Welcome back to another episode of the Dental Boardroom Podcast, where we help dental practice owners break down the world of finance and build a path to financial independence.
We’re now entering Phase 3 of our series Financial Planning for Dental Practice Owners: Turning Chaos into Financial Freedom. This phase focuses on developing your business financial plan, and today’s episode dives deep into Step 1: Organizing Your Practice Financial Reports.
You’ll learn how your financial statements act as "financial X-rays" for your business and why reviewing them monthly is essential—not just for tax filing, but for understanding and strengthening the economic health of your practice. We explore the history of financial reporting, how it revolutionized commerce, and how the right structure can help you make better business decisions and accumulate wealth.
Whether you're a numbers person or not, this episode will help you see your P&L and balance sheet in a whole new light—and help you start using them as tools for growth.
📥 Resources Mentioned:
• Ten Questions to Ask Your CPA
• Questions to Ask Yourself When Reviewing Financials
• Sample Profit and Loss Statements

🔑 Key Points:
• Phase 3 of financial planning focuses on your business financial plan
• Step 1 is to organize your practice financial reports
• Financial statements should be used to tell the story of your practice—not just file taxes
• Most dentists don't regularly review financial reports, but doing so is crucial
• Monthly reporting is vital to make informed financial decisions
• Good formatting of reports reveals financial health and wealth-building opportunities
• The historical context of double-entry accounting and its transformative power
• Financial statements can and should be customized for dental practices
• Reviewing reports consistently helps prevent fraud, optimize tax planning, and guide smarter spending
• Accountants and advisors play a key role in structuring meaningful, dentist-specific reports

Transcript:

Wes Read: [00:00:00] Welcome back everybody to another episode of the Dental Boardroom podcast, where we attempt to break down all things financial for a dental practice owner and help them structure a plan for financial independence, which is the theme of the series that I'm on right now. Financial planning for dental practice owners turning chaos into Financial freedom.

And phase one was building out your sort of strategic team to create a master plan for wealth accumulation and for really healthy. Running of your dental practice. Then phase two was building a personal financial plan for financial independence, where we talked about creating a long-term financial plan, a short-term financial plan, the long-term being when you wanna retire, and what does your future look like and what costs are coming that come with that.

And then the. Personal financial plan today is about your spending plan today and [00:01:00] how and when you pull money outta the practice to support your personal needs today, and then finding a happy middle ground or an equilibrium between your future goals and what that's gonna cost and your what goals or spending needs today and what that costs so that you have a sustainable financial plan as a dentist and practice owner.

Today we're going on to phase three. Which is probably where most of the meat comes in because as I've stated before, if we can get the cash flow and the financial condition of your practice to be extremely healthy, it's a lot easier than to, uh, translate that success and health into your personal financial life to have that meaningful life that you have defined.

And specifically, what aspects of that life have a financial aspect to them. Phase three, develop your business financial plan. Now, there are multiple phases or [00:02:00] stages to do this right? Let me enumerate them. Step one, organize your practice. Financial reports. Organize your practice, financial reports.

That's what we're gonna talk about today. Step two is understand your breakevens. I've talked a little bit about breakevens in the prior episodes. We're gonna talk about those a little bit more. I think it's critical to understand the nature of breakevens and the economics of it inside of a dental practice.

And again, not trying to make you a, an an economic professional, but I do believe as the CEO of your business, there are certain financial concepts that you do need to understand. So that's two, understand your breakevens. Number three is complete a tax plan. Number four is to determine your W2 level, your W2 payroll for the year, what should be on your W2 at the end of the year.[00:03:00]

For what your goals are, your tax situation, your 401k situation, your tax planning, what should your W2 be? And then lastly, the fifth step in developing a business financial plan is to complete a cash flow projection. Look out on the future and determine what is gonna happen to your bank account in the practice, and then to allocate surplus capital.

So. I really want you to enumerate these. See these in your mind. Number one, organize your practice financial reports. Number two, understand your breakevens. Number three, complete a tax plan. Number four, determine your W2 payroll for the year. And number five, complete a cashflow projection and allocate surplus capital.

These are the five steps I'm gonna go through over the, over the next few podcast episodes. These are intended to be done in sequential order, and then each year you sort of go through this cycle again. Let's start off with step number one, organize your practice financial reports. [00:04:00] I will tell you that in the same way I struggle to floss every night.

Dentists struggle to read their financial statements every month, and it's not just you dentists, it's not just you. I mean, I look at mine regularly, but then again, I'm A-C-P-N-A financial advisor. I'm a fractional CFO, so that's very natural for me to do it. Just like it's very natural for you to floss, you probably floss after every meal as a dentist.

However, most small business owners, dentists included, don't necessarily do their financial flossing by reviewing their financial statements after each month. Now we do our absolute best to finish these financial statements for our clients and deliver them as timely as possible. We do a lot of financial statements and oftentimes we lose connection to bank accounts or we have questions about specific transactions.

So as much as I would love to have them all done by the first of the month for the, from the, for the prior month, that just is not realistic. We try to have them done by the 15th for most of our clients. [00:05:00] Key thing though, is that you have them monthly. It is very important to have them monthly and you review them monthly, just like it is important to floss on a daily basis, brush and floss.

So I'm gonna spend some time talking about what is a good financial x-ray. What are these practice financial reports? Now, to start, to start, I wanna emphasize, I wanna speak to the importance of financial reporting as financial x-rays. Financial statements aren't necessarily just to give a person a historical set of numbers to look at or just to file a fin a tax return.

Too often for small businesses. The profit and loss statement and the balance sheet are used primarily and foremostly to file the corporate tax return, which is deeply unfortunate that that's the leading use. The leading use of these should be to tell a story. They should be used to tell an economic story about the financial [00:06:00] health of this thing called your dental practice.

And secondly, it should then be used to file a tax return, and if you do it in that order with those purposes. The number one, the first use of it. Using it to tell a story will actually help you save taxes when you do. Number two, to enter the data from the financial statements into the tax software to file the tax return.

You'll save in taxes if you do number one, right and consistently, which is use your financial statements to analyze the financial health and make key financial decisions. Now, as a dentist, you weren't trained in how to. Construct these financial statements, the format, the layout, how to use QuickBooks, how to reconcile the relationship between the p and l and the balance sheet.

You weren't trained in all this, and so you don't necessarily have to be. There are concepts of it that I absolutely want you to understand, and I've done a few podcast episodes. You could go and listen to them. 10 things. 10 questions to ask yourself every month when you review your [00:07:00] financial statements, and also 10 questions to ask your CPA when you meet.

Those are separate podcasts, so I'm trying to educate you on how to sort of digest these financial statements to make healthy decisions, but you're not necessarily trained in it. That's why it is important that you have a good CPA or a good financial consultant who helps you structure these. In a way that is specific to you as a dental practice owner.

You don't want one that's gonna be specific to restaurants. You want a financial statement format that's specific to you, and therefore it will be a lot easier to extract out the main themes and takeaways from those financial statements each month. So organizing your, your financial statements. Let's, let's go back to there was a time when businesses did not have financial statements.

You've gotta go back a few hundred years and. I think it was the 15 hundreds or 16 hundreds double ledger accounting was invented, where if in an, in a transaction there's always two sides to a transaction, there was a debit and there was a credit. And yeah, we, [00:08:00] CPAs and accountants get made fun of for being counting these debits and credits and that's okay.

But there was a time when this was discovered that it was groundbreaking. It was absolutely groundbreaking to business owners, entrepreneurs, to the financial sector. What it did is it created this regular story where business owners could then extract out information about their practice to be more successful, and also to prevent fraud and embezzlement.

Also to, of course to minimize their, their, their, their taxes. Now, things back then were quite different than they are now, but it came out of Amsterdam, sort of the Netherlands era. It came outta there, this double ledger accounting, and it completely transformed the way that wealth, who owned wealth. And it really moved it from sort of the, the, um.

The royalty and it transitioned a lot of wealth into the hands of private merchants, accounting being one of the key reasons why. And out of that came the first stock exchange ever, which was the Amsterdam Stock Exchange in the first [00:09:00] public company was the East and East trading Company. And all this came out of what is really crystal clear reporting, which was underpinned by these inventions of accounting.

Now. I love to elevate accounting as an accounting, just to help myself feel positive every once in a while that I'm in a cool space. That said, accounting has sort of lost its luster over the years, for sure, but I wanna sort of reinvigorate that luster in your eyes to understand that it is still very important to understand the economic story of your practice because just in the way that it revolutionized the way money was made and wealth was earned.

Way back in the day. It can also do the same thing for you if you use it as a key tool to build your own wealth. Alright, let's go into the format of financial statements. Again, as you know, I'm sharing my screen for those, watching this on YouTube. Uh, I will narrate this for those of you listening to it on your phone.

So step one, organize your practice. Financial reporting. When I get a prospect. [00:10:00] I get their p and l and I look at it and I can immediately tell how well was this dental practice owner instituting an organized plan around their money, around saving taxes and around accumulating wealth, et cetera, just by looking at the format of their financial statements, because of the format of the financial statements doesn't tell you anything Then.

A lot of decisions, important decisions are not being made. So here's what a common p and l looks like. It has the collections at the top. It might have patient refunds under that, and then the net income, the total income, and then below that it has all of the expenses in alphabetical order. So those of you on my screen see my screen, I'll, I'll narrate this.

Under expenses, there's advertising and promotion. Automobile expenses, bank service charges, computer expenses, continuing education, contract, labor, credit card fees, dental and clinical supplies, Dr. Mills, doctor, salary, interest expense, lab services, license, medical services, office supplies, pension expense, rent, staff wages, travel and [00:11:00] lodging.

Utilities. You add all add up. It's your total expense. So what's on the screen is a practice that's doing 1.4 million 50,000 in patient refunds. So 1.35 million is left. And then after all those expense items. Expense items totaled 1.283 million. That leaves a net ordinary income of $67,000 on the bottom of the p and l.

Now to clarify, the p and l stands for profit and loss statement because it can show a profit or a loss. The formal accounting term, which will usually show up at the top of your p and l, and what we CPAs use is your statement of income and expenses. Your statement of income and expenses, but that is synonymous with your p and l, which is synonymous with your proven law statement.

It's all the same thing. It's showing what money came in and what money went out the door for tax deductible expenses, and I wanna emphasize tax deductible because you've got money going out the door that is not on here because it's not tax deductible when you transfer money to your personal account outta your business.

That is not a, that's not an expense. [00:12:00] That's not tax deductible when you just do a transfer on your phone from one bank account, your business bank account to your personal checking account, that's not gonna be on here. When you pay back the bank, the principal portion of the debt, that's not gonna be on here.

The interest is because that's the cost to get the money. That is a business tax deductible expense, but not paying back the debt. You're just paying back money that somebody gave you that wasn't taxable when they gave it to you. Is the money that landed in your account so when you pay it back, it's not a tax deduction does not show up on your p and l.

So the p and l does not show all of your cash flow. It shows most of it, but, or a lot of it at least, but it does not show exactly where your cash went. It is more used to itemize out what is tax deductible of the ex of the money that went outta your business. Checking out what is tax deductible. That's the main reason of a p and l.

So it's a little bit unfortunate that the p and l was designed ultimately for the tax return. The reality is, is you need to take this and. Adjust it a little bit to be useful to tell your story [00:13:00] economically, not just to get the tax return done. That's why if you're a client of practice, CFO, what you have to do is you have to take this p and l, you gotta make some adjustments to it to make it more of a cash flow statement to, to, so it accounts for everything coming in and going out, not just what the IRS wants to see as coming in, going out for tax calculations.

That's important. How do you convert this into a true full. End-to-end cashflow analysis. So what we do is we have, we have an Excel spreadsheet and we take the p and l and we bring it in there, and then we bring in the debt, we bring in, uh, distributions out of the practice. We bring in everything. And then from there we do a cashflow forecast, which is step five of this business financial planning process, which I will get into later.

But during this business financial planning process, you have to get to the underlying cash flow beginning to end. But the key starting point is your profit and loss statement. And so let's talk about how to structure this [00:14:00] because this format of your income up at the top, your expenses down below an alphabetical order with a net ordinary income at the very bottom is not telling you much because this is saying, this business, this practice does $67,000 a year.

So the question is, is this a healthy practice or not? Financially, when you look at this. At first blush, it's very hard to tell whether or not this is a successful practice or not because a lot of the doctor's personal wealth building is embedded in various areas here on the p and l. And also the doctor's personal expenses are sort of weaved in and out A lot of these line items on here.

And so when I see the $67,000 at the bottom, I don't know how much of their personal spending and their personal wealth building is. Baked into these other areas up above that are really maybe hybrid business. Hybrid personal. So that's difficult. It's difficult to tell that. I know $1.4 million practice is a good practice, but I don't know what the cash flow is gonna look like at the very bottom to [00:15:00] determine whether or not this is a healthy thing.

So that's, let's figure out how do you, how do you rightsize this? How do you reformat it? So going down to the next page, there are various items on here, which are the culprits. The ones that are likely going to see a lot of personal stuff. For example, advertising and promotion. On this statement, I see $20,000 for the year going to advertising and promotion.

Well, maybe you did pay for a marketing company, roughly $1,500 a month or so. Great. Or maybe you took a trip to Europe and called it a promotion. Just to sort of bury it inside there, which I've absolutely seen done many, many times. Other ones automobile expenses, that's not a true business expense. You and I know it, especially if you're buying an $80,000 car that Yeah, we are definitely towing the line by getting tax deductions for that, and we recommend all of our clients have their car in the business.

So when I, when I point these out, by the way, it's not that I'm. [00:16:00] Disagreeing with running them through the business at all. Some of them may be a little more aggressive than I'm comfortable with, and if you're a client of practice CFO or with whatever CPA files your tax return, your CPA's name is on the bottom of that tax return that gets filed.

So we have liability exposure as well that that is why I would never file a tax return if I felt something was outright fraudulent or what's called tax evasion. Tax evasion is illegal and I will have no part to do with it. However, as I'm trying to help you build financial independence, I have to, I have to mitigate the massive friction of taxes, and the way to do that is to toe the line, which I'm a big believer of.

So let's run through as much stuff of this that we think we can justify as having a business purpose in order to get our taxes down. I do it personally to advertising and promotions, automobile expense, continuing education on here. So it's [00:17:00] 40 grand. Maybe you took a big trip to Hawaii and maybe you took a CE course while you were there.

Who knows? But you're calling it all continuing education. That's very aggressive, but I do see that a lot. And if you're a buyer of a dental practice and you're looking at this p and l and you see continuing education for 40,000. You're gonna wanna ask, what is that? Is that something that I'm gonna be paying for after I buy the practice or not?

And by the way, on that note, this whole exercise I want you to simulate in your head as if you are selling your practice tomorrow. You're selling your practice tomorrow, and you wanna know what is the true profitability of this so that you can tell a bank and you can highlight to a buyer, this is my true profitability.

I know it says 60,000 thousand dollars at the bottom of my p and l, but that doesn't tell you the story. And so that's why doing this formatting or just changing the way that you lay out everything on your p and l to tell the story in a quick, easy, digestible way is so important. It will A, make you a better [00:18:00] decision maker around your practice money, and B, it will get you a higher value of your dental practice.

So what other culprits are here in this list, Dr. Mills and Entertainment? 20 grand. Pretty much a hundred percent of that needs to be added back to the profits. You're gonna hear me use that term, add back, add backs is when you take these expenses and you add 'em back to that profit number at the bottom, 67,000 in order to get to true profits.

All right? Those are called add backs. Alright, the next item is the doctor's salary. Now, you as a doctor, I've stated this many times, sorry if I'm a broken record, but your W2 in your corporation should have no. Correlation to your production. None. It should be correlated entirely to your tax and financial planning.

Your tax and your financial planning, and whether or not you have a 401k and or a defined benefit plan in the practice [00:19:00] drives significantly. Whether your W2 should be high or whether it should be as high, as high as possible, all the way up to about 350,000. You, you never wanna go above, above that number.

Right. I think this year in 2025 is 340,000. You never wanna go above that 'cause then you're just unnecessarily paying Medicare taxes of 2.9% on every dollar of W2 above that amount. You never wanna go above that, but you may wanna go as low as you can. You can if you don't have a 401k or a defined benefit plan in order to avoid paying FICA taxes.

Because FICA taxes at 15.3% are expensive. Some people pay more in FICA tax than they do in income tax. And so you wanna get that low, you get it too low and the hour's gonna come knocking. It's the number one reason for an audit of a dental practice is the practice owner doesn't pay themself. Another enough.

W2, they pay themselves 10,000 bucks. And then the profit of the corporation is 500,000 bucks. Yeah, buckle up. You're gonna get audited. And if you're at zero, [00:20:00] pretty much guarantee at some point the IS is gonna come sniffing around and they're gonna want, they're, they're gonna audit you. And then what they're gonna do is not just.

Bump up your W2 and make you pay FICA taxes. They're gonna go through your whole books and records, and it's gonna take a year. And then they're gonna look at the next two years after that. And next thing you know, you're two years into this, you've dropped 40 grand to a CPA and an attorney to help you through it.

It's a complete bust, a complete waste of time. So. Gotta make sure you pay yourself a reasonable wage via W2 to avoid an IRS audit. Now if you don't have a 401k or DB plan though, you can get that pretty low. You can get that that pretty low. And different CPAs have very different thoughts on what is reasonable wage, because the IRS doesn't exactly define it.

One CPA will say, well, you should pay yourself a W2 what you would pay yourself if you were a a true associate. Alright, I get that argument. Another will say, don't pay yourself less than 50% of your total net profits. So if your practice is 2 million and your net profits before paying [00:21:00] you anything is 500,000, then don't pay yourself anything less as a W2 than 250,000.

And then you take a K one distribution of 250,000 for a total of 500,000. That's what some CPS will say. What I will say is that most of the time if you pay yourself six figures, IEA hundred thousand dollars as a W2, the understaffed IRS probably is never gonna get around to auditing you. And then once the statute of limitations goes, it passes up, you know, three years you're outta the woods, you're good, and you saved quite a bit of money in FICA taxes.

All right? Now you may say, well, Wes, don't I wanna pay FICA taxes? Don't I wanna pay my social security? So I get social security later? Well, there's some truth to that. The more you pay in W2, the more you pay in FICA taxes and the more you pay in FICA or social security tax, the more you get in Social Security tax when you turn 68 or 70 or whenever you start to take that money.

That is true, but it is not a dollar for [00:22:00] dollar sort of transfer. No, first of all, so the, the span of the amount of F attacks, I mean, sorry, the span of amount of social security income that you're gonna get is a fairly small bracket. So whether you pay yourself a hundred thousand a year or $350,000 a year, it actually doesn't make a huge difference in how much social security income you're gonna get.

And it definitely makes some, but not a huge difference. I'd rather see you pay less in FICA tax in order to save that differential in an investment account, and then that will grow and compound over time, especially tax deferred if it's in a 401k or an ira. And that's gonna give you way more benefit than that extra little juice of social security when you, when you retire.

The other thing is our Social Security trust in this country is pretty much gone. I mean, I think it's like five more years before this thing is completely eliminated and we got all these massive problems. Massive, massive debt. The one big beautiful bill is gonna add just a massive amount more to that debt.

It's projected to be 3.5, [00:23:00] guarantee you 3.5 over 10 years. I guarantee you we will add more than 3.5 uh, trillion. Two, the national debt before the end of Donald Trump's term, I guarantee you, he added 7 trillion. The first time Biden came in, added 6 trillion. There's no way we are stopping that massive train, especially with the fact that both parties, no one is willing to restrain their spending right now.

And so we're heading toward this debt cliff that ultimately is gonna force us all to our needs to figure out how to, to come up with a hard solution to this. Somebody's gonna pay for this at some point. So we'll see where that goes. But my bottom line there is like social security being there in the future.

I don't know if it's as reliable as we would like it to be. Now, if you're 65 right now, you're probably fine. If you're 35 right now, you're probably not gonna get what is the stated amount that you would receive later, unless some dramatic changes are made. Back to the W2 conversation, I would, [00:24:00] if you do not have a 401k or db, I'd probably bring you down to a hundred thousand unless you're a really profitable practice.

And if you've got net income of 500,000 to a million, I'm probably gonna pay you more than a hundred thousand because let's say your net income is 500,000 before paying yourself anything. If you do a hundred thousand W2 and you have a $400,000 K one. Equaling that 500,000 profits. Remember, it's a teeter totter.

K one on one side, W2 on the other. If you pay yourself more W2, you're gonna get less K one. If you pay yourself, uh, less W2, you're gonna get more K one. It's just a teeter totter, but it's the same amount. And if you pay yourself a hundred thousand W2, and a 400,000 K one, that could start to be questioned by the IRS for sure, for sure.

But if your W2 is a hundred thousand, your K one is 200,000, you're gonna be fine. You're gonna be fine. Now, you may get some IS auditor. It comes and tells you otherwise, but in my experience, having done this now for, I don't know, 20 years since coming into the [00:25:00] CPA world, you're gonna be just fine there.

Uh, if you go under a hundred thousand and pay yourself, say, 50,000 W2, just make sure that's seen in context. If your practice is running a loss, so your K one is zero and you may be a startup. Or just running on hard times, and if you pay yourself 50,000, you're probably fine. It's really that 50,000 relative to what is the K one or the net income to the corporation.

That relationship is very important. Okay. Let's carry on. What are some of the other culprits on here? Interest expense at $22,000. Interest expense is the interest you're paying for getting a loan from the bank, as you know. And the reason why I like to call that out is because that's not a true operating cost.

If I bought your practice, I'm not paying your debt because it's an asset purchase. I'm buying your assets, I'm not assuming your debt, and you're gonna have to take the sell of your practice proceeds and pay off your own [00:26:00] debt. I like to call the interest expense down below the operating income because interest expense is not an operational item.

It's a financing item like I mentioned, so I call that out. Also, office supplies, Amazon, Costco, so much baked in here that's personal. You know it and I know it, and so I like to call that out a little bit separately where I can Pension expense or 401k, if most of what you're putting in dollars outta your pocket into the 401k is going to you.

And or a spouse, then I like to call that out because it's not necessarily a true operating expense. If I bought your practice, I'm not gonna be paying perhaps that much. I'm not gonna be funding your own retirement. And some doctors will get a defined benefit plan and $400,000 a year into that. I, we do that with our really high role in doctors who are a little bit older, and it makes a tremendous sense.

They cut their taxes off by 70% doing this thing, it's a little tricky. You gotta oversee it. Well. If that, that $300,000 going into a [00:27:00] defined benefit plan or what's on my screen for the 401k, a lot less, but a $40,000, I'm gonna wanna move that around to a place that it doesn't cloud. What is the true profitability of this dental practice?

'cause in many ways, that's not an operating expense. That's really a savings. That's a savings account is what is going on there. Alright. Staff wages. I highlight that only because a lot of times we bake a spouse or kids in our wages in order to save taxes. I do this a lot. This is not a tax strategy web, um, podcast right now, but every child you get on your ta on your, in your corporation.

I wouldn't put 'em on there under say, five or six years old. I wouldn't do that. But once they get to that age, if you put 'em on there and pay them, what is the annual standard deduction? Uh, you're essentially shifting, uh, that amount of income from your high tax bracket to a zero income tax bracket. Now, there's some FICA taxes on it, but a zero income tax bracket and that income shifting strategy.

Can save around two to $3,000 per child per year and that add up, that adds up for sure. [00:28:00] And so I wanna know in those staff wages, do we have any sort of fake wages, which is just employ, uh, kids or a spouse who isn't really in the practice, but we put him or her on payroll in order to fund their 401k. I wanna pull all that out so that way I know what are the true wages of the practice.

Travel and lodging Another big culprit as well, for obvious reasons. It's usually personal, uh, money. So that $40,000 probably doctor's trip, uh, for personal use. Alright, now what should it look like? Well, I'm gonna give you a sample of the practice, CFO financial statements. Now these are actually outdated.

We've now since moved to a different reporting software. Uh, however they're formatted very similar. To what you're seeing on the screen. And let me narrate that. For those of you that are just listening, I have various columns on my p and l and I call it, as I mentioned, the statement of income and expense.

And on the left hand side, I don't just [00:29:00] have the income and all the expenses, but I categorize them into, um, subcategories. And then even under those, I break them out into sub subcategories. For income. I do show practice collections and refunds for a few clients. I will break that out and say, collections for this doctor.

Collections for this doctor. Collections for hygiene. For some doctors, most doctors, that's totally unnecessary. Sometimes when you have a multi-specialty practice or some other, for whatever reason, we may do that, but I like to keep that fairly simple. Collections, refunds, net collections at the top. Then I break up my overhead into the following categories, labor supplies, lab facility.

And admin expenses. Now that's five categories of expenses. Since when I did this, I've now added a new category for marketing. I actually call marketing out separately, where it used to be baked into admin expenses. So there's really six categories, labor, supplies, lab facility, marketing and admin. And in [00:30:00] none of that is anything going to pay the doctor yet.

Because I want to know what is coming out of this portion of the p and l called the operating income or income from operations, because then I can compare that to what is a healthy practice before paying a doctor. And then the doctor's compensation, the doctor's perks like travel and lodging, that kind of stuff comes down below the operating income.

So let me elaborate that as I go here. But the, the other callins I have is I have a callin for the month. I would call 'em year to date. So January through the end of the prior month. And then I have two percentages and one percentage is showing what is the financial planning percentage goal. In other words, what is our percent allocation of income that we want to pay to labor?

And in this case it's 30%. It's in, uh, right next to the labor category in the p and l, and it says 30%. And what that means is that 30% of your collections, [00:31:00] we are budgeting 30% to go to paying your team, your assistant, your front office, your hygiene, payroll taxes, employee benefit plan, other indirect costs associates, that kind of thing.

And in this case, the doctor had actually allocate, actually spent 27% of their collections toward the employees. Now we had set a financial planning goal. 30%. So that's why I have the 30%. I can compare that right away. This is a great storytelling moment. My goal is 30%, and for the month I did 23%. And year to date, I'm 27%.

I am beating my goal. I'm spending less on staff cost than was what was my target. But then I have a column for what is the industry standard for a general dentistry practice. And we, we of course, um, will change that, modify that for specialists. An oral surgeon is gonna have a lower than a GP allocation to staff cost.

Primarily they don't have hygiene costs, [00:32:00] so I have the industry averages as well. And then on the far right, I show the prior year to date. So if we are in March as this one is, it's showing three months this year in the year to date column, and then the same three months last year. So that I have an apples to apples comparison, and then I show the change between the two.

So that's how we format the profit and loss statement. We have better categories. We break out those categories. We show month, year to date, prior year to date, and the change. And then we, and then we compare the actuals to what are the goals that we set as a financial planning goal and also compared to the industry standards.

And that just gives you so much rich context. To measure the health of your practice. So as I go down this p and l, and eventually we get to the bottom, and like I said, you get to your total overhead expenses before paying anything for the doctor. And in this case, it's showing that the doctor, [00:33:00] year to date through March, paid 53.7%.

Now, I had dollar signs on here. Of course this was, in this case it's 250 3008 65 was the total overhead for three months, and that was 53% of the collections. Which were 473,106 for the for the for the year, and that's 53.7%. We set a goal of having 58% overhead with a profit margin of 42%, and the industry standard is 57% overhead with a 43% profit margin or operating income.

And now we can see for the year, year to date, how are we doing relative to the total. Then we get down to what is the punchline of the p and l, and that's your operating income. What is left after your overhead operating expenses. And so like I said, we set a goal here, 42%. The industry averaged 43% for a GP about depends where you live in the country, but that's about what it is.

And now this doctor, we can do a really good comparison against [00:34:00] those things. Then this operating income, this punchline of the p and l, shows you the amount that you have earned as a doctor to pay for your taxes. To pay for your debt, to pay for your perks, like your meal and automobile expenses, and kids on payroll and spouse on payroll.

It pays those, those perks. It pays for your funding into your 401k defined benefit. Plan your savings and it pays you for today. So this, in this case, this example, doctor has 219,000 for the first three months. So that's like, I don't know, 70,000 or so each month of operating income. That's a healthy operating income.

This a, this healthy practice right here and that that then, uh, if we go down to the bottom, I draw a line. And I say everything below. This is tax and financial planning, and that's where I have the doctor salary, the doctor, family wages, automobile expenses, doctor, payroll taxes, personal medical insurance, payments, depreciation, [00:35:00] amortization, interest expense, all that is below the line because that all relates to tax and financial planning.

And then at the very, very bottom, you get to a number called your net income, and it's double underlined. And the only value in that. Is for taxes because that's the number that flows out on your K one to your personal tax return, and you pay taxes on that number. That is the structure or hierarchy, layout of a healthy profit and loss statement for a dental practice.

And if you structure it this way and then you use my tool that I gave out in a prior podcast. 10 questions to ask yourself when reviewing your p and l. Now you're starting to really, really think like a good business owner. Okay. Our takeaways are the following for this episode. Number one, reformat your financial statements and review them monthly.

The resources I have are a [00:36:00] sample chart of accounts, and I will include these in the show notes, a sample, profit and loss statement, and then questions to ask yourself in reviewing your financial statements each month. And then also add number four, 10 questions you can ask your CPA as well. So those are the resources that I give out whenever I do this lecture so that people can not just hear this and learn a few things, but actually go and get traction with their financial system.

On the next episode, we're going to go into step two, which is understanding your breakevens. You can't define your breakevens in your practice until you have healthy, clear financial reporting. That's why these are sequential, and I'm looking forward to doing that one. Until then, have a great one. We'll keep going on the series of financial planning for dental practice owners turning chaos into financial independence.