Your Practice P&L
Why This Matters
Reading an income statement, more commonly called a P&L, is one skill: knowing what each line holds and where the subtotals come from. Operating a practice from one is a different job, and it is the one this lesson teaches. The version your accountant gives you answers a different question than the version an owner should be reading. Understanding that difference, and putting the owner’s version to work in your own practice, is what this lesson covers.
In this lesson we explore how the owner’s version gets built and read.
- The management P&L. Sorts spend into five operating categories with a benchmark on each.
- Clinical compensation. The owner’s own pay for the dentistry they perform, fixed at 30% of personal adjusted production.
- Net EBITDA. What sits beneath that line: the practice’s profit as a business.
The habit that makes it work is small: fifteen minutes on the same day each month, five ratios, one written action.
- Adjusted production
- Gross production minus contractual write-offs: what the practice earned at contracted rates. The denominator for the collection rate.
- Collection rate
- Collections divided by adjusted production. Target 96–99%, read on a rolling three months rather than a single month.
- Clinical compensation
- The owner’s pay for dentistry they personally perform: 30% of personal adjusted production, whatever salary the books already show.
- Net EBITDA
- Operating income minus the owner’s clinical compensation: earnings before interest, taxes, depreciation and amortization. Target margin 20% or better.
Real World Applications
Reading your owner’s version of your P&L every month means you catch a category drifting before a year of margin is already gone.
- Build your management P&L from three months of data. The lines run in this order. Gross production, less contractual write-offs, equals adjusted production. Less balances you have written off, equals collections. Then the five spending categories, which are staff compensation, facility and occupancy, lab and supplies, marketing, and all other operating. Then total overhead, operating income, your clinical compensation, and net EBITDA at the bottom.
- Work out your two rates, and keep their bases straight. The write-off rate is contractual write-offs divided by gross production. The collection rate is collections divided by adjusted production. They measure different things against different bases, and running either one against the wrong base is the most common error at the top of a P&L. Read both on a rolling three months.
- Your staff benchmark is built, not looked up. Team compensation runs 22–27% of collections, and on top of that sits 30% of your associates’ adjusted production. Add the two together and that sum is the number to judge your staff line against.
- Add two lines to the bottom of the statement. Below operating income, subtract your clinical compensation, which is 30% of your personal adjusted production. What remains is net EBITDA. Divide that by collections and read the margin against 20%.
- Act on the category furthest outside its benchmark. Turn the gap into dollars by multiplying the percentage difference by your collections, because two points on staff compensation is worth far more than two points on marketing. Write down the one change you will make and who will make it.
The P&L Your Accountant Gives You Answers a Different Question
There are two P&Ls. Your accountant builds a P&L each month, which is used for your accounting books and tax returns. You also have an management P&L that is used for managing the business.
Two key things are missing from your accountant’s P&L, and they are what the owner’s version is built on.
- Spend grouped into five operating categories, each with a benchmark. Your accountant groups spend into ledger accounts, which is right for filing a return and useless for deciding what to change. Five categories with a benchmark on each turn a list of numbers into a diagnosis.
- The standardized 30% owner clinical compensation line. Nothing about tax or accounting standards requires that line to exist, so your accountant does not put it there. Without it you read operating income and never see net EBITDA, which is what the business earns once your own dentistry is paid for at market rate.
One nuance. If you are taxed as an S corporation you may already take a W-2 salary that sits in the books, so owner compensation sometimes does appear on an accounting P&L. The missing piece is the standardized wage. Whatever you pay yourself, management and valuation both need 30% of your personal adjusted production, which is a different number for most owners.
A tax P&L is a report card mailed to the government: accurate, and silent on what to change. An management P&L is the coach’s film session: same game, same data, organized to show you what to fix before next month.
The Structure of the Management P&L
Here is a full example of a complete management P&L, with every line carrying both the dollar amount and the percentage of collections. Two things to know before you compare yourself to it. This is a strong practice rather than a typical one, running 55.0% overhead against a 60–65% typical benchmark and a 26.0% net EBITDA margin. And the figures assume a steady year, one where the balance patients owe you ends roughly where it started, which is why the statement closes cleanly here and will not in any single month. The two lines your accountant’s version does not carry are highlighted.
| Line | Amount | % of collections |
|---|---|---|
| Gross production (billed at full UCR) | $2,150,000 | |
| − Contractual write-offs | ($200,000) | 9.3% of gross |
| = Adjusted (net) production | $1,950,000 | |
| − Balances written off as uncollectible (bad debt) | ($60,000) | |
| ± Change in accounts receivable (nil across a steady-state year, but not nil in a month) | $0 | |
| = Collections | $1,890,000 | 100% base |
| Collection rate (collections ÷ adjusted production) | 96.9% | |
| 1. Staff compensation | ($510,300) | 27.0% |
| · of which associate doctor comp (30% × $180,000 associate production) | ($54,000) | 2.9% |
| · of which team comp (hygiene, clinical support, admin) | ($456,300) | 24.1% |
| 2. Facility & occupancy | ($132,300) | 7.0% |
| 3. Lab & supplies | ($207,900) | 11.0% |
| 4. Marketing | ($75,600) | 4.0% |
| 5. All other operating | ($113,400) | 6.0% |
| Total overhead (total operating expenses) | ($1,039,500) | 55.0% |
| Operating income (owner earnings, before the owner’s own pay) | $850,500 | 45.0% |
| − Owner clinical comp (30% × $1,200,000 personal adjusted production) | ($360,000) | 19.0% |
| = Net EBITDA | $490,500 | 26.0% |
Collections − Total overhead = Operating income
Operating income − (30% × personal adjusted production) = Net EBITDA
Operating income states whether the practice is profitable. Net EBITDA states whether the business itself is profitable, because it is what remains once your own dentistry has been paid for at market rate.
The same statement, with your numbers in it. Click any amount to edit it, and every line below recalculates. Each percentage turns green when that line sits inside its benchmark and red when it does not.
| Line | Amount | % Coll. |
|---|
Dr. Okafor. Gross production $1,580,000; contractual write-offs $142,200 (9.0% of gross); adjusted production $1,437,800; unpaid patient balances $43,000; collections $1,394,800, a 97.0% collection rate, inside the benchmark range. She produces $1,005,000 personally and hygiene contributes $432,800 (30.1% of adjusted production); there is no associate. Against collections, staff $390,544 (28%), facility $97,636 (7%), lab & supplies $153,428 (11%), marketing $55,792 (4%), all other $83,688 (6%). Total overhead $781,088 (56.0%). Operating income $613,712 (44.0%). Owner clinical comp 30% × $1,005,000 = $301,500. Net EBITDA $312,212, a 22.4% margin. The margin clears the 20% target and four of the five spending categories sit inside their benchmark ranges. Staff compensation does not. She has no associate production, so her built benchmark is team compensation alone at 22–27%, and 28.0% puts her a point above its ceiling, which on $1,394,800 of collections is $13,948 a year. Note also what the P&L cannot tell you. She performs 100% of the dentistry, so this is a strong practice that is also entirely owner-dependent. One action. Audit the staff schedule for a redundant role or chronic overtime, because it is the only line she has outside its range.
Where Revenue Leaks at the Top of the Management P&L
Diagnosing a revenue leak starts with separating the common sources cleanly. Collections are production, less insurance adjustments, less the balances that never arrive. A practice that reads all of that as one number usually reaches the wrong diagnosis, because each of the three has a different owner and a different fix.
THE WRITE-OFF RATE This one is strategy rather than effort. Write-offs are contractual, the gap between your full usual, customary and reasonable (UCR) fee and the fee schedule you signed, so the rate is payer mix multiplied by contracted discount. It barely moves in response to how hard the front desk works. Benchmark 8–15% of gross production, and materially higher where Medicaid or deeply discounted plans dominate your payer mix. The example practice writes off $200,000 against $2,150,000 of gross production, which is 9.3%.
What an owner does about it is renegotiate a fee schedule or drop a contract. Those are ownership decisions with a multi-year horizon, and both of them trade volume against margin. A high write-off rate can be a deliberate purchase of patient flow, so long as you know the price you paid for it. None of this gets fixed by chasing patients.
THE COLLECTION RATE This one is process. It reports what happened to money you had already earned at contracted rates, so it responds to management inside a quarter rather than over years. Benchmark 96–99% of adjusted production, read on a rolling three months. The example practice collects $1,890,000 against $1,950,000 of adjusted production, which is 96.9%.
What an owner does about it is collect at time of service, submit claims faster and cleaner, and work aged balances until they clear. Measure the rate against adjusted production and never against gross production. Measuring against gross buries a fee schedule decision inside a front-desk score, which is how the wrong person ends up being blamed.
LATE, NOT LOST The money has not left the practice. It is late. Accounts receivable (A/R) rising means production is outrunning collection and the money is still owed to you. A/R falling means you banked work from an earlier period, which can push a collection rate above 100%. Either direction is arithmetic rather than performance, and either one distorts a rate read over a short window.
Pull your A/R aging today into 0–30 days, 31–60 days, 61–90 days, and over 90 days. Keep everything past 30 days under 15% of total A/R. Until the aging is in front of you, a low collection rate does not tell you whether the cause is process or timing.
Both rates sit above collections, and a point of one is not worth a point of the other. Held at the example practice’s $2,150,000 of gross production, move either rate and read what it costs.
Grouping Your Spend
Every dollar of spend belongs in one of the groups below, and each group carries a benchmark of its own. The percentages are the example practice, which spends 55.0% of its $1,890,000 in collections on overhead.
1 · Staff compensation · benchmark 25–30% for this provider mix. All non-owner wages, payroll taxes, benefits, continuing education and the retirement match. This is the largest single expense, so it is usually where the largest fixable gap lives. It also includes associate doctor compensation, which is why no flat benchmark judges every practice. Build the benchmark instead. Team compensation runs 22–27% of collections, and associate compensation adds 30% of associate production on top. For the example practice that sum is 25–30%, and its 27.0%, or $510,300, sits inside it. A practice whose associates do most of the dentistry belongs materially higher and is not overspending.
2 · Facility and occupancy · benchmark 5–8%. Rent, utilities, property taxes, building insurance and maintenance, and the example practice runs 7.0%, or $132,300. If you own the building through a separate entity, the rent you pay yourself still belongs here at fair market rate. Understating it flatters overhead and overstates what the practice is worth. Do not put a mortgage payment on this line. Principal is a balance-sheet repayment and a cash flow item rather than an operating expense, and the interest is a financing cost that belongs below operating income. Booking the whole payment here overstates occupancy and understates your profitability.
3 · Lab and supplies · benchmark 10–14%. Lab fees, clinical supplies and small equipment, and the example practice runs 11.0%, or $207,900. Outside lab alone runs 8–10% for a general practice, so when this category sits above its ceiling the lab invoices are the first thing to audit, being the largest controllable cost in it. There is a chairside exception: where computer-aided design and manufacturing in the building replaces the outside lab invoice, the lab cost moves into equipment and materials instead. Judge a chairside practice against a lower benchmark before concluding the cost is missing.
4 · Marketing · benchmark 3–5%. Digital, print, community sponsorships and patient-acquisition cost, and the example practice runs 4.0%, or $75,600. Maintenance spending holds 3–5%, and deliberate growth mode runs 6–10%. Always tie the spend to new-patient count and cost per acquisition. Cutting below the floor reads as a saving this year and arrives two to four quarters later as fewer new patients.
5 · All other operating · benchmark 5–8%. Technology and software, professional fees, malpractice and liability insurance, office supplies and the small remainder, and the example practice runs 6.0%, or $113,400. This is the category most prone to creep, because nothing in it is ever big enough to trigger a decision.
Added together, the example practice spends 55.0% of collections, or $1,039,500, and the 45.0% that remains, $850,500, is operating income. Under roughly $750,000 of collections a practice often runs 70–80%, because fixed cost sits on a small base. Read the total alongside the net EBITDA margin, which should hold at 20% or better.
A total inside its benchmark does not mean every category is. A total of 58% still sits inside the strong range and can hide two categories above their ceilings, so work through the categories one at a time and read the total last.
Why the Percentage Provides More Insight Than the Dollar Figure
The dollar figures on a P&L are an odometer. They tell you the cumulative total (how far you have traveled, how many dollars rolled out the door) and nothing about whether you are moving at the right speed. The ratio is the speedometer, because each category as a percentage of collections is your rate right now.
Staff compensation of $420,000 last year and $475,000 this year is an odometer reading that climbed $55,000, and it looks like a problem. But collections grew from $1,400,000 to $1,700,000, so the speedometer dropped from 30.0% to 27.9%. The cost rose; the practice grew faster. That is healthy spending wearing the costume of a problem, and cutting staff here, which is the instinct the dollar figure provokes, would be the wrong move.
Every line on your management P&L carries both the dollar amount and the percentage. On review, read the percentages first. Are they within the benchmark ranges? Are they trending the right way across a three-month lookback? A ratio inside its benchmark and stable needs no action. A ratio outside its benchmark, or moving more than about a point and a half in a month, demands investigation now, this month and not at year-end.
Dr. Chen. Collections $1,250,000. He produces $937,500 personally; hygiene contributes $312,500 (25% of collections). Staff $412,500 (33.0%), facility $93,750 (7.5%), lab & supplies $162,500 (13.0%), marketing $12,500 (1.0%), all other $100,000 (8.0%). Total overhead $781,250 (62.5%). Operating income $468,750 (37.5%). Owner clinical comp 30% × $937,500 = $281,250. Net EBITDA $187,500, a 15.0% margin. The flags are not all the same kind of problem. Staff compensation runs 6 points above the top of its benchmark range. He has no associate production either, so his built benchmark is team compensation alone at 22–27%, and 6 points of $1,250,000 is $75,000 a year leaving the building now. Marketing runs 2 points below its 3% floor, so $25,000 a year is not being deployed, which is not a saving and is the likely explanation for stagnant collections. Hygiene at 25% is a capacity question rather than a P&L problem. In order, audit staff cost first because it is the live leak and by far the larger number, looking for one redundant role or chronic overtime, then fund marketing back toward its benchmark range.
Fifteen Minutes a Month
An management P&L is only worth building if you know how to read it. Most dentists look at financial statements once a year, when the CPA prepares the return. By then a ratio that drifted two points has already been drifting for twelve months at full run rate. It is more appropriate to set aside fifteen minutes on the same day every month to review your management P&L.
The 15-minute monthly review.
- Review the top line. Compare collections to the prior month and to the same month last year, which is the comparison that strips out seasonality.
- Review the five benchmark ratios. Read staff compensation, facility and occupancy, lab and supplies, marketing, and all other operating against their benchmark ranges, and flag anything that moved more than about 1.5 points.
- Understand your operating income. Read the dollars and the margin on a three-month rolling average, because one month is noise and three months is a direction.
- Produce your net EBITDA. Take owner clinical compensation, 30% of your personal adjusted production, out of operating income, then read the margin against 20%.
- Decide which action carries the most value. Multiply each gap by collections, write down the largest one, and check the result at next month’s review.
Tie that cadence to a leak you have already seen. A practice that signs a deeper fee schedule and lets its write-off rate drift three points, from the 9.3% of gross production the example practice runs to 12.3%, is still inside the published 8–15% range and is already giving up 3.0% of $2,150,000, or $64,500 a year, at $5,375 for every month the drift stays open. The month you find it decides how much of that you pay.
Dr. Patel reviews January, February and March. Collections hold near $170,000 a month. The staff ratio reads 26.8%, then 27.4%, then 28.9%. That is 2.1 points in ninety days, which on $170,000 a month is $3,570 of additional monthly staff cost. Drilling in turns up a hygienist and a temp receptionist, and they are not equivalent. The hygienist moved from 32 to 36 hours a week in February, roughly $1,170 a month loaded, and she produces, so that spend has a revenue side and belongs in the hygiene capacity question rather than in a cost cut. The temp receptionist was added in March at $2,400 a month with no measurable change in new-patient calls, and that one has no revenue side at all. The action sits on the temp alone. Give the temp a defined outcome to hit, or redirect the $2,400 a month into marketing, where Chen’s arithmetic above says it earns. Caught in March, the temp has cost $2,400. Missed for twelve months it costs $28,800, and the whole reason it surfaced is that somebody looked in March.
Four Traps to Avoid Even With a Well-Built P&L
Even a clean management P&L can mislead you if you are not careful. Each of the examples below hides a real problem behind a number that on the surface looks completely reasonable.
Trap 1 · Hidden owner perks. Vehicle payments, personal insurance, a spouse’s salary, meals and travel run through the practice all reduce reported operating income without being real business expenses. They inflate every overhead percentage and make the practice look less profitable than it is. Pull them out before you judge any category, and expect a buyer to pull them out too when the practice is valued.
Trap 2 · Seasonal mismatch. June and December often dip in collections while annual insurance, equipment and bonuses land in the fourth quarter, so a single soft month can read like a crisis. Compare each month against the prior month and against the same month a year earlier.
Trap 3 · Accrual against cash timing. Dentistry performed in March may not collect until May. An accrual view flatters March and a cash view flatters May. Neither view is wrong, and mixing them produces bad decisions. Track adjusted production, collections and the movement in accounts receivable separately, run every ratio on collections, and reconcile to cash once a quarter.
Trap 4 · One-time items, and what is not an expense at all. A $20,000 settlement or a prepaid annual premium lands in one month and wrecks that month’s ratios, so keep those items on their own line and out of your trend. A $45,000 equipment purchase is not an expense at all. Equipment with a life beyond a year is a capital outlay, so it sits on the balance sheet and reaches the P&L as depreciation spread over several years. What lands in March is the cash, not a $45,000 expense.
Chen’s marketing line sits at 1.0% of collections against a benchmark range of 3–5%, and his collections have been flat. He wants to know what raising the spend earns before he commits to it.
Collections = $1,250,000
Total overhead = 62.5% of collections
Marketing now = $12,500 · marketing proposed = $36,000
New patients = 8 per month · first-year revenue per new patient = $1,500
The operating income the higher spend adds over a full year, once the extra spend is taken back out.
Extra spend = $36,000 − $12,500 = $23,500
New marketing rate = $36,000 ÷ $1,250,000 = 2.9% of collections
New patients in a year = 8 × 12 = 96
New collections = 96 × $1,500 = $144,000
Contribution rate = 100% − 62.5% = 37.5%
Operating income from the new work = $144,000 × 37.5% = $54,000
Net of the extra spend = $54,000 − $23,500 = $30,500
The new dentistry carries the practice’s own overhead before any of it counts as profit, which is why the headline $144,000 measures revenue rather than return. The fix is to fund marketing at $36,000 and count new patients every month. At 2.9% of collections the spend is a ramp toward the 3–5% benchmark rather than a leap past it, so the next increase can be judged the same way.
The One Thing
Your accountant’s P&L answers a tax question once a year. The management P&L answers an operating one every month: where each dollar of collections went, as a percentage, while there is still time to change it.
Key Takeaways
- Build a second document, not a replacement. Your CPA’s version is correct for filing a return and useless for steering. Every line on yours carries both the dollar amount and the percentage of collections.
- Collections is the denominator, not production. Every percentage on the statement is taken against money received.collection rate = collections ÷ adjusted production
- Every dollar of spend sits in one of five operating categories, and each one carries its own benchmark. Ledger accounts are for the return; categories are for the decision.
- Clinical compensation is a line on this statement. Fixed at 30% of personal adjusted production, it separates what the dentist earned from what the business earned.net EBITDA = operating income − clinical comp
- Fifteen minutes a month beats an annual review. A ratio that drifted two points has already been drifting at full run rate for twelve months before the return is prepared.
| Line | Amount |
|---|---|
| Collections | $1,890,000 |
| Total operating expenses (55.0%) | $1,039,500 |
| Operating income | $850,500 |
| Owner personal adjusted production | $1,200,000 |
| Clinical compensation (30%) | $360,000 |
| Net EBITDA | $490,500 |
| Normalized EBITDA margin | 26.0% |
Apply This Week
- Rebuild last month as an management P&L: dollars and percent of collections on every line.
- Calculate the collection rate on a rolling three months, not a single month.
- Sort every expense into the five operating categories and mark each against its benchmark.
- Add the clinical compensation line and read net EBITDA underneath it.
- Put fifteen minutes in the diary for the same day each month.
Watch For
- Owner perks sitting in operating expenses and flattering the profit.
- A ratio that moved because collections moved, not because spend did.
- Percentages taken against production instead of collections.
- A statement read once a year, when the return is prepared.