As a dental entrepreneur, it’s important to have an understanding of business terminology to evaluate a dental practice or business, especially if you plan on starting or buying your own practice. However, the jargon can be overwhelming, and you might feel lost in a sea of financial reports and figures. But worry not, this post series aims to simplify the most important dental business terminology to help you understand the concepts of business profitability.
Annual Revenue and Its Relation to Gross and Net Income
Annual revenue is the total amount of money a dental practice earns in a year, including all sources of income. Gross income, on the other hand, is the total income generated from patient treatment before deducting any expenses. So for the vast majority of offices Gross income = Annual Revenue. Net income refers to the remaining amount after all expenses have been paid.
It’s important to note that the gross income doesn’t necessarily indicate the success of a dental practice’s financial health. For example, if a practice with a high gross income also has a high overhead percentage, the net income could still be low, indicating a lack of profitability. Thus, it’s crucial to evaluate the net income rather than the gross income alone when analyzing the financial health of a dental practice. Two examples to evaluate: one office may have an annual revenue or gross income of 2 million dollars per year but a net income of 700K, this would indicate a 65% overhead for the year or “bills you need to pay number”. Office number two only produces 1.4 million dollars however its bills and expenses are much lower let’s say 50% overhead, this office while doing 600K “less dentistry” produces the same net income of 700K. Simplified If you’re an owner doctor this net income is your paycheck. Let’s dive into overhead.
Overhead Percentage and How to Calculate It
Overhead percentage is the total percentage of expenses a dental practice incurs on a yearly basis. This includes rent, insurance, team salaries, supplies, and other expenditures incurred to operate the business. Overhead percentage is calculated by dividing the total overhead expenses by the annual revenue of the practice. Basically everything the office must pay for before it pays the owner doctor is called “overhead”.
A healthy overhead percentage is typically around 50-70%. However, this percentage can vary depending on the practice’s size, location, and other factors. It’s essential to keep overhead expenses under control and to continually evaluate and adjust these figures to maintain a profitable practice.
Marketing and Personal Expenses
In addition to overhead expenses, marketing expenses and personal expenses may also be included in the financial reports of a dental practice. Marketing expenses refer to the amount spent on advertising and promoting the practice. Personal expenses, on the other hand, refer to the expenses incurred by the dentist personally, such as personal loans or withdrawals from the business account.
When analyzing a practice’s profitability, it’s important to separate these expenses from the overhead expenses and evaluate them separately. This allows for a more accurate picture of the practice’s financial health. Because if you’re buying an office, you won’t have to pay these expenses.
Conclusion:
Understanding dental business terminology is crucial for dental students who plan on starting their practice or evaluating the financial health of an existing practice. Gross income, net income, overhead percentage, and additional expenses are all important concepts to grasp when assessing a practice’s profitability. By breaking down these terms and providing examples of their applications, we hope to have provided valuable insights into the world of dental business. Remember, business success does not solely rely on high gross income; it’s important to keep track of overhead expenses and regularly evaluate and adjust these numbers to achieve optimal profitability.