Reading a Dental Practice P&L

A profit and loss statement arrives from the bookkeeper on the tenth of the month. The owner opens it, scrolls to the last line, compares that number to what is in the operating account, notices the two have nothing to do with each other, and files the whole thing in the folder where P&Ls go to be ignored. This happens in a great many practices, run by intelligent people, for years at a time.

It is not a competence problem. Nobody teaches this in dental school, and a generic accounting explainer will not tell you the three things that make a dental P&L specifically confusing. This post walks the statement from top to bottom in plain language, names those three distortions, and gives you a reading routine that takes about ten minutes a month once you know where to look.

The Quick Answer

A P&L answers four questions in order: what came in, what it cost to deliver the dentistry, what it cost to keep the doors open, and what was left. Read it top to bottom, in dollars first and percentages second, and compare each line to the same line a year ago rather than to last month.

Three things scramble the story in a dental practice, and all three are fixable. The top line is usually collections, not production, and the gap between them is one of the most important numbers you have. Owner compensation sits inside the expenses, which makes the bottom line a number the owner chose rather than a number the practice produced. And depreciation, loan principal and equipment purchases move cash and profit in opposite directions, which is why your net income and your bank balance will never agree and should not be expected to.

The Shape of the Statement

Every P&L, in any industry, has the same skeleton.

1. Revenue. What the practice earned in the period.
2. Direct or variable costs. The costs that move with the work: lab, clinical supplies, and in some formats clinical payroll. Many dental P&Ls do not separate these at all, which is a missed opportunity rather than an error.
3. Operating expenses. Everything else it takes to run the business.
4. Net income. Revenue minus everything above it.

Below net income you will sometimes see other income and expense: interest on a practice loan, gain or loss on a sold asset, occasionally investment income. These are real but they are not operations, and they belong below the line for exactly that reason.

The word to be careful with is profit. Net income on a dental P&L is not what the owner made, it is not cash in the bank, and it is not what a buyer would call earnings. It is one defined figure with three specific limitations, which the rest of this article is mostly about.

The Top Line: Production, Adjustments, Collections

This is where most confusion starts, because two different systems are describing the same month and neither is wrong.

Your practice management software thinks in production: the full fee value of the dentistry performed. Then it subtracts adjustments, which include contractual write-offs on plans you participate with, courtesies, discounts and corrections, to give net production. Then, over the following weeks, money actually arrives, which is collections.

Your accounting system thinks in revenue, and in most small practices that revenue figure is collections. So the P&L's top line is money received in the period, not dentistry performed in the period, and those two things are separated by however long your claims take to pay.

Three consequences follow, and they explain most of the questions owners ask their CPAs.

• The P&L will not tie to your production report, ever. Stop trying to make it. They answer different questions and both answers are useful.
• A great production month shows up on the P&L later. If you want to know how the practice performed this month, look at production and collections in the practice management software. The P&L tells you what the business banked.
• Write-offs need to be visible. If contractual adjustments are netted silently into revenue, you cannot see the single largest number in any plan participation decision. That is a chart of accounts issue, and our guide to setting up a dental practice chart of accounts covers how to structure revenue so this stays visible.

Things that show up in revenue and are not revenue

Worth checking once a year, because they distort every ratio built on the top line. Owner contributions and loan proceeds are financing, not income. Proceeds from selling old equipment are not revenue. Refunds to patients should reduce revenue rather than appear as an expense. Insurance recoveries, vendor rebates and credit card chargebacks all need a considered home. None of these are large every month. All of them are large in the month they happen.

Where the Big Expenses Live

A dental P&L has roughly ten expense neighborhoods. Knowing which is which, and which ones move with volume, is most of what reading the statement requires.

The fixed and variable distinction is the one to hold onto. Fixed costs do not care how busy you were. Variable costs do. That is why a slow month damages the bottom line out of proportion to the drop in collections, and why an added hygiene day can raise payroll in dollars while improving every ratio on the page.

Payroll is almost always the largest line, and it is the one most often understated, because owners think in wages and the statement records fully loaded cost. Our guide to dental practice payroll covers what actually attaches to a wage before it reaches the P&L.

What Belongs in Overhead and What Does Not

Overhead is not "everything above net income." Five categories appear on a P&L and do not belong in an operating overhead comparison: owner compensation, associate compensation, loan principal and interest, depreciation and amortization, and one-time or personal items.

Leave them in and your overhead percentage measures the owner's choices rather than the practice's efficiency. Our guide to dental practice overhead benchmarks walks through the normalization step by step and gives the category ranges to compare against, so this article will not repeat it. What matters here is recognizing those five lines when you see them on the statement, because until you do, the percentages are not telling you anything.

Owner Compensation, and Why the Bottom Line Means Nothing Yet

Now for the part that makes two identical practices look completely different.

How an owner takes money out is an entity and tax decision made with a CPA. It can come through as wages, as distributions, as a mix, or through other mechanisms. Wherever it lands on the statement, it is a discretionary number, not a cost the practice incurred to operate. An owner who pays themselves generously shows a thin bottom line. An owner who leaves money in the business shows a fat one. Neither has said a word about how the practice runs.

So the useful figure is not net income. It is owner's total benefit: net income, plus all owner compensation, plus owner-specific items running through the business, plus the difference between related-party rent and market rent if the owner owns the building. That number is what the practice actually produced for the person who owns it, and it is comparable between practices in a way that net income is not.

There is a second, sharper question underneath it, and every owner should ask it once a year. Some of that total benefit is payment for clinical work, which any associate would have to be paid for. The rest is the return on owning the business. Separating the two tells you whether you own a good practice or an expensive job, and it is the same separation a buyer's accountant will make when you eventually sell. Our overview of how dental practices are valued shows where that adjusted earnings figure lands in a transaction.

One practice's statement, invented figures

Example only. These numbers belong to nobody. Run your own. A single-doctor practice shows collections of $1,000,000 and net income of $180,000. The owner concludes the practice is mediocre. The statement also contains $240,000 of owner wages, $20,000 of owner benefits and retirement, $15,000 of vehicle and travel that is really personal, and rent of $110,000 paid to the owner's own building entity where market rent would be $85,000.

The practice did not produce $180,000. It produced $480,000 of benefit to its owner. Whether that is good depends on what the owner's clinical production would cost to replace, what the debt service is, and what comparable practices produce. But the reported bottom line was never going to tell that story, and an owner reading only that line would have drawn the wrong conclusion about their own business.

Cash Versus Accrual, and Why It Matters More Than It Sounds

Cash basis records revenue when money arrives and expenses when money leaves. Accrual basis records them when they are earned and incurred, regardless of when the cash moves. Most small practices keep cash-basis books because it is simpler and often preferred for tax purposes, a decision that belongs with your CPA.

For management, cash basis hides things. Specifically:

• Lab bills lag the work. A heavy crown month shows the production now and the lab cost later, so this month's margin looks better than it was.
• Supplies arrive in lumps. A large stocking order lands in one month and is consumed over several.
• Payroll periods do not match calendar months. Some months contain an extra pay period, which makes payroll look like it jumped when nothing changed.
• Annual prepayments distort a single month. Malpractice premiums, software renewals and association dues paid yearly land in one month and belong to twelve.
• Large equipment purchases can be expensed immediately for tax purposes, which produces a month that looks catastrophic and a year that looks lumpy. Our guide to Section 179 and dental equipment covers why those numbers behave the way they do.

You do not have to convert your books. You do have to know which distortions are in front of you when a line moves. Many dental CPAs will produce an accrual-style management P&L alongside the cash-basis one, and if yours can, ask for it.

Why Profit and the Bank Balance Never Match

This is the question owners ask most and get answered least clearly. Net income is not cash, because at least five things move one without moving the other.

Depreciation is the one that confuses people most. It is not a bill. It is the accounting system spreading the cost of an asset you already paid for across the years you will use it. That is why a profitable practice can be cash-poor, and why a practice that just bought a lot of equipment can look unprofitable while its bank account is behaving normally.

Debt is the mirror image. Principal payments never appear on the P&L, only interest does, so a heavily financed practice can show respectable profit and still feel tight every month. If you are modeling what a note actually does to cash flow, our practice loan calculator separates principal from interest so you can see both.

The Ten Minute Monthly Read

The last line is what separates owners who use their financials from owners who receive them. One question and one action a month compounds into real control of the business within a year. For the operating numbers that sit upstream of all of this, our guide to the KPIs worth tracking covers what to watch weekly, and the financial management chapter of our operations track goes further into how owners use these reports.

THE CHAIRSIDE TAKE

Ask your bookkeeper for a three-column P&L, then read it top to bottom once a month with a pen. Know that the top line is collections and not production, add owner compensation back before you judge the bottom line, and stop expecting profit to match the bank account, because depreciation and loan principal guarantee it never will. Ten minutes a month and one question to your CPA will teach you more about your own practice than any benchmark article, including ours. The statement is not hard. It just has never been explained to you in the order it was written.

Educational content only. It is not legal, financial, tax, or clinical advice. Prices and ranges are approximate and vary by region, condition, and year. Verify current rules with your state dental board and qualified professionals. ChairsideSource is not affiliated with any manufacturer, the ADA, or the DAT.