Understanding Expenses, Revenue & Profit

Introduction to Dental Practice Managerial Accounting

Managerial accounting helps a dental practice owner make better operating decisions. It turns the numbers in your practice management system and accounting software into clear answers: Are we collecting enough? Which services produce healthy profit? Are payroll, supplies, and lab costs under control? Can we afford another hygienist, operatory, or piece of equipment?

This is more than bookkeeping. Bookkeeping records what happened. Managerial accounting helps you decide what to do next. A practice can have a full schedule and still struggle because collections are slow, payroll is too high, or treatment is being completed without enough margin.

Concept: Expenses

Expenses are the costs required to run the practice. Common expenses include dentist and team payroll, rent, utilities, malpractice insurance, software subscriptions, dental supplies, laboratory fees, equipment leases, repairs, merchant fees, marketing, and continuing education.

Separate fixed expenses from variable expenses. Fixed expenses, such as rent and software, usually stay similar each month. Variable expenses rise as you provide more care. Dental supplies, lab bills, credit card fees, and some outside specialist services often fall into this group.

Real-World Example: A general dental practice notices that its supply spending has increased from 6% to 9% of collections. The owner reviews invoices and finds frequent small orders, expired materials, and several premium products being used when lower-cost alternatives would meet the clinical need. After setting par levels and reviewing approved products with the clinical team, supply costs fall without reducing patient care.

Concept: Revenue

Revenue is the money the practice earns from exams, hygiene visits, restorative treatment, implants, orthodontics, whitening, and other services. Track both production and collections. Production is the value of care provided. Collections are the money actually received after insurance adjustments, refunds, payment plans, and patient balances.

A practice may show strong production while having weak cash flow if claims are delayed or patients are not paying their portions. Review revenue by provider, procedure group, payer, and collection month. This shows where growth is real and where it is only appearing on the schedule.

Real-World Example: A practice adds two hygiene days each week and increases monthly production. However, collections do not improve because many claims are missing attachments and patient balances are not followed up. The owner improves claim checks and payment conversations, turning added appointment volume into usable cash.

Profit First

The Profit First method changes the usual formula from Revenue - Expenses = Profit to Revenue - Profit = Expenses. In practice, this means setting aside a planned amount for profit and taxes before spending what remains on operations.

Use realistic percentages rather than copying another practice. A mature general practice may begin by reserving 3% to 5% of monthly collections for profit and 10% to 15% for taxes, then adjust after reviewing debt, owner compensation, and local tax needs. A start-up may use smaller amounts while it builds its patient base. Ask your CPA to confirm the tax allocation.

Real-World Example: A practice collects $100,000 in a month. The owner transfers $4,000 to a profit account and $12,000 to a tax account before paying operating bills. The remaining $84,000 becomes the operating budget. This creates discipline and makes overspending visible early.

The Importance of Cash Flow Management

Cash flow management tracks when money enters and leaves the practice. It is different from profit. A practice can be profitable on paper but short on cash because insurance payments are delayed, a large lab bill is due, or a new cone-beam scanner requires a deposit.

Review a rolling 13-week cash forecast each week. List expected insurance deposits, patient payments, payroll, rent, lab invoices, loan payments, taxes, and planned equipment purchases. Mark each item as committed, likely, or uncertain. Keep enough cash for payroll, taxes, and critical suppliers before approving expansion or discretionary spending.

Real-World Example: An orthodontic practice expects a seasonal slowdown during summer. The owner reviews upcoming deposits and expenses six weeks ahead, delays a nonessential remodel, and increases payment-plan follow-up. The practice enters the slower period with cash available for payroll and clinical supplies.

Conclusion

Strong dental practices manage more than the schedule. They understand the cost of delivering care, the difference between production and collections, and the cash required to operate safely. Review a simple monthly scorecard, protect tax and profit reserves, and investigate changes instead of guessing. The goal is a practice that can pay its team, support excellent patient care, fund growth, and produce dependable owner profit.