Dental practice financial analysis, step by step.
Financial analysis of a dental practice starts with a problem: the tax-basis statements most practices run on are built to minimize taxable income, not to describe the business. Owner compensation is set for tax reasons. Equipment is expensed under Section 179 rather than depreciated across its life. Personal items sit in the operating expenses. Membership plan collections are booked as revenue on receipt.
Analysis performed on that file produces confident, wrong answers. The first step is always normalization.
The sequence.
- Normalize owner compensationReplace what the owner pays themselves with what it would cost to hire a dentist to do that clinical work. The difference is return on ownership, not wages.
- Restate capital spendingRestate equipment expensed under Section 179 onto a depreciation schedule so a year with a new CBCT is comparable to a year without one.
- Release deferred revenue correctlyMembership plans and prepaid treatment recognized as care is delivered rather than as cash arrives.
- Separate hygieneHygiene revenue and direct cost isolated so the department can be read as the profit center it is.
- Test collections against productionAdjusted production against actual collections, by payer, with the lag visible.
- Read the balance sheetFinanced equipment, working capital, and the portion of the bank balance that is deferred revenue rather than yours.
What the analysis is for
Normalization is not an accounting exercise for its own sake. It exists so that three questions can be answered honestly: what does this practice actually earn, what would a buyer pay for it, and what happens to both if you make the decision in front of you.
A practice that looks like it earns $240,000 on a tax-basis P&L may earn $310,000 on a normalized one, or $180,000. Which of those is true determines whether you can afford an associate, whether the second location is financeable, and what the practice is worth when you leave it.
The same normalized file supports all three questions. Running the analysis once, properly, is cheaper than running it badly three times.
Frequently asked.
How do you analyze a dental practice financially?
Normalize owner compensation and capital spending, release deferred revenue as care is delivered, separate hygiene as a profit center, test collections against adjusted production, and read the balance sheet for financed equipment and unearned revenue.
Why normalize a dental P&L?
Because tax-basis statements are prepared to minimize taxable income. Owner pay, Section 179 elections and personal items all distort the operating picture, and a buyer or lender will normalize them anyway.
What is normalized owner earnings?
What the practice earns after paying market compensation for the clinical work the owner performs. It separates the return on owning the business from the wage for working in it.
General information for practice owners, not accounting, tax, legal, valuation or investment advice for your situation. MedPraxis CFO is not a CPA firm, a registered investment adviser, or a business broker. Talk to your own CPA, attorney or adviser before acting on anything here.