Our lack of basic business education in dentistry is a shame, as I have said many times in my lectures and articles in Dental Economics. To kick off our series, “52 Dental Business Blogs in 52 Weeks,” we should start with a powerful piece of information that every business owner seems to know except us dentists… the Profit and Loss Statement (P&L).
A Profit and Loss Statement, also known as an Income Statement, shows us how much money we’ve made (or lost) in a given time period. It gives detail to the simple formula:
Revenue – Expenses = Income
Let’s pretend that you and I own a dental practice: Amazing Dentistry LLP. Our accountant hands us our annual P&L for 2015 and it looks like this (which I have drastically simplified for our purposes):
We collected $600,000 as revenue. We may have charged a lot more than that, but revenue only includes what we have actually been paid. Our total costs to make that $600K would include things like staff wages, dental supplies, lab bills, and so on. A proper P&L will detail all of those costs into neat little categories. When we add them up, the total expenses come to $400,000. So the total income/profit for us in 2015 would be $200,000. If we split that up evenly, then you and I pulled in $100K each for the year. Not too bad!
We can actually get a lot of information out of a P&L beyond just practice profitability. The juiciest morsel would have to be calculating overhead. It’s super simple to do! Here’s the formula:
(Expense / Revenue) x 100 = Overhead
In the case of Amazing Dentistry LLP, our lab overhead would be (100,000/600,000) x 100 = 16.67%. As it turns our, lab fees for a general dentistry practice should only be around 10%, so our 16% is coming in a bit high. If you and I were looking for ways to be more profitable next year, we could definitely evaluate our lab situation. For more info on this, check out my earlier post on calculating practice overhead.
So that’s the Profit and Loss Statement. You can get it from your accountant annually, semi-annually, or even quarterly. You can also use your accounting software (e.g. Quickbooks) to print up a rough one whenever you like.
For more information, check out this terrific CE article on Profit and Loss Statements and click the link on the page. It’s free to read and you can pay if you want to take the CE test.