist of items as you go through there to guide your analysis of your financial statements. So you can listen to this podcast. I'm going to post this on YouTube. And so I'm sharing my screen right now of what a sample P and L will look like. Now, for those of you who aren't viewing this on YouTube, I will verbally explain what I'm showing on the screen as well. And if you would like, you can reach out to us here at practice CFO and I have a list of 10 questions you should ask your CPA when you meet with them to better structure your financial statements and make key financial decisions in your practice. Okay, let's go through this. We are looking at a practice CFO prepared financial statement. Now this is a financial statement that does not come out of QuickBooks. FYI, 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 feel 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 inside a Practice Orbit users can determine a reasonable sale price for practice 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 all parties are coordinating the sale together. 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 auto notified 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.

You're wondering. QuickBooks is the main accounting software that most small businesses use, and we use QuickBooks online for all of our clients. But QuickBooks does not allow you to generate really good reports. They have some basic reports that you can filter in a million ways, but they don't let you compare how you're doing against goals that you set trends over time, graphical views for easy digestion of the data. They don't have a benchmark analysis of how you're doing relative to your dental peers out there. And so what we do is we extract the data from QuickBooks into a third party reporting software called Reach Reporting. And I just love this software. It allows us to pull from QuickBooks and pull from Google Sheets data where we put things in there like your goals and budgets. And then we weave the two QuickBooks and the Google Sheets into this very customized dental report for our doctors to look at every month. Now your CPA or your accountant or bookkeeper should should be able to give you something even if it's a sort of a limited version of it, something that would be very helpful. So follow along here. You can even send this to your accountant or bookkeeper and see if they can structure their what's called the chart of accounts in your accounting records in order to present a similar format of the financial statements. All right, let's go into this. I'm on page one. This is the title page. I'm going to scroll down. This was prepared for Steven Sample, DDS in Inc. And I've got a table of contents. And generally if it's prepared by a third party and not I. E. Not yourself, there should be an accountant's preparation letter and then the profit and loss statement. Now what I like to show also is a 12 month rolling view of your profit and loss and then I have the balance sheet and also a 12 month rolling view of your balance sheet. Now again I'm not going to get in the balance sheet today so we're going to focus on the profit and loss. I'm going to skip over the accountants preparation letter. This is just one of those standard protocols in my industry that we're required to do is to state who's responsible for the numbers in this statement of income and expenses in this P and L. Ultimately that's you. It's actually not your bookkeeper or your accountant. They're just sort of compiling the numbers. But it's really on you to confirm that this information is accurate if you were to give it to say a third party like a bank in order to get a loan. And I'll indicate here that we are not independent. We at practice CFO are also helping our doctors on a very personal financial level. Often Setting up investment accounts, placing basic term, life and disability, and all those areas of personal finance and business consulting, which makes us therefore not independent. The only time you really need to be independent if you're doing an independent audit on a business. We are not auditing our clients. We're there actually to be their partner, their thinking partner and their financial coach. All right, enough of that. Let's now dive into the actual content of the P and L. Here's how we have structured these P and L. At the very top it will say provident loss statement, the name of the corporation and then as of what date. So this sample we're looking at is as of August 31, 2024. Then you'll notice various columns. The very first column on the left are the accounts. These are the titles of the categories where your money is coming in and where it's going. For example, the very first line is under income and that's our practice collections. And then under that I have refunds. And the net of those two is called total income. And then below that I have expenses. And there are the following main categories of expenses. Number one, labor. Number two, supplies. Number three, labs. Number four, facilities. Number five, business promotions, AKA sales and marketing, advertising. And lastly administrative expenses. So that's 1, 2, 3, 4, 5, 6 main categories. Labor, supplies, labs, facilities, marketing. I have on here business promotions and lastly admin. Then if I scroll down here, you'll notice if you add up those six categories, you get total expenses. If you then subtract the total income from or the total expenses from the total income you get to a term called net operating income. And if you'll notice, I have this bolded and orange because this is the punchline of the profit and loss statement. This operating income is telling you how much of your revenue that you're collecting from patients and insurance that you're keeping after paying your labor, labs, supplies, facility marketing and admin. How much is left now? How much is left is then going to be used to pay for the following. You personally, that's your life today, you in the future, that's your savings, like a 401k IRA or other types of savings. It has to pay your debt in the practice. It has to pay.

For any other sort of tax planning items like a spouse on payroll or kids on payroll or, or your meals or travel, Amazon, Costco, that kind of thing that you run through the practice. We call those your perks. It also has to pay for your taxes as well. So that operating income number, the reason why we sift below that number paying you, paying your debt, paying your taxes, paying your savings and those tax planning items. The reason why we push all those below net operating income is so that we can compare you with other dental practices. Because other dental practices are going to flush through more or less from a tax planning those personal expenses through the corporation. Doctors will pay themselves a W2 out of their own corporation. That's a function of tax planning, not a function of collections. And so you may be paying yourself as low as possible. Maybe that's paying yourself $50,000 W2 just to avoid FICA tax. Where another doctor is wanting to maximize their 401k and defined benefit plan and they might be paying themselves $380,000 in order to maximize those plans. And so you don't want to put your, I. E. The doctor owner payroll up above that line in the labor. In other words, the labor section only includes your team, not you, nor does it include any family or anybody else you have on payroll that's not actually doing any work in the practice. But you're paying in order to shift income from your tax bracket to their lower tax bracket. Or maybe you have your spouse on payroll in order to max their 401. If they don't have a 401 in a separate job, or if they're a stay at home parent whatnot, they then you can run a payroll for them and max their payroll in the 401k. And so all of that I push down below the item to not cloud what is the true profitability of the practice. Now when you go to sell your practice, the buyer and the bank want to be able to sift through sort of that murkiness to identify what is the buyer actually going to have in net profit to pay their own selves, their own savings, their own taxes and their own debt. And that's why a bank or buyer is also going to try to sift out all that garbage so they can see the real economic profit. Now the problem that I see when we get new clients is we get these P and ls which are so clouded that you can't easily decipher the profitability of that practice and therefore compare the health of that practice to, to industry standards of what a healthy budget would look like for labor and labs and supplies, et cetera. And so one of the first things we always do with our client as they go through onboarding is we restructure their financial statements in order to tell a really good story around their profitability. And so whether you're selling your Practice tomorrow or whether you're selling in 30 years, it doesn't matter. Your financial statements should be laid out the exact same way. If you're selling tomorrow, you do it because you want to maximize the equity on the sell. If you're selling in 30 years or anywhere in between, you want to structure it this way so you can be a great financial manager of your business. So it doesn't matter. I always say pretend like you're selling tomorrow, even if you're not, because if you do that, you're going to, you're, you're going to take a much more keen interest in understanding your business economics than if you were just sort of lax about it, checking it once a year, or really never diving into your finances and always asking, where's my money going? How much am I going to owe in taxes? Where do I stand? How do I stack up relative to my peers out there in dentistry, in my labor cost structure, in my other overhead categories? This stuff should be answered every month in a profit and loss statement. Now at Practice cfo, we have a second report called the CFO Analysis. So which takes all those numbers and it really moves them into graphical formats with line charts and bar charts comparing how you're doing to the industry and to your actual goals. That I'm not going to go over today. Most accountants won't do that. We took a lot of time to build those. I don't think you have to have those. But they are a huge bonus if you can take the data, convert it into very digestible formats of sort of these charts and graphs and whatnot to so that you can look at it and just digest it. Boom. In a minute you can see how you're doing. But what I have right here for you at least is going to give you a pretty good style of format that your bookkeeper, accountant or CPA can prep for you. 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 fraction fragmented market. With transaction costs so high, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are sold. It's an online marketplace platform and it brings together buyers, sellers and their teams to smoothly navigate a transition. When you list your practice for sale on Practice Orbit, you'll present a detailed and polished profile of your practice to a large pool of potential buyers. Think of it like a Zillow home profile, but for your practice. And importantly, that profile will remain anonymous, which means you can showcase your practice without worrying about the public or team members finding out. Only after an interested buyer signs an NDA will that buyer see your name, address and order practice pictures. And at Practice Orbit, we have a team deeply experienced in dental practice sales. Our broker and support team will hold your hand each step of the way. When you combine the power of marketplace technology with the highly qualified team at Practice Orbit, the result is a maximized sale price and a smooth transition timeline. And hey buyers, you can search for practices, submit NDAs and tender offers letters directly within the platform. You can even create saved searches and be auto notified when a new practice comes for sale in your market. If you're thinking about buying or selling a dental practice, create your free account today at www.practiceorbit.com. all right, let's go back up to the top. Let's now look at the other columns to have in the P and L. So the far left column are all the categories. Now I mentioned the six categories of Labor, Supplies, Lab, Facility, Marketing, and Admin. Now, within each of those there are subcategories. To be clear, it's not just labor with a number. Under Labor, I have Assistant Front office, hygiene associate, W2s, associates that are 1099s, payroll taxes, employee benefits, workers compensation contract, Labor Direct, and other direct employee expenses. Under Supplies, I've got General Supplies, I've got Implant supplies, Surgical supplies. Depending on the type of doctor that you are, you may have other types of supplies. Under Labs, I've got General Labs, I have Invisalign, I have Labs Ortho, and you can break out labs however you want to. So these can be a little bit flexible. And depending on our clients, the type of specialist they are, or if they're a generalist, I can add different sub accounts to these main categories. And sometimes we'll even do some very unique sub accounts that are specific to a given practice. Under Facilities, I have Rent, I got Repair, Maintenance and Improvements. I've got Utilities, I've got Janitorial and Grounds. Under Business Promotions, AKA Marketing and Advertising, I've got Broadcast, Print, General, Online, and other. And depending on the type of marketing you do, you can create other sub accounts under there and then under Admin. Admin is really everything else. It's your bank charges, it's your accounting costs, your payroll costs, your phone costs, it's travel and lodging, it's ce, it's all of everything else that isn't related to you. Once you get to the bottom of that and you calculate that net operating income, that punchline of the P and L below this. Let me elaborate on this part a little bit. This is where you put other things that are not going to cloud that true profitability of the net operating income, for example, interest income. Maybe you get some cash back from your credit card, for example. Also, your interest expense on your debt should also be below the line, because the interest on the debt does not relate to the profitability of your practice. What the debt is, is you're taking the profitability from your practice and then you're paying off that debt. And in time, that debt will be gone. But whether or not the debt is gone or still there, the profitability of your practice is going to be the same, because profitability is not the same as net cash flow. Profitability is not the same as net cash flow. And too often doctors assume that the number at the bottom of their profit and loss statement is the amount of new money that should be in their bank account at the end of the month. Well, that's not the case. And the reason why is the profit and loss statement is designed to be a statement that one tells you operating profit. And number two, it stages the numbers that go into the tax return. The business tax return that gets that then gets sent to the irs. And the IRS is very specific on what you can and what you cannot deduct. And so you can't put something on the P and L that is not tax deductible. Now, the debt payment of the debt payment you make to your bank, the only thing that's deductible on that debt payment is the interest, the principal portion of your debt is not tax deductible. So if you make a $10,000 payment to, let's say, bank of America, and it's for your acquisition loan, and let's say $6,000 of that is interest, or let's say $6,000 of that is principal, and 4,000 is interest, how much is going to show on your P and l of that $10,000 outflow? Only the 4,000 interest, the 6,000 of principal that's reducing the balance is not tax deductible. And the reason why that's not tax deductible is because you didn't recognize as income the amount of the loan when you got it. So when you bought your practice, let's stick with your debt being acquisition debt when you bought your practice, theoretically the bank would have given you that money. Let's say it was a million bucks. The bank gives you the million bucks you got that you deposit it in your business checking account and then you take that million bucks and you go give it to the seller. And that money would have landed in your account and it would have went out of your account. Now the reality is that the bank sent that money directly to the seller. It never actually even hit your business checking account other than maybe a working capital layered in there, like 50,000 bucks that would hit your account. But the key point there is that the IRS does not let you deduct the repayment of principal. And, and it makes sense because you weren't taxed on the loan amount, that million dollars that you got to buy the practice. You never pay taxes on the money that the bank lent you. So when you pay it back, you're not going to get a tax deduction. That's simply paying somebody back money that they let you borrow. However, the amount of money you paid the bank to allow or to get that loan, that is deductible. That's called interest. That's how banks make money, or one of the ways they make money. And you do get to deduct the interest. And then the bank, of course, recognizes that as income to them. And wherever on two sides of a transaction, income is recognized on one side, well, the expense can be recognized as a deduction on the other side and vice versa. If it's not recognized as income, then the expense can't be deducted. Anyways. I'm getting a little too deep there. The basic takeaway here is that when you pay back loan, the principal portion is not going to show up on your P and L, only the interest portion is. And so if you ask me, Wes, why isn't my profit and loss statement telling me my cash flow for the month? Well, again, because it's telling you what the IRS considers to be your taxable profit, which is not the same as your actual cash flow profit. Because not every dollar that goes out of your bank account is is an expense that shows up on your P and L. The other thing you'll see I have below this line is called amortization and depreciation. Amortization is when you buy your practice and 80% of it, plus or minus, goes to goodwill, which is an intangible asset. You can't touch it. It's the brand name, it's the patient records, it's the location, it's what keeps your patients coming back. It's your website, it's your team stability all that, that makes your practice worth money that someone will pay for. That's a lot higher than the value of the dental chairs and x ray machine. That's called your goodwill. And your goodwill, you get to deduct, but you don't get to deduct that right away. So when you bought that practice for a million bucks and 800,000 was allocated or portioned to Goodwill, you deduct that 800,000 equally year by year over a 15 year period. And that's called your amortization. Depreciation is the deduction of the equipment you bought. So in that example of buying a million dollar practice, $800,000 in goodwill, $200,000 went to equipment. You don't get to deduct that $200,000 right away. Now you can through this thing called Section 179 deduction. A lot of you have heard of that, where you accelerate the deduction of that equipment, which is also called a fixed asset, you get to accelerate that deduction into the current year and take the full depreciation deduction all in year one. But generally speaking, the normal way of handling that is you don't take a section 179 and you depreciate that over a five year period. So that $200,000, when you bought that practice for a million, 800,000 went to Goodwill, 200,000 went to equipment. You deduct that equipment over five, five years, which is why buyers like to allocate more to equipment, because they get to deduct it faster, where the amortization is deducted over 15 years, but the sellers want more allocated to goodwill because that is generally taxed at a lower rate than the amount apportioned to equipment. So there's a little bit of a tug of war, and that's for a discussion on another day. But this amortization and this depreciation, this all falls below that net operating income line. So all of this stuff, the other income, random, other expenses that aren't related to your dental practice, what would be a random expense? Let me give you an example. I actually have this called out separately down below. A lot of states, especially ones like California, where you have a high state tax, if your state doesn't have a state income tax, ignore this. If you're in a high state income tax like California, California made a law that allows you to pay your federal income tax through your corporation and then you get a deduction for that payment. Actually, I got that wrong. Step back. When you, when you make a, this payment, it's actually your Calif. In this case it's California or whatever state you're in, you pay that California tax through your corporation, what you normally would have had withheld from your W2 or paid as an estimated payment quarterly to the state of California. And you used to make that out of a personal account. Now if you pay it out of your business account, you get to deduct it on your federal return just like you would deduct payments to Patterson or Henry Schein for supplies. And now you get a deduction for it that's called your pass through entity tax, aka your AB150 if you're here in California. So that is a very unique type of payment. That is not a normal dental business transaction. So we push that down below the line. So any of these sort of one off anomalies that are not going to be attached to the normal operations of your practice or that a buyer is not going to have to pay or theirs will be different. That could sit it down below. All right, so the very left column is all these categories that I've just gone over. The second column is the month. How much did you receive or spend in that category for that month? In my example right here on the screen, the practice collections for this month of August 2024 were 238,000. So this is. This practice is ripping pretty good. 238,000. That's a great practice. 238,000. The refunds are showing a zero and this is a sample. Normally you're going to have a little something in the refunds. So the total income 238,000. Then if I keep going down under labor for Assistant we had 9,799 front office. I'm going to round here 21,000, hygiene 12,000, associate 16,000, payroll tax 3,000 etc. For you'll see. Then I add up all the labor for total of of $64,000 for that month. And you'll notice the next column over is a percent. And what that third column should be showing is how much of your income for the month in this case that $238,000 collection. How much of that is going to pay these expenses? For example, the assistant cost of 9,799 constitutes 4% of your collections. So your assistant took to almost a took. Your assistant received 4% of the your assistance received 4% of the income for that month. Your front office took 9%. Your hygiene took 5. Your associate took 7. Your payroll taxes took 1. So total labor of 64,005 79 equals 27% of your collections. In other words, if you took 64,000 and divided it by the 238,000 of collections, you come out with 27%. Then I do the same thing all the way down. Supplies, total 505,000, 445, that's 2% for the month. Labs, total 17,000. That's 7% of your collections. Facilities, 5% of your collections. Marketing, 4% of your collections, and admin 6%. So if you add up all of those expenses, that equals 123,000. Well, 123,000 divided by your collections for the month of 238, that equals 52,000. I'm sorry, my bad. 52% of your collections went to cover your expenses. Again, it has not gone to cover your debt. It hasn't gone to pay you anything. It any family on payroll, all the perks, 401k, defined benefit plan, all of that stuff is not included in that 52%, $123,000 of expenses. But what this allows me to do is say, okay, for the month, Dr. Steven Sample here had a net operating profit of 48%. So a lot of times you hear this sort of rule of thumb that your profit should be 40%. Okay, well, that's what this number is. And this doctor did 48%. That was a good month. That was a good month. Now, if I go to the next column, it's the same thing, except instead of the month, it's year to date. And for me, that's the more important column, the year to date column. Because months go up and down. They go up and down. But year to date, let's say you're, you're halfway through the year. Now you got five, six, seven months in the aggregate in this column. In this case, this is an August financial statement. So you've got eight months in the year January through August in the year to date column. And so you can see year to date through August, this doctor's done 1.8 million with 8889 in refunds, for a total of 1.823 million. Then you can see that the total labor. I'm not going to go through assistant front office hygiene. Just the total labor was 438. And that's 24%, therefore, of the collections, the total supplies were 70,000. That's 4%. The total labs were 8. The total facility were 5. The total marketing was 3, and the total admin was 10, for a total overhead of 55%. And therefore total profit, aka net operating income of 45%. Think about that word, operating income. This is the income from operations, and this is the amount of money that goes to pay for everything you. That's the income from operations. That's the number that I can compare to other dental practices in the industry to have an apples to apples comparative analysis. Now, you'll notice in the next column over, I show the priority year to date, January through August 31st of 2023, since this one is January through August of 2024. So now I have a nice comparison of current year to date relative to prior year to date. How am I doing this year compared to last year? And then the farthest column on the right is showing the change. So this year I'm up 116,000 through August compared to the prior year, that's 7%. So I'm up 7%. Top line. I call it your revenue. We call it collections in our space. Right at 7%. Then I say your labor costs are only $843 difference. That is not. That's less than half a percent. So it's registering a 0% change in labor. This is good. Your collections went up and your labor stayed the same. That's a beautiful scenario right there. It means that you got more production out of your labor resources, and that's a good thing. So this doctor did some sort of motivation, some planning, some bonus structure, whatever, in order to get more production out of the same employee count. All right, now we go down to supplies. The supplies were actually down by 2%. The labs are actually down by 34%. The labs last year were 230,000. This year through August, they're 151. So again and again, this is comparing nine, eight months to eight months, not eight months this year to 12 months last year. No, that's not an apples to apples comparison. That's not helpful. It's gotta be eight months this year compared to the same eight months last year. So if I keep going down, what is the overall overhead change? The overall overhead went down by 11%. Well, this is beautiful. Your collections went up by 7%. And. And your overhead went down by 41%. Now, we actually pulled this from a client whose name I will not mention as a sample to show after working with practice cfo, collections went up, expenses went down, and therefore the operating income went up, in this case by 241,000 through the first eight months of the year. So that's sort of trending towards somewhere around $300,000 net increase. And really, that's where we say, all right, practice cfo. We, we did our job. We did our job with helping our client improve their financial situation. And then we take that extra money, we use it to pay down debt, we use it to fund retirement plans, we use it to maybe budget in a family vacation. Whatever it is that the doctor wants to do with us, sort of coaching them through that, that extra increase. We have a really specific game plan around what to do with that. Okay, so that is the main columns on the P and L. And then down below that net operating income is everything else really related to tax and financial planning. If you can see my screen, you got it here. You can always reach out to us. I'm happy to send a sample of these financial statements if you would like. Then what I do is if I go down to the next page is I show the profit and loss statement month by month. This to me is actually just as valuable, if not more valuable than, than the main P and L, because I like to see the changes over time. And then you'll see a total on the right hand side. So now I can see what is the total over the past rolling 12 months, which is always helpful to see where the main P and L is, only showing you the total through the current month, in this case of August 31st. Now let me dive into one more subject. This is sort of part two of the podcast. Part one is what is the layout? What is the structure of the P and L? To tell a quick story now before I go into this, part two and part two being how do you measure your performance relative to your peers in the industry? Sticking for one more moment on part one on the format, it's really important that you are conscientious about which card you use, which card you pull out of your wallet or pull up on your Apple pay, whatever. When you're going to buy things in your life, some are business, some are personal. You really want to keep a good separation between the two. Don't pay for your pool person through your business and don't pay bonuses for your team through your personal account. Obviously keep those two separate. Now you may ask, well, Wes, what about things that are sort of the middle ground? Stuff like a laptop I buy for my home office or for my trip to New York where I'm going to go to a dental event for a day and I'm going to stay three days and vacation.

So a lot of that stuff that I'm going to say run through the practice in order to get tax deductions toe the line, don't cross it. That stuff you want to put on your business account, but everything else you want to put on your personal card, keep those separate. That really helps in having a clear set of financial statements. So your bookkeeper knows that anything that shows up on that business card is truly a business expense and they don't need to ask about it. The second thing I want to say is try to avoid just transferring randomly money from your business account to your personal account. If you do that and you don't have a systematic way of transferring money in, in a, in a sustainable way, what happens is you're always running short in cash in your business or you don't have enough basis in your corporation and you end up owing excess distributions tax. I'm not going to go into the details on that, but just have a game plan, preferably with your CPA or financial advisor looped in who understands dental, to make sure that whatever you're pulling out of your practice is sustainable from a cash flow a tax standpoint. All right, let's go on to part two. What are the industry standards for each of these six categories of overhead? Let's start off with labor.

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I'M going to pull up now a different screen and it's just a Google sheets Here, and let me make it bigger.

And you'll see I have a row for general dentist, orthodontist, periodontist, pediatric dentist, oral surgeon, endodontist, and then I have a periodontist with implants. And under the general dentist, I've highlighted here in yellow, what is a healthy portion of your collections that should go to pay for your team, not you exclude you out of this, your team, front office assistant, hygiene, financial coordinator, associates, etc. For a general dentist, I'm going to say 29%. Now, I want to clarify one thing. 29% is if you don't have associates. If you do have associates, it's probably going to be closer to 33 to 30, I might even say 7%. I have over here on the right hand side, total wages with Associates, that's 35%. And the reason for that is obvious. You're paying your associate typically somewhere around 28 to 35%. If they're specialists, you might be paying them 45, 50%. And if they're W2, you're going to have more payroll taxes, benefits, things like that. And so having associate rounds up the expected wage allocation from 29% to 35% of your collections. However, if you have an associate, I would expect you to have a higher collection. If you're in there working and you have an associate now, instead of doing, let's say 1.33 million, let's say you're doing 2.3 million. And so even though your profit as a percentage might be lower because you have a higher collection, your take home will still be more. As an example, let's say you're doing a million dollars and your Profit margin is 40%. That's 400,000. Let's say now you're doing $2 million because you have an associate and your Profit margin is 30%. So your profit margin is a lot less because you have this associate, you're paying them more, it makes your labor costs go up. And so your overhead now is only 30% instead of 40% of your collections. So your profit is less as a percent. But what's 30% times 2 million? That's $600,000. Would you rather have 30% of 2 million or 40% of 1 million? Well, obviously, assuming everything else is equal, you're going to want that second option, doing 2 million with a 30% profit margin, taking home $600,000 to pay for your debt, yourself, your future self, paying your taxes, et cetera. So like I have a client that's doing 6 million with a 25% profit margin. Hey, that's still a lot of money. That's $1.5 million as a profit. So even though it's only 25% as a percent, it's a lot less than your industry standard of roughly 40% still. And in that case, that doctor very much is more like a business owner. They're only doing. And that's actually a specific case where I have a client that that doctor is only doing about 5 or 600,000 in production of the roughly $6 million in collections. But that doctor spending a lot of time with, recruiting really good team, overseeing their associates, having a specialist come in a couple days a month, very specialist, and is truly acting as a business owner. And so the higher income is less because in this case his. Because of his clinical outcome personally, and a lot more because of his business outcome as a business manager. Okay, so back on subject here. A general dentist without an associate, I'm going to say is about 29%. Wages and orthodontist around 28%, periodontist around 24%, pediatric dentist around 23%, an oral surgeon closer to 20%, an endodontist closer to 20%, and a periodontist, periodontist with implants at 24%. So now let's look at the other category. So let's look at supplies. What should a general dentist be paying in supplies? I am showing about 7%, an orthodontist around 6%. Now, that doesn't include Invisalign, because that's going to go into the lab category. We're talking about supplies. Periodontist around 6%, pediatric dentist, around 6%. Now, oral surgeons who have a lot of, like, the membrane stuff, you know better than me, they're typically around 11%. So where their labor costs are substantially less, their supply costs are substantial, are substantially more. All right, endodontists are around 7% for some supplies. Got a lot of files in there going on. And let's go on to labs now. General Dentist, 6%. Now, this is going to be also correlated to whether or not you have a CAD CAM in the practice. If you have a CAD cam and, and I want to capitalize the A N D. And you're using it because I do have a number of doctors who bought it and really don't use it that much. They never really sort of train their team on it, change their process around it, all that stuff. It's not a matter of just buying it. It's a matter of building it into your process in the office with Your patient experience. If you're using that CAD cam for most or all of your clinical restorative work, then this labs, I've seen them as low as about 2%. Now if you do that, you need to include the blocks and burs in there to be fair. So I, I usually see that about 2 to 5% if you have a CAD cam. If you don't, I typically see it around 6 to 11%. 11% is if you're paying for some really high quality labs. I'll see that more when some doctors. I have a doctor in La Jolla, California, very nice upper class area. He uses a very high end lab. He does very obviously quality work and he just pays about 11% and that's just a part of his model. But he's also doing $250,000 a month as a, as a single doctor owner too. So it's all about your philosophy, your style and your approach there. More than honest. I have about 7% for labs. That's going to be your invisalign costs in there. Periodontist, I have 7%. Pediatric zero. You don't have labs. Oral surgeon zero and Adonis zero. Facilities. All right, so for facilities is going to vary by where you are in the country. San Diego typically going to be higher than if you're in rural Nebraska. So general dentist on average though, I'd say 7%. If you're in San Diego, I'm happy. If you're under 10%. Orthodontist, 2%. That's really low. Orthodontist, I'm showing a lot less. I think it's because orthodontists typically have bays instead of full on operatory rooms and so they can fit a lot more in a smaller square footage. That might be a little bit low. It may be higher than that. Like, like 5% or so. Periodontist, I have 6%. Pediatric dentist, I have a 7%. Oral surgeon, I have at 5% and endodontist 5%. I do want to throw out a, a shout out to a couple resources I got. I think the main one is McGill. Hill does a, does a study among their clients every year and I use this and I've also merged it with some studies on our own clients to get to what is a, an estimated amount here. Marketing. Marketing. Marketing really is a function of where you are. If you have a lot of empty chairs like the airline, like an airline you need to market. Your success I would say is similar to airlines. It's all about getting the chairs full. And if you Your chairs are already full and your machine is running and you just got people coming in because you've been around for a while. You may not need anything into marketing depending on if you're trying to grow or not. If you're a new and you're a startup, you really need to. You may be spending 10, 15% on marketing. So these are very general numbers. They should be up or down isn't right or wrong. It just depends on where you are in your growth trajectory as a practice. But I general dentist, a 2% orthos at 10 orthos typically got to do a lot more marketing at your local soccer events and other sort of schools, that kind of thing. Periodontist, I got at 2, pediatric, I got at 4. Oral surgeons, I got at 2, endos at 2. Of course a lot of you specialists like oral surgeons and endos, it's a matter of getting referrals from the general dentist. All right, admin, this is that last category. Admin, I've got pretty much 10% across the board board. And that's going to be for all that other stuff, your website, your accountant, your attorney, bookkeeper, your phone cost, your utility, your scrubs, all that stuff. I'm adding up to about 10% of your collection. So if you collect 100,000 on average, I would expect about $10,000 a month to cover all of those other items. So the total overhead for general dental practice I would say should be right around 60, 61% with a profit margin around 39 to 40%. Orthodontist, total overhead is 63 with a profit margin around 37%. A periodontist, 55% total overhead with an operating profit of 45%. Pediatric dentist, 50 50, oral surgeon, 48% overhead, 52% profit margin. And entodontist coming in at the lowest overhead in general at 44% with a 56% operating profit. This is why you oral surgeons and endos tend to do really well as you just have a lot lower overhead. All right, that is a quick comparison of your or a way to compare your practice to industry standards. Now coming back to my profit and loss statement. It's not on here but on a separate report which you can't do this with QuickBooks because QuickBooks doesn't let you put in custom data. It can't feed in from Google sheets or anything like that. That's why QuickBooks is really limited and you either have to export the data to Excel and then do a comparative analysis of your numbers to industry standard benchmarks or you have to use a third party reporting app that will pull the data out of QuickBooks Online. You're likely using QuickBooks Online at this point. Pull the data out and then you can feed in custom data to do these really nice comparative analysis. And we do that every month through our CFO analysis. All right, everybody, that was a rundown on the structure of your P and L, with a little bit of education on why it should be structured that way, and then how to interpret the results every month. As a business owner, tune in next time as I carry on and I talk about other aspects in business finance for dentists. I may do my next episode on Balance Sheets. We'll see if I'm in the mood for it. Until next time.