Do you understand your Profit and Loss statement? Well, even if you’re not trained, you can still look at the bottom “net income” line and get an idea of your profit right? Well, probably not. Does that number take into account owner’s draw and loans? Sometimes it does, sometimes it doesn’t. Here’s a guide to understanding your P&L:
Total Income: This is income before expenses. This is the amount you actually collected from your patients. This is NOT your production.
Cost of Dentistry: This includes dental supplies, lab work, medical waste, and ortho supplies.
Facilities/Occupancy: This includes rent, all utilities, janitorial services, and maintenance you do.
General Overhead: Overhead has too many definitions, and different charts of accounts organize this differently. It will include things like office supplies, legal fees, and professional fees.
Payroll: This can also go by “wages.” Includes payroll, payroll taxes, staff meals, and uniforms, benefits, and retirement matching. The thing to note here is that payroll on a P&L includes non-payroll things, so the total can be more than just wages.
Total Expenses: This is the total of everything up until this point in the P&L. But there are additional expenses to consider.
Other Expenses and Other Income: These come after the total expenses line. This typically includes Owner’s Expenses. It’s best to think of the “other” section as a separate P&L. If “Other Income” is negative, that just means you have more “other expenses” than “other income.” There’s no reason to panic at this.
Owner’s Expenses: This may or may not be included in a P&L. If it is, it’s often after the total expenses line, and is not considered an overhead expense. The P&L usually labels this as “other expense.”
Net Income: This is not profit. This is Total Income + Other Income – Total Expenses – Other Expenses. If a tax or payment does not appear on the P&L, it will not be taken into account. Owner’s draws and loan principal payments aren’t on the P&L. It also doesn’t tell you what taxes and automated payments are coming up.
Despite its name, a Profit and Loss statement doesn’t tell you how much profit you made. The best way to understand a P&L is as a guide to what your expenses look like. If you treat it like this, you’ll have a more realistic view of your finances.