Everyone wants to make a profit. That is how a business stays in operation. Even if the business is a charitable 'Non-Profit,' it must make a profit in order to stay in business. It's important that you look at your dental practice as a business in order for it to stay profitable. What do you have implemented, from a business perspective, to help your practice's numbers? Do you know your numbers? Having a KPI monitoring system is a great first step in understanding where your business is at!
How does a dental practice make a profit?
Anything above your overhead is your profit margin. Meaning, the amount left from collections after you pay all your bills is your profit. Some say to remove doctor expenses from the overhead amounts, but we don't think that should be excluded from the overhead. It muddies what is truly profit. Personal funds and business funds should be separated whenever possible.
One reason why you should separate the doctor expenses from the profit is because there should be a Retained Earnings Fund that is saved from the profit of the business. Retained Earnings is considered an emergency fund, opportunity fund, or slush fund for your business. This fund should be built up to six months of expenses, which will provide flexibility to do things with your business in order to capitalize on opportunities, sales, and provide a sense of relief...knowing that your practice could still pay the bills if there was an emergency.
If you have debt (business debt or personal debt), you should pull a living wage out of the practice and whatever is left after overhead is paid for. Put the majority of that 'profit' to pay off debt. We say to put the majority of the gross profit to pay off debt, but not all of it. This is because you don't want to ignore your retained earnings fund.
Why have a retained earnings fund for your dental practice?
The goal is to build up the retained earnings fund to a minimal amount that is sufficient enough to cover costs in order to keep the business open. 10%-20% of the profit, after overhead that is paid for, should go to the retained earning fund. The rest should go to pay off debt.
Retained earnings is meant for growing the practice, taking advantage of opportunities, liberating you from borrowing money, and protecting you from emergencies. It is quite a large financial goal, but you need to consider yourself as your own credit line....especially once you pay off all your debt. Why pay others interest when you can borrow from yourself interest free?
Dental Practice Profit Formulas
This leads us to the simple profit formula for the practice:
Profit Formula: Collections - Overhead = Gross Profit
Gross profit - (Retained Earnings + Debt Payoff) = $0 Balance
This formula changes a bit once the debt is paid off and your retained earnings are fully funded. Instead, there will only be a constant cycle of using retained earnings and rebuilding the retained earnings.
The profit formula would then be:
Gross Profit - Retained Earnings = Net Profit
Your net profit is the money that is going straight to the bank. This is what's left after collections, overhead, retained earnings, and debt payments have been subtracted. You've even already accounted for your taxes as a part of your overhead. So, your net profit is truly your's to use as you choose. Over time, the goal is to be able to continue to grow this number by reducing things like overhead and debt payments!