UNDERSTANDING YOUR P&L STATEMENT as a MANAGEMENT TOOL
Hopefully you are now more aware of where your journey is beginning from, in the form of the benchmarks of a Super General Dental Practice. You have read Chapter 16 & 17 about overhead and benchmarks in the Super General Dental Practice book that you downloaded (www.supergeneralpractice.com), and have partnered with your team to understand the fundamentals of a solid business benchmark for your practice. Make sure you are including your team on every aspect of the 180 Degree Journey. In doing so, you will have discovered where you fall a little short and where you are doing well. Keep in mind that being accountable means that you, the doctor, are the number one reason your practice is doing well and the number one reason it struggles. A bitter pill to swallow, but remember, accountability extends to each of your team members. That’s why, during this discovery stage of finding out where you are, you will also find that you can no longer keep marginal team members. Keeping these types of employees only holds you back, while telling the good ones that you believe by keeping the “weakest link” on the team, that you don’t care or don’t know what is happening.
Today, we will once again go to a video where you will need a year-to-date Profit & Loss Statement in front of you along with your copy of the Growth Analysis Spread Sheet. Don’t begin this journey by not starting on time and having your destination chosen.
Most of us are accustomed to seeing a Profit & Loss Statement for our practice. Let me rephrase that. Many of us see one, but our CPA typically gets it to us 90 days after the month is over. You should take the time to look at some document that reflects your profits, spending, purchases, and productivity at least weekly. You can’t manage what you don’t measure. Surprisingly, very few of us ever consider that a P&L Statement is not a very good tool for making management and financial decisions. Your Profit & Loss Statements are not profit and loss. It is merely a GAAP document (Generally Accepted Accounting Principles document) that lists expenses that have a tax implication. It is not true profit and loss because there are no debt payments included, and includes depreciation and amortization which you can’t wipe your bottom with. Bottom line, we really want key components of a Profit & Loss Statement, Cash Flow Statement, and Balance Sheet. A format to actually see where we are financially every minute of the day if you wanted. It would have to be easily accessible in your office or home, be up to date every day, reflect your true spending and money in the bank.
This video will go into a way to use a Profit & Loss Statement, by reformatting it, to make it easier to read and use. We will violate a couple of GAAP principles in order to raise our awareness of the real health of our practices. Any CPA can do this for you, or any sophomore in high school could reformat your Quickbooks to make this very simple and eliminate waiting on a CPA for this information or being unable to deduce or interpret a traditional P & L Statement. If you find that your CPA will not do this, fire them. They have never actually run a successful business, or they too would appreciate the clarity this format brings to making business decisions based on up-to-date facts. On the accompanying video you will see a big part of my team: Jared Duckett and Bill Ladd, Duckett & Ladd Dental CPA & Advisors (www.duckettladd.com). You will be able to hear and see them on this video where we have collaborated to come up with a solution to formatting your P & L Statement to ensure that it is useful in your day-to-day management of your practice.
Our goal today is to make sure you completely understand actual profit and loss in the real world of ownership and accountability. Whatever you use, however you study these key performance indicators, the document you use should be easy to read, easy to understand, actionable, and scalable.
In a short-hand sort of way, allow me to summarize what we will discuss before you go to this link https://youtu.be/Ffg9h69NAFs to watch the video. Steven Covey in “The 7 Habits of Highly Effective People” identifies the number one trait to make you successful in any endeavor: “Begin with the end in mind”. In other words, if you can describe or create a picture of where you want to be you will shorten the path and define the result. The same is true in overhead. Your overhead should be in the 50% to 60% range. This is realistic in any practice that is 5 years or older. You should be able to keep approximately half of every dollar you produce. Remember: You should collect over 98% of all fees charged out (Net Adjusted Production). An increase in productivity is of no value if the cost of overhead is not contained. We also believe strongly that you need to be debt-free. It’s amazing how much less stressful every day is when you’re out of debt.
Looking at hundreds of practices and their numbers, I am too often surprised at the lack of information the doctor can lay his hands on. The Profit and Loss (P&L) Statements are not available until 90 days after the closing of the month. The doctor cannot read the P&L or glean the information that he/she needs to make decisions, and does not realize that a Profit and Loss Statement does not reflect true cash flow (what you collected and what you spent). They do not use software like Quickbooks to write checks and create a cash flow analysis. They are being overcharged and underserved by CPA’s and bookkeepers that do not understand the dental business and seem to be in no hurry about getting the numbers to their clients. If you want to lower your overhead, manage your practice for profitability, and control your future, you must have accurate, timely, real-world numbers to guide you.
Let’s take a look at overhead for a moment and the way we suggest you have your CPA organize this mashup of your Profit & Loss Statement, Cash Flow Statement, and Balance Sheet. This document will become a minute-to-minute accounting of in-flow and out-flow of money. We believe all operating expenses should be contained in about 7 categories. Attached to the categories is an ideal benchmark to help you move toward that 50%-55% overhead. These are the categories.
Staff Compensation 24-24%
Office Supplies 1-2%
Dental Supplies 6-7%
NOTE: The seventh category is monies or benefits for you, the owner.
Staff compensation includes everything you spend on staff: Taxes, continuing education, bonus, trips, normal pay, benefits, uniforms, it includes everyone but the owner doctor. Hygienist and associates are included here.
Facility includes all the physical plant and its costs: Taxes, note payment of the building itself, maintenance, lease, servicing note for the purchase of a practice, utilities, equipment purchase or lease, repairs, etc.
Lab should include everything you spend on lab, including Cerec, supplies, outside lab work, and anything else related to that side of your practice. If the benchmark seems low, or you spend more on lab than the 8-10% you are probably limiting your practice to adults and a greater portion of you practice is C&B. This means your ability to market your practice is limited to a smaller, more lucrative audience and should reflect these demographics. If your lab is lower, you may not be assertive enough in your case presentation or not clinically mature enough to present more ideal treatment. Each of these numbers mean something, and creates a picture of the health of your practice.
Marketing would include all internal and external things you do to inspire and reach your potential clients: Print ads, give always, signage, and promotions, phone book, everything. It is said that everything you do, from answering the phone to staying on time, communicates a message to your clients. You cannot, not market. While 3-5% is the benchmark, it is not unreasonable to spend more. A higher end practice may spend more here and less in compensation. Do not cut back on putting your message out there. In providing a service or product: Do what you do so well that people cannot help but tell everyone they know about you.
Office supplies are self-explanatory and are not usually a problem for most offices. Watch what you spend, and spend wisely. Only one person should be in charge of ordering dental and office supplies, and they should have a written budget that is adhered to.
Dental supplies and the money spent for them are often abused. Create a budget, monitor spending through purchase orders, and have one person do all of the purchasing for the practice.
Remember: Every operating expense should fit into one of these categories. Your first question will be: What about all those things I run through the practice to write off? The answer: Everything below the line is yours. You choose to spend them on cars and whatever. This is not part of your true operating overhead. You can still write it off. We will just use the Cash Flow Report or, as you will see, a new format for your Profit & Loss Statements, to manage both productivity and overhead.
99% of your questions will become obvious as you study the traditional Profit & Loss Statement (bad P&L) versus our “rethinking” of a modified and improved Profit and Loss Statement.
Next, I want to introduce Bill Ladd CPA and some of his views about “Rethinking Your Profit & Loss Statement”. You will also meet his partner, Jared Duckett on the video we have linked with this introduction to Profit & Loss Statements. Bill was kind enough to write the rest of this Blog, and I know that this, along with the two examples he has supplied, will go a long way towards helping each of you manage your numbers.
Why is it that financial statements, and the P&L in particular, are such an afterthought for many practice owners? The answer is simple (and logical) for most – they’re worthless. Okay, that might be a bit drastic, but I don’t think it’s too far off the mark. We’ve seen too many examples of P&Ls that are merely checking off the box of a compulsory monthly close. Delivered timely – nope, containing meaningful categories – nope, a tool for making great decisions – not a chance. So, is the stalwart P&L obsolete? Maybe. Or maybe it’s just time to re-think it.
But before we jump into that, a brief primer on the P&L. One of the cornerstones of an accounting student’s education is the Mount Rushmore of financial reporting. The Balance Sheet, the Profit and Loss and the Cash Flow statement. Perhaps we’ll tackle the Balance Sheet in another article, but today it’s all about the P&L and Cash Flow Statements. The P&L is a flowing view of the income you received and the expenses you paid and how profitable you are. The Cash Flow reflects cash in and out and whether you were net cash positive or negative. All three have their place, and can be useful, but does everyone need these three? The big boys all have them, hell you can go on-line and see these financials for Amazon, Facebook and Apple if you want, but are they right for my dental practice? Will they give me the info needed to make great decisions? We decided to go searching for answers to these questions, and to see if we can build a better mousetrap. But first, we needed a brother in arms, a co-conspirator in breaking the stranglehold of the canned QuickBooks P&L template that so many use. Someone who knew the business of dentistry inside and out, and was just as frustrated as we were. It didn’t take long. One call to Dr. Michael Abernathy with Summit Practice Solutions and we knew we had our dance partner.
For years Mike has been the voice of one crying in the wilderness…What is this crap you are spitting out each month? What good does it do you, and how in the world do you make decisions based on it? For all his pleading, it always fell on deaf ears. What you’re asking doesn’t make sense, isn’t proper. It’s just not how these things are done. But why not he’d ask? Why not indeed. Together we embarked on building out a bit of a Frankenstein monster of financial statements. One that only it’s parents could love perhaps, but given time we believed all would see beauty in our creation. But let’s not get ahead of ourselves, we had to start with the raw materials.
Enter Exhibit A (link below) – your standard P&L. We grant you it’s clean. Income, Expenses and Net Income. All you need right? Perhaps, but does it truly show you how you are performing financially? Can you easily see if your personnel costs, supplies or lab are out of control? You can, but you’d have to do the math. Ahh, there’s something we can improve upon. Let’s make sure all categories are broken out, include all appropriate accounts and have the math worked out so you can see at a glance exactly what percent you are spending. This all sounds good, but once it’s classified properly and we have the math worked out, how do we know if those ratios are good? Those could be pulled out and placed on a dashboard for discussion with your advisor, or you could keep it simple and just use the trusty ratios developed by Mike for an optimized practice. We’ve added those as a quick reference point. Do any have substantial variances? That’s where you need to focus your attention. Finally, we get that this is designed to give us a feel for profitability, but does that translate to take home? Is our cash flow good? This brings us to a bit of a mash-up. What if we pulled out key elements of the Cash Flow statement and incorporated it into this document? What are the biggest drains of cash you don’t see on a P&L – debt payments, owner’s withdrawals, etc. Suddenly we have a triple threat financial statement. Ratios to show holes in the bucket in which attention needs to be placed, an indicator of overall profitability of the practice and whether the cash flow is actually tracking with the profitability. See Exhibit B (link below) for our little monster. We’re proud of her.
And for those who are screaming, but this isn’t a tax or GAAP basis financial statement, we get it. You’re right it’s not, and that is not its purpose. This will not take the place of a tax or GAAP basis financial statement which may have a place in your practice. This is a decision-making tool, bottom line. Your accountant can still use those canned reports for tax prep or convert you to accrual basis if need be.
There you have it, a reimagined, new and improved P&L courtesy of Dr. Abernathy and Duckett Ladd. Is it a bit more work for your bookkeeper? Maybe a bit. Will it make you a better business owner who can make better business decisions? We think so. Don’t want to mess with it? We get it. At Duckett Ladd we believe in making your life better, and we love maintaining the books for our clients. We have a team of all-stars who know and understand this model and are good at it. Plus, we throw in a video unpacking the results – another tool in your toolbelt to build the business that supports the life you want.
Get your latest Profit and Loss Statement in front of you (check the date on it!) and go to this link https://youtu.be/Ffg9h69NAFs to compare what you have now with what you actually need in order to effectively manage your business.
This is how you Summit.
Michael Abernathy, DDS
LINKS TO DOCUMENTS REFERENCED ABOVE BY BILL LADD