How to Read a Dental Practice P&L

Many dentists receive a profit and loss statement every month and look at one number: the bottom line. That is understandable, but it misses most of what the report can tell you. A well-built P&L shows where your money comes from, where it goes, and which decisions are working. This guide walks through each section in the order it appears, explains where owner pay hides, and ends with a short routine you can use every month.

What a P&L is, and what it is not

A profit and loss statement (also called an income statement) reports revenue and expenses over a period, usually a month, a quarter or a year. The difference is net income. It is one of three core financial statements. The balance sheet shows what the practice owns and owes on a given date. The cash flow statement shows how cash moved. A practice can be profitable on the P&L and still short on cash, because loan principal, owner distributions and equipment purchases do not all show up as expenses. Our guide to managing cash flow in a dental practice covers that gap.

Things a dental P&L will not tell you on its own:

• How much is owed to the practice by patients and insurers (that is your accounts receivable, on the aging report and balance sheet).
• How much debt the practice carries, or how much principal it paid this month.
• Whether production, the schedule or new-patient numbers are rising or falling.
• How much cash is in the bank, and whether the owner took more out than the practice earned.

Cash basis or accrual basis

Before reading any number, find out which accounting method the books use. Under the cash method, revenue is recorded when the money arrives and expenses when they are paid. Under the accrual method, revenue is recorded when it is earned and expenses when they are incurred. The IRS explains both in Publication 538. Many small professional practices keep their tax books on the cash method; some keep management reports on a modified accrual basis so that a large lab bill paid in March does not make February look artificially strong.

Neither is wrong. What matters is consistency, and knowing that a cash-basis P&L tells you about collections and payments, not about production.

How the report should be laid out

The same numbers can be easy or impossible to read depending on the format. Ask your bookkeeper or CPA for a monthly P&L with these columns:

• Current month in dollars and as a percentage of collections. The percentage column is what lets you compare a $95,000 month with a $120,000 month.
• Same month last year, which removes seasonal effects such as holiday weeks and the January insurance reset.
• Year to date and trailing twelve months, which smooth out the lumpy lines like quarterly insurance premiums and annual software renewals.
• Budget, if you have one, so the question becomes “are we on plan?” rather than “does this look normal?”

If you have more than one location or several providers, a P&L by location or a collections split by provider is worth the extra bookkeeping. A single combined report can hide one office or one associate carrying the others.

The revenue section

Revenue on a dental P&L should be collections, ideally split into at least patient payments and insurance payments, and by provider if you have associates. Production and adjustments belong in your practice management reports, not on the P&L, but you should reconcile the two every month. If the P&L shows $105,000 of revenue and your practice software shows $108,000 of collections, someone should be able to explain the $3,000 difference (a refund, a deposit in transit, a merchant fee netted out). Watch for:

• Refunds recorded as expenses instead of reductions of revenue.
• Card deposits recorded net of processing fees, which hides the fee and understates revenue.
• Loan proceeds or owner contributions accidentally recorded as income.

The numbers that sit above the P&L

The P&L starts at collections, but the story starts earlier, in your practice software. A simple bridge shows where the money went between the work you did and the money you received:

If the P&L looks weak, this bridge tells you whether the problem is production, insurance adjustments or collections. Our guides to the dental collection rate and PPO write-offs and fee schedules go deeper on each.

Operating expenses, line by line

Expenses are typically grouped into team costs, clinical costs (supplies and lab), occupancy, administrative costs and marketing. A useful P&L shows each major line both in dollars and as a percentage of collections, which lets you compare months of different sizes. See what is normal overhead for a dental practice for the ranges consultants commonly use for each category.

Owner compensation and add-backs

This is where most dental P&Ls get confusing. Depending on your entity, the owner’s pay may appear as W-2 wages, as guaranteed payments, or not at all (if you take draws or distributions, which come out of equity). Owner benefits such as health insurance, retirement contributions, a vehicle or continuing education may be mixed in with team costs.

Where owner pay shows up, by entity type

Two details trip up many readers. In an S corporation, the IRS expects shareholder-employees to receive reasonable compensation before taking distributions, and health insurance for a more-than-2% shareholder is deducted by the corporation and reported as wages on the owner’s W-2. In a partnership, IRS Publication 541 explains that guaranteed payments are deducted by the partnership like a business expense. Either way, the owner’s cost belongs on its own clearly labeled lines, not inside “staff wages.”

To see the real earning power of the practice, an advisor “adds back” those owner items and any one-time costs. This normalized figure, often called owner’s benefit or adjusted EBITDA, is also the starting point when someone values the practice. Read more in how dental practices are valued and how dental practice owners pay themselves.

Depreciation, amortization and interest

When a practice buys equipment, the cost is usually recovered through depreciation over several years, or deducted faster through Section 179 expensing or bonus depreciation. The IRS covers the rules in Publication 946. On the P&L, a big depreciation number can make profit look small in the year you buy a CBCT or a new set of chairs, even though the cash already left months earlier. Goodwill from buying a practice is amortized over 15 years for tax purposes, which creates a non-cash expense that can run for a long time after an acquisition.

Interest on practice loans is an expense. Principal is not. If you only look at net income, you will not see that a practice with $250,000 of profit may also be paying $180,000 a year of loan principal.

The ratios to pull from every P&L

You do not need a dozen metrics. These few, calculated the same way each month, tell you most of what the report has to say:

The ranges are rules of thumb that consultants commonly use, not survey data, and they vary with specialty, payer mix and location. A ratio that moves several points in one month is a reason to ask a question, not a reason to panic.

Profit problem or cash problem?

Owners often come to a P&L because the bank balance feels tight. The P&L helps you tell which kind of problem you have:

• Profit problem: operating profit before owner pay is falling or well below your past results. Look at collections, the production bridge above, and which expense lines grew faster than revenue.
• Cash problem: profit looks normal but cash keeps shrinking. Look below the P&L at loan principal, owner draws or distributions, equipment purchases, estimated tax payments and growing accounts receivable.
• Both: a practice with thin profit and heavy debt service can be squeezed from both sides. Fix the revenue side first; cost cuts rarely close a large gap on their own.

Five questions to ask every month

1. Did collections match what the practice software says we collected?
2. Which expense lines moved by more than a couple of percentage points of collections, and why?
3. How does this month compare to the same month last year, and to the trailing twelve months?
4. What one-time items are in here that should be noted or reclassified?
5. After loan principal and owner draws, did cash go up or down?

Set aside about half an hour once the books are closed. Read the percentage column first, then the comparison columns, then write down the one or two lines you want explained. A P&L is only as good as the bookkeeping behind it. If categories change from month to month or the report arrives six weeks late, fix that first. Our dental bookkeeping basics guide describes a monthly close that produces a reliable report by the middle of the following month.

A simplified monthly example

The table shows a simplified monthly P&L for an illustrative practice. Reading it top to bottom, then adding the cash items underneath, shows why profit and cash can tell different stories.

Net income of $20,600 looks healthy. Suppose $4,000 of the depreciation and interest line is depreciation, a non-cash expense; adding it back gives about $24,600 of cash from operations. If the practice also paid $14,000 of loan principal and the owner took a $12,000 distribution, cash still fell by about $1,400 that month. That is the kind of picture a monthly review should surface.

Notice also that overhead in this example is 59% ($64,900 ÷ $110,000), squarely within the commonly cited range, yet the owner’s cash went down. Normal overhead does not guarantee comfortable cash when debt service and distributions are heavy.

Common coding mistakes that distort the P&L

• Loan payments recorded entirely as expense, overstating costs and understating profit.
• Equipment purchases expensed in the month paid instead of recorded as assets and depreciated by your CPA.
• Lab and supplies combined in one account, making neither comparable to benchmarks.
• Owner personal expenses paid by the practice and coded to office supplies or meals.
• Payroll recorded as one net amount, hiding employer taxes and benefits.
• Owner wages lumped into team wages, which makes staff cost look far higher than it is.

Each of these makes the report harder to read and can create problems when the numbers are used for a loan application, a valuation or a tax return.

Getting help reading your numbers

If your P&L feels like a list of numbers without a story, it may need to be rebuilt around a dental-specific chart of accounts. Cisor’s dental accounting team prepares monthly statements dentists can actually read and walks owners through what changed. You can try the category math yourself in our dental overhead calculator, or call (703) 345-0606 to talk it through.