A short article discussing the importance of evaluating a Profit and Loss (P&L) statement when considering buying a dental practice. The P&L statement is essential for assessing the financial health and overhead of a practice.
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“I want to buy a practice and everyone talks about evaluating the profit and loss statement. This sounds important but I have no idea what I’m looking for when seeing one!”
A profit and loss statement is a way to evaluate the financial health and “overhead” of a practice. If you are running a business, or looking at one to purchase, this is a key financial report. Quickbooks online makes it easy to enter on your own, and if you do your own basic bookkeeping you’ll have a great idea about what you might need to change to make your business more profitable. For those that rely on an accountant to do your basic bookkeeping, you’ll be at least a month behind in receiving your reports. If you made it through dental school, you can absolutely enter daily production, collections, and bills into Quickbooks.
The numbers below pertain to an up and functioning dental office. If you are doing a startup, it will be a year or so before you can really evaluate your “norms” and tweak them to be in the correct ranges. At the beginning, you just buy what you need and pay with the money you are hopefully generating. Do not over buy or have too many employees at the beginning or you’ll drown!
At the very top of a Profit and Loss report is usually how the money is brought in. Production can be in all one sum, or divided into categories. If it’s divided it will usually be by dentist production, hygiene production, and other (usually membership fees, retail sales of dental supplies, and anything else that brings money INTO the practice).
In this example we are going to use round numbers to make it easy to understand.
Let’s say our production is $1,000,000 worth of dentistry, now we have to account for how much it took to produce the $1,000,000.
If we produced that much, great! But the MOST IMPORTANT number is how much did we COLLECT. There are normal dental expenses and normal ranges, you need to know those ranges.
If you are evaluating a practice that is in network with a lot of lower paying insurance plans, the production could still be $1,000,000 but collections are more likely to be 30% less than that – so around $700,000. Some practices use the in network insurance fee as their production as opposed to their normal fee, so their P & L will be more aligned with a FFS practice. You need to know in which way the practice does their reports to understand what the true production is, but the real number we are dealing with is collections or “actual money put into the bank”.
Once you have the collection total – we have to evaluate how much money was spent to make the money. We have fixed expenses (rent, monthly software subscriptions, utilities) and variable expenses (team salary, supplies, marketing, labs, etc.). This is where our normal range of percentages is used.
The highest cost is usually the team. This will usually be divided out by the team functions. It will require an outlay between 20% and 40% of your total collections. The lower the better, but you have to pay people well to keep the office functioning (20-27% is ideal). It “should” be divided out so that you know what percentage hygienists, assistants, and business personnel are costing, but for this exercise we will assume 30% or $300,000 is spent on paying the entire team. This should include their hourly salary, taxes you pay on their behalf, and all benefits( health insurance , retirement, bonuses, trips, CE).
The next amount is facility costs. This should be 7-10% of the total collections. This usually includes your rent, landscaping, cleaning, utilities and maintenance of your equipment or computers. If you own your facility, it’s a bit more complicated. We are going to use 9% for our exercise, so about $90,000 will go for facility cost.
Supplies that you need to do dentistry are the next amount. This includes anything you buy from dental supply companies, Amazon, nitrous oxide, or Walmart to run your business. This will usually be around 5-8%. We’ll use 8% since inflation has made life very complicated lately, so $80,000. I never did this by the month (as in – creating a budget where all I could spend was 6% of previous months collections), but I bought in bulk at dental conventions, and generally bought whatever I needed that month. At the end of a year it ALWAYS totaled 5%, so buy things on sale when it’s practical.
Lab expense varies according to the type of practice you have. A prosthodontic or heavy implant practice will have a much higher lab expense than a pediatric practice. Lab expenses should include crown, bridge, implant supplies and orthodontic appliances or aligners. So this could be anywhere from 4%-9%. We’ll use 7% or $70,000 for this example.
Next we have recurring administrative costs. This will include your monthly bills for services. Practice management fees, credit card fees, insurance verification services, accounting fees, electronic claims, banking fees, consultants, office supplies, ads for new employees, website hosting are all put into this category. This should be less than 6%, but we’ll use $60,000.
No office will be successful without having patients coming into the practice, so marketing is very important. We can use being “in network” as a marketing expense. If you are “in network”, the money spent in this category should be pretty low. If the practice is not “in network” but instead is FFS, the marketing expense will be higher. Advertisements, search engine optimization (SEO), sponsorships, direct mail campaigns, websites, commercials and festivals would all be included in this category. This will usually be under 6% but likely higher in the first few years of a practice when you are trying to get your name into the public. We will use 6% for this example or $60,000.
The last (and hopefully smallest category) is discounts. This includes balance write offs due to patients not paying their bills (bad debt), voluntary discounts (like discounting dental treatment for family members), and insurance discounts. This is a very important number. It could be 2% or 35% depending on how the practice is run and how effective the business personnel are at collecting from patients. We are going to use 4% for this exercise or $40,000. If you are in network but use your network fees as your normal production fees then this will be accurate. If you are “in network” and use UCR fees for your area as your production fees, then your discounts due to insurance write offs will be much higher. But again this report is based on collections, not productions, so it all should be categorized correctly.
This is an average practice without trying to save money in every category. Overhead in this practice adds up all the percentages of costs to run the business, and subtracts that from how much money was generated.
The overhead for this practice is 70% (quite high) but I wanted to overestimate costs instead of underestimating. What most people are aiming for as an overhead number of 60% (or less).
This million dollar producing practice leaves $300,000 for doctor compensation. Not phenomenal once you take out payroll taxes and retirement, but the flexibility of spending the money on what you feel is important cannot be underestimated!
If you are in the process of conducting due diligence for a practice you’re considering purchasing, we have a service built just for you! In our Due Diligence Assistance, we do a deep dive on a practice’s financials/valuation/P&L/etc. to determine the overall health of the practice. Our detailed analysis leaves no stone unturned so you can make sure you have ALL of the relevant information before making one of the biggest decisions of your life – buying a dental practice.
Click here for more information on our Due Diligence Assistance Service.
