Profit & loss: Two very significant words for all commercial enterprises, including your dental practice. One is good and one is bad, but they are both necessary to determine your practice’s financial health. We’re going to take a closer look at the good, the bad, and maybe just a little bit of ugly in your financial reports.
Why Profit and Loss Reports Matter in Dental Practices
They matter because you don’t have a clue if you’re in the red or black without them. As Bruce Springsteen says, you’re dancing in the dark.
P&L reports in decision-making: The data in P&L reports shows whether you’re solvent enough to meet all your short- and long-term obligations. When you’re in the black, you can take action to grow your practice. Without this knowledge you could make decisions that drown your practice in red.
Identify revenue streams and expenses: Patients might not be your only source of revenue. Some practices sell products, like toothpaste and mouthwash. You might lecture part-time at a local college or be in demand as a guest speaker at conferences. That’s all money coming in.
But money also goes out. You have to stock up on toothpaste and mouthwash, some equipment is single-use only, like gloves. You’ve got to know where money goes, otherwise you can’t plug a leak or consolidate purchases to benefit from bulk-buying discounts and lower delivery expenses.
Common financial pitfalls: You’re a dentist, not a CFO, which means you might be making these three mistakes:
- Remembering about taxes two days before they’re due. Proper tax planning keeps you compliant with tax law and identifies potential savings and benefits.
- Falling behind trends. You might not think it but dentistry is like fashion, trends come and go and if you don’t stay current you could lose patients to more modern practices.
- Bookkeeping on the fly. Want accurate accounts and financial guidance to drive your practice forward? Don’t do your own bookkeeping. Outsource your accounting needs to a firm that specializes in industry-specific accounting. For instance, LWI provides a range of financial services, including CFO services for reporting, analysis, and financial goals.
P&L reports support budgeting and forecasting: Budgeting and forecasting are essential planning tools that can secure growth. You can use data to identify spending patterns and opportunities for improved cash flow management.
Profitability through regular P&L analysis: P&L analysis highlights your practice’s performance and operations, the efficiency of your financial management, underperforming sectors. and performance compared to your competitors. You want to look at your break-even point, discounted cash flow, and ROI.
Key Components of a Dental Practice P&L Report
A typical P&L report contains:
- Revenue categories: This looks at all your services and products to determine each element’s revenue, including income sources (patient fees, insurance reimbursements) and passive income (investments).
- Operating expenses: This covers all expenses necessary to run your practice, including rent, salaries, supplies, equipment maintenance, overheads, and utilities.
- Depreciation and interest expenses: These are indirect expenses, the ones not directly related to your practice’s operations, including depreciation of equipment (a business car) and interest on outstanding amounts (loans to purchase equipment, supplier accounts).
- Gross profit and net profit: Gross profit is the total revenue – all income sources – after subtracting direct expenses (salaries, supply costs, equipment). Net profit is the money left after subtracting operating expenses from your gross profit.
Gross profit (total income) shows you how much money you made in total. Net profit is important because it shows how much money you made after expenses – your take-home money.
Analyzing Revenue and Expense Trends
Back to financial fashion. Watching Revenue and Expenses walk down the catwalk is your opportunity to critique their performance. If Revenue trips, you must get her back on her feet. If Expenses struts, you must throw out a banana peel to bring her down.
Let’s move away from a dodgy analogy and get to the facts.
Start by tracking income per service, for example, checkups and root canal. See which services are bringing home the bacon and which can’t find the deli meat section.
You can focus on underperforming revenue streams and hope you’re not throwing good money after bad. Or, tie a tourniquet and amputate the streams that have run dry.
List all your expenses, then put your head between your knees and breathe. When you feel better, think of ideas to reduce expenses, like bulk-buying antiseptic soap, disinfectants, antibacterial cloths, etc.
Don’t underestimate the importance of benchmarking your performance against your competitors and industry standards. You could be sailing along, thinking you’re the bee’s knees, but according to industry averages, you’re three years behind your competitors. Benchmarking identifies areas for improvement and opportunities for advancement so you can close the gap between you and industry leaders.
Want to return to fashion? No, neither do we. Instead, we’ll give you some advice. Learn more about industry trends. The information will help you improve performance, yes, but it also helps you with one of the trickiest aspects of running a dental practice: Pricing.
When you understand pricing trends in the industry, you can adjust your pricing strategies to ensure you’re not cheating yourself out of valuable revenue.
Common Mistakes When Reviewing P&L Reports
Figuring out finances is difficult and it’s easy to make mistakes, but you needn’t feel bad about it because you’re in good company. Most dentists who manage their bookkeeping make these errors:
- Overlooking small recurring expenses. How often do you stock up on items for the kitchen? Do you take the money from petty cash or use private funds? Do you record it properly in the practice’s books?
- Misclassifying operating expenses and capital costs. You fork out a lot of money for both, so they’re expenses, yes? Sort of. They are both technically expenses, but capital costs or expenses are investments intended to grow your practice and drive revenue. Operating expenses don’t add value to your practice, but they pay for all the costs that keep you in business.
- Misunderstanding cash and accrual reporting differences. The difference is when transactions are recorded in your books. Cash accounting is when money changes hands at the time of the transaction. So, you give a patient an invoice and they settle the account immediately. Accrual accounting is ethereal; revenue is recorded even if the account is only going to be paid in a week’s time.
- Not reviewing reports regularly. It’s no good reviewing financials when you remember. You’ve got to stay on top of your finances to optimize opportunities and manage risks.
- Relying on outdated benchmarks or software. Outdated tech is inaccurate and unreliable. Two things you really want to avoid in dental accounting. One solution is to regularly check up on industry standards and competitors’ performance. Another way is to invest in advanced accounting software. Sage Intacct’s AI-powered accounting software has all the functions you need to optimize your accounting processes and gain real-time insight into your practice’s financial performance.
Improving Profitability Using P&L Insights
You can’t do a blessed thing without profits, so here are some tips to grow your profit margin and reach your goals (sunsets in the Caribbean, anyone?)
P&L reports enhance cost management by identifying costs that exceed industry averages. Then you can implement cost-cutting strategies and allocate the money saved more constructively. On the flip side, you’ll also spot the services with high-profit margins. You can target those services to boost revenue.
Billing often crops up as an issue in healthcare practices. Accounting software can automate billing processes and schedule reminders to improve payment collection and lighten the load for accounts receivable.
You can also use P&L reports to make smart investment decisions, although you might want to outsource your accounting services and get investment advice from dental accounting specialists.
You can look at Profit & Loss reports all the livelong day, but they’re just numbers until you take action. For example, you might have spotted opportunities to increase revenue, but what’s the point until you actually implement a plan to optimize them?
More Profit, Less Loss
Put like that it sounds so simple. It’s not, of course. If it were, you’d be sipping umbrella drinks under the divine Caribbean sun. However, you can make it simpler. Get yourself some good cloud-based accounting software and outsource the serious services where accuracy, acumen, and expertise are especially required.
