Chapter 5: Financial Management for Practice Owners

Most dentists become owners without ever having read a profit and loss statement closely. The accountant sends a PDF, the owner glances at the bottom line, and the file goes into a folder. That habit is how practices collecting over a million dollars a year end up with an owner who cannot say where the money went or whether overhead is normal.

This chapter is the financial layer under everything else in the Operations track. Scheduling, case acceptance, and the revenue cycle all show up here eventually, as lines on a statement. If you can read those lines, you can find problems months before they become crises.

Why the P&L deserves a monthly hour

A profit and loss statement (also called an income statement) answers three questions: how much did we collect, what did it cost, and what was left for the owner. It does not show how much cash you have (the balance sheet and bank statements do) or how productive the schedule was (practice management reports do).

Two setup decisions determine whether your P&L is useful:

• Cash or accrual basis. Most small dental practices keep books on a cash basis: revenue counts when money is deposited, expenses count when bills are paid. A big supply order paid in March makes March look bad; reading trailing twelve months smooths that out. Your CPA decides the basis with you, and it has tax implications, so do not switch on your own.
• A dental chart of accounts. The chart of accounts is the list of categories every transaction is sorted into. A generic small business template lumps dental supplies, lab fees, and office supplies together, which makes benchmarking impossible. A dental CPA will set categories that match how the industry reports costs, so you can compare yourself to benchmarks and to your own prior years.

Reading a dental P&L line by line

Below is a sample P&L for a hypothetical general practice. Every number is invented for illustration and chosen to sit near commonly cited benchmarks. It is not typical of any particular market, and your own statement will be organized somewhat differently depending on your CPA.

Hypothetical example: a general practice collecting $1.2 million a year

Collections, not production

The top line should be collections: money actually deposited. Production (the fee value of dentistry performed) belongs in your practice management reports, not the P&L. The gap between the two comes from PPO write-offs, other adjustments, and uncollected balances. If your statement shows only a single deposit total, ask your bookkeeper to separate patient refunds and insurance refunds so they do not quietly reduce revenue without explanation. The revenue cycle chapter covers how to shrink the production to collections gap.

Employee costs

This is almost always the largest overhead category. Include wages for hygienists, assistants, and front office staff, employer payroll taxes, health insurance, retirement contributions, and temp agency costs. Do not include the owner or associate dentists; they belong in the owner compensation section, below overhead. When associate pay is mixed into staff wages, staff costs look alarmingly high and the comparison to benchmarks is meaningless. This is one of the most common reasons an owner thinks staff costs are out of line when they are not.

When this line is high, the causes are usually one of: too many staff hours for current production, hygiene that is not producing enough to cover hygienist wages (see hygiene profitability), wages rising faster than fees, or low production spread over a normal team. Cutting people is rarely the first answer. Raising production per staff hour usually is.

Dental supplies and lab

These two lines move with the kind of dentistry you do. A practice doing a lot of crown and bridge, implants, or dentures will run higher lab costs, and that is fine if fees support it. Practices with in-office milling often shift cost from lab to supplies and to equipment depreciation. What deserves attention is drift: supplies creeping from 5% to 8% of collections over two years usually means ordering without a budget, multiple people ordering, or expensive items bought out of habit.

Facility and equipment

Rent, common area and pass-through charges under a net lease, utilities, equipment leases, repairs, depreciation, and interest on practice debt. If you own your building through a separate entity, the practice should pay that entity a fair market rent so the practice P&L is comparable to one that leases. The lease vs. buy chapter explains why that separation matters at sale.

Depreciation and amortization

These are non-cash expenses. Depreciation spreads the cost of equipment over its tax life; amortization spreads the cost of goodwill from a practice purchase. They reduce taxable income without any money leaving the account that month. A new owner who bought a practice may see large amortization and depreciation lines that make the practice look less profitable on paper than it is in cash. That is normal, and it is one reason lenders and buyers add them back when calculating EBITDA (see how dental practices are valued).

Other business expenses and discretionary spending

Marketing, merchant fees, software, insurance, professional fees, continuing education, and the like: individually small, collectively meaningful. Software grows fastest in many practices because every new tool comes with a monthly subscription. Review subscriptions once a year and cancel what nobody uses. Discretionary spending (auto, meals, travel) is where personal and business blur, and where the IRS looks closely. Keep it documented and modest.

The bottom of the statement

What remains after overhead pays the owner and any associates, funds retirement plan contributions for the owner, and covers taxes. How that amount appears depends on your entity. In an S corporation, the owner's salary shows as an expense and the remainder flows through as profit. In a sole proprietorship or single-member LLC, the entire remainder is the owner's taxable business income. Either way, the question to ask is the same: what did the business earn after paying a dentist a fair wage for the dentistry?

Overhead benchmarks by category, and what "normal" means

The benchmarks most often cited in the dental trade press come from the Academy of Dental CPAs (ADCPA), a group of accounting firms that specialize in dentistry. As published in Dental Economics in 2021, they are roughly the following, expressed as a percentage of collections for a general practice:

Treat those numbers as a map, not a verdict. Other consultants publish slightly different ranges, and the ADA Health Policy Institute has documented that practice expenses have been rising faster than revenue in recent years, which pushes real-world overhead up. For a fuller discussion of how to read your own numbers against these, see dental practice overhead benchmarks.

When your numbers should differ

• Heavy PPO participation. Lower fees mean every fixed cost is a bigger share of collections. A PPO-heavy practice can be well run and still show higher overhead percentages. The fix, if there is one, is on the revenue side (see should you drop a PPO).
• Startups and recent acquisitions. Debt service, amortization, and a thin patient base make overhead look high for the first few years. Compare yourself to your own plan, not to a mature practice.
• Specialty practices. Orthodontics, oral surgery, and periodontics have different cost structures for lab, supplies, and staffing. General practice benchmarks do not transfer directly.
• Owner-occupied real estate. If rent is paid to your own building entity at below market rates, facility costs look artificially low.

Cash flow: why a profitable practice can run out of money

The P&L measures profit. Your bank account measures cash. They diverge for predictable reasons, and understanding them prevents the most common panic in a new owner's first year.

What moves cash but not the P&L

• Loan principal. Only the interest portion of a loan payment is an expense. The principal reduces the loan balance on the balance sheet. A practice with a large acquisition loan can show healthy profit and still have little cash after the monthly note.
• Owner distributions. Money you take out of an S corporation or LLC beyond salary is not an expense. It does not appear on the P&L at all.
• Equipment paid with cash. A $60,000 CBCT bought outright hits the bank account immediately but shows up on the P&L only as depreciation over time (unless expensed for tax purposes).
• Taxes. For pass-through entities, the business profit is taxed on your personal return. The practice generates the income; you need the cash set aside to pay estimated taxes on it.
• Timing of collections. Insurance pays weeks after the visit. A strong production month shows up in cash the following month or later.

Hypothetical example: from profit to spendable cash

Using the sample practice above: $483,600 was available for owner compensation and profit. Add back $24,000 of depreciation (a non-cash expense) and subtract $60,000 of loan principal (a cash outflow that is not an expense). That leaves about $447,600 of cash available to the owner for the year, before personal income taxes, before any equipment bought with cash, and before building a reserve. If the owner's estimated federal and state taxes on this income are substantial, as they will be, the owner's actual spendable income is meaningfully lower than the P&L bottom line suggests. These figures are invented for illustration.

Cash management habits that work

1. Keep an operating reserve. A common rule of thumb among practice advisors is two to three months of operating expenses in reserve, separate from the operating account. It covers a slow month, a broken compressor, or a credentialing delay without touching a credit card.
2. Open a line of credit before you need it. Banks lend most easily to practices that do not urgently need money. Keep the line unused as a backstop, not a funding source for routine operations.
3. Use separate accounts. Many owners find it easier to hold cash in an operating account, a tax account, a reserve account, and a capital replacement account, moving a set percentage of each deposit into each. The system matters less than making tax money untouchable.
4. Look at a weekly cash snapshot. Bank balance, deposits this week, payroll and major bills due in the next two weeks, and insurance aging over 60 days. It takes ten minutes and replaces surprises with decisions.
5. Forecast thirteen weeks out. A rolling 13-week cash forecast (a simple spreadsheet listing expected deposits and payments by week) catches crunches early, especially around quarterly tax payments, annual insurance premiums, and large lab bills.
6. Plan for seasonality. Many practices see patterns around insurance benefit resets and holidays: patients rush to use remaining benefits late in the year and new deductibles slow treatment early in the year. Look at your own three-year history to see whether that is true for you.
7. Control accounts receivable. Patient balances over 90 days and insurance claims over 60 days are cash you have earned and not received. Our Open Dental billing module shows how to work the aging report if you use that software.

Owner compensation: paying yourself on purpose

A practice owner is paid in two capacities: as a dentist doing clinical work, and as an owner taking business risk. Mixing the two makes it impossible to tell whether the business is healthy. A practice where the owner takes home $350,000 sounds fine until you realize the owner is working 45 hours a week and would earn a comparable amount as a well-paid associate with none of the risk. In that case, the business itself is barely earning a return.

A simple framework

1. Pay yourself a clinical wage. Set it at roughly what you would pay an associate to do the dentistry you personally do. Associate pay is commonly structured as a percentage of collections or production; the associate pay calculator can help you estimate a fair number. In an S corporation, some or all of this becomes your W-2 salary.
2. Treat what remains as business profit. After overhead and your clinical wage, the remainder is the return on owning the practice. Use it in order: fund the tax account, maintain the reserve, pay down expensive debt, reinvest in equipment and facilities, then take distributions.
3. Take regular, predictable distributions. Quarterly distributions after a review of cash and upcoming obligations work better than pulling money whenever the balance looks high.
4. Fund retirement deliberately. Practice-sponsored plans (401(k), safe harbor 401(k), profit sharing, cash balance plans for high earners) can shelter meaningful income. For 2026 the IRS set the 401(k) employee deferral limit at $24,500, with an $8,000 catch-up for those 50 and older and a higher catch-up for ages 60 to 63. Plan design has nondiscrimination rules that affect what you must contribute for staff, so work through this with your CPA and a plan administrator.

Benchmarks cited above put owner compensation (owner plus associate dentist pay) around 35% to 40% of collections for a well-run general practice. If yours is far below that, the problem is usually on the revenue side or in one of the large overhead categories, and the P&L will show you which.

Entity structure basics: sole prop, LLC, PC, PLLC, and S corp

Entity structure is where dentists get the most confident, contradictory advice from colleagues. Here is the plain version. State law controls much of this, so treat it as orientation for a conversation with your attorney and CPA, not a decision guide.

The legal entity

An important limit: no entity protects you from liability for your own clinical work. Professional entities can separate you from the business's contracts and from claims arising from other people's work in some circumstances, but your own malpractice exposure is personal. That is what malpractice insurance is for.

The tax election

Separate from the legal entity is how it is taxed. A single-member LLC or PLLC is disregarded by default (taxed like a sole proprietorship). A multi-member LLC is taxed as a partnership by default. A corporation is a C corporation by default. Many of these can elect S corporation status by filing IRS Form 2553, generally no later than two months and fifteen days after the start of the tax year in which the election is to take effect.

The appeal of the S election is payroll tax. As a sole proprietor, your whole net business income is subject to self-employment tax. As an S corporation owner who works in the business, you must pay yourself a reasonable salary, which is subject to payroll taxes, but distributions above that salary are not. The IRS is clear that officers who provide services must receive reasonable compensation before taking distributions, and it looks at factors like duties, time, training, and what comparable businesses pay. Setting an artificially low salary is a classic audit issue.

Hypothetical example: how big is the S corp savings?

Suppose a practice produces $400,000 of net income for its owner in 2026. These numbers are invented and the math is deliberately simplified.

• Taxed as a sole proprietor: self-employment tax applies to about 92.35% of net earnings, so roughly $369,400. Social Security tax (12.4%) applies only up to the 2026 wage base of $184,500, and Medicare tax (2.9%) applies to all of it. Total: about $33,600.
• Taxed as an S corporation with a $180,000 salary: combined employer and employee payroll tax of 15.3% on $180,000 is about $27,500. The $220,000 in distributions carries no payroll tax.
• Difference: roughly $6,000 a year, before the cost of running payroll, extra tax returns, state-level entity taxes or fees, and effects on retirement contributions and the qualified business income deduction.

The point: because Social Security tax stops at the wage base, the savings at high incomes are mostly the Medicare portion on distributions. The election is often still worthwhile, but it is a spreadsheet decision, not an automatic one. It also interacts with the Section 199A qualified business income deduction (dentistry is a specified service business, so the deduction phases out at higher incomes; the 2025 tax law made the deduction permanent and widened the phase-out range starting in 2026) and with state pass-through entity tax elections that many states now offer. Some states and localities also tax S corporations or do not fully follow the federal S election. Your CPA should model your actual numbers.

Working with a dental CPA

A general small business accountant can file your returns. A CPA who works mostly with dental practices can tell you that your hygiene wages are high relative to hygiene production, that your lab percentage is out of line for your procedure mix, and how your numbers compare to dozens of similar practices. That comparison is the value. The ADCPA and similar groups exist precisely because dental practices share a cost structure that generalists do not see often enough to benchmark.

Expect three roles, sometimes in one firm: a bookkeeper who records and reconciles transactions monthly, a payroll provider who files payroll taxes and W-2s, and the CPA who interprets the numbers, plans taxes, and advises on structure. A financial planner handles your personal investments and is not a substitute for a CPA on practice tax matters.

What to ask a prospective dental CPA

Red flags

• Statements arrive months late, or only at tax time.
• Associate compensation is lumped into staff wages, or equipment into supplies, and nobody notices.
• You never hear from the CPA before December 31, only after, when it is too late to plan.
• Aggressive strategies are pitched without a clear explanation of the risk.
• They cannot tell you how your overhead compares with other practices they serve.

A monthly and annual financial rhythm

Good financial management is mostly a calendar: the same few things, reviewed on a schedule.

Where to go from here

Start small: next month, ask for your P&L with a percentage column, read every line, circle the three furthest from the benchmarks, and ask your CPA why.

Related reading:

• Dental Practice Overhead: Benchmarks by Category and How to Read Yours
• The Dental Practice KPIs Worth Tracking
• Leasing vs. Financing vs. Cash for Dental Equipment
• Open Dental Module 7: Reports and Queries

What's next

Financial discipline protects the practice from slow leaks. Compliance protects it from sudden ones. Chapter 6: Compliance covers OSHA, HIPAA, infection control documentation, amalgam separators, radiation safety, records retention, and the employment law basics every owner is responsible for.

This chapter is educational and is not tax, legal, or financial advice. Tax figures cited are for 2026 and change annually. Entity rules vary by state. Confirm decisions with a CPA and attorney who work with dental practices.

This guide is educational content and does not constitute legal, financial, tax, or clinical advice. Laws and regulations vary by state and change over time. Consult your own dental-specific attorney, CPA, and state dental board before acting.