If you own a dental practice and you're still in the chair most days, this one's for you. It also applies to medical practice owners who carry a full patient list. I'll show you one adjustment to your practice profit and loss that tells you whether the business is earning a return in its own right, or whether the "profit" line is mostly your own wage under a different name. It's one calculation, and you can do it with last year's numbers.
Most owner-run practices don't pay the principal a market wage for the clinical work they do. The owner takes drawings or a modest salary, and whatever is left at the bottom of the P&L gets called profit.
The trouble is that the bottom line is doing two jobs at once. Part of it pays you for the dentistry or medicine you personally did. The rest, if there is any, is what the practice earns as a business: the return on the chairs, the team, the systems and the risk you carry.
Here's an illustrative example. A dental practice collects $1.2 million a year. The principal bills about $650,000 of that personally, and an associate and a hygienist bill the rest. After wages for the team, lab fees, consumables, rent and everything else, the P&L shows $380,000 before anything is paid to the principal. That reads as a profit margin of about 32%, which looks very healthy.
The fix is called an owner wage add-back, or more accurately in this case, a market wage swap. You replace whatever you pay yourself with what it would cost to pay someone else to do your role.
For a dental principal, that usually has two parts:
Take both out of the $380,000 and the practice earns about $112,500. That's a margin of roughly 9.4% on $1.2 million, not 32%.
Nothing has changed in the bank account. The practice is the same practice. What's changed is that you can now see the two things separately: about $267,500 is the market value of your work, and about $112,500 is what the business itself earns.
That second number answers a different question from the headline profit. It tells you what the practice would make if you stepped back from the chair and paid someone to cover you.
If it's healthy, you've built a business that earns a return beyond your own labour. If it's thin, or negative, then much of what looks like profit is really payment for your work. That's not a failure. Plenty of owners are happy to run a practice that is, in effect, a well-equipped place to do their own work. But it's worth knowing which one you have, because the two call for different decisions about growth, hours and an eventual exit.
Here's a medical illustration. A GP owner bills $520,000 a year through their own practice, which has two other doctors on percentage arrangements. The P&L shows $290,000 before the owner is paid. If an illustrative market arrangement for the owner's clinical sessions comes to about $260,000, and the management time is worth about $30,000, the practice itself earns roughly nothing. The owner is earning a good income, but almost all of it comes from their own consultations rather than from the business around them.
This matters most when you compare your numbers with anyone else's. A dental practice profit margin figure from a colleague, a broker or a benchmark is only useful if you know whether the owner's wage was in or out.
One practice might report 30% because the owner takes nothing through the P&L. Another might report 12% because the owner is paid a full market wage. The second could easily be the stronger business. Putting a market wage in before you compare puts every practice on the same basis.
Take two illustrative dental practices, each collecting $1.5 million. The first reports a 30% margin with the owner unpaid in the P&L. The second reports 14% after paying its owner $230,000 for the same clinical load. Swap a market wage into the first and its margin drops to around 15%. The two are close to identical.
Once you can see the business separately from your wage, a few questions get clearer.
If you cut back a day a week, the P&L will show profit falling. The adjusted view shows whether the practice is really earning less, or whether you're just doing less of the work yourself. If you're weighing up another chair or another associate, you can ask whether the extra capacity adds to what the business earns, rather than only to the revenue line.
Here's an illustrative dental example. A principal is thinking about dropping from five clinical days to four. The headline P&L drops by about $110,000. The adjusted view shows the practice's own earnings hardly move: most of that $110,000 was the principal's own clinical income, and an associate covering the day would bring some of it back.
This adjustment sits alongside the measures I've written about before. Cash flow vs profit explains why a profitable month can still leave the bank short. The KPI pack covers the handful of measures worth tracking each month. The owner wage swap is a lens you apply to the profit figure itself, usually once a year when the full-year numbers are in.
Take last year's P&L. Write down what it would cost to pay someone else to do your clinical work and your management work, using figures you'd be prepared to defend. Subtract both from the profit before you pay yourself, then look at what's left as a percentage of collections. That's the number that tells you what the practice earns on its own.
If you'd like a second pair of eyes on the assumptions, or help reading what the adjusted margin means for your plans, talk it through with me at Full Cycle Accounting.
This is general information only and doesn't take into account your objectives, financial situation or needs. Before acting on it, consider whether it's appropriate for you — or talk to me about your situation.
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