You want clarity around your Profit & Loss report and what it says about your practice performance.
Believe it or not, your Profit and Loss report can be a powerful tool to discover where your practice stands by comparing your practice overhead expenses against the average costs of other practices, apples to apples.
You may have heard this method called "dental overhead percentages," right? The more technical name for it is dental overhead benchmarking.
Comparing your dental practice overhead against others.
So, how can you compare your practice against the average of other practices if the practices are all different sizes? If a practice is much larger than yours, it will have more revenue and costs, right?
That is true. But how much do other practices spend in proportion to their collected revenue? Once you know how much you spend as a percent of your collected revenue, you can compare it against how much other practices spend as a percent of their collected revenue.
To figure that out, we need to use a straightforward math formula, which I explain in the post below.
What are Dental Expense Benchmarks?
Dental overhead expense benchmarks are simply an average or a standard for how much a practice spends in different categories of expenses.
When you group all the expenses from your Profit & Loss report into just six overhead categories, you can compare each category against other practices, apples to apples.
When you tally the total expenses in each category and calculate the total of those categories as a percent of your total collected revenue, you can compare your category percentages against the average of other practices, which is called dental overhead benchmarking.
Listed below is the breakdown of the average percentages for dental practices per overhead benchmark category.
The dental overhead expense category percentages:
Personnel (Team) Costs 24-28% of Income
Clinical Costs 12-14% of Income
Facility Costs 10% of Income
Other Business Costs 11% of Income
Discretionary Costs 0-2% of Income
Owners, Associates, Other & Profit 35-40% of Income
After reading this post, you’ll know how to categorize your expense accounts from your Profit and Loss report to do your own benchmarking and analyze it in a way that will make more sense to you.
Grouping your dental overhead expense benchmark categories:
With your Profit & Loss report in front of you, use a ruler or reader guide and read down the list of expense accounts on the Profit & Loss report, one by one.
When you find an account for each of the six overhead benchmark categories below, write down the expense account name and amount in a list for each category grouping.
Personnel (Team) Benchmark 24-28%
Personnel costs are the expenses related to your team’s compensation, including employee benefits and the cost to bring them in, like recruitment fees.
You don't need to separate every tiny, itty, bitty thing like uniforms and continuing education. In fact, we prefer not to because you start to lose focus on the bigger picture. Simplicity wins here. Only separating what's essential, like the gross pay of your team, is the major factor in this category.
Expense Accounts Included:
Gross Pay - Dental Assistants
Gross Pay - Hygienists
Gross Pay - Office/Admin
Payroll Taxes - Staff
Contractors (temps, not associates)
Answering Services
Collection/Billing Services
Health Insurance - Staff
Pension Expense - Staff
Hiring Fees (Job Ads)
Outsourced Services:
If you're outsourcing services that are usually done in-house in most practices, then it's a good idea to put those expenses here.
For example, answering services and billing/collection services will go into the Personnel category because in-house employees usually handle those tasks. To compare apples to apples with other practices, let's keep the outsourced tasks' costs in with the employees' costs.
Common Mistakes:
Don't include compensation or expenses for the owners or associates in this category. The only exception is if your associate does mainly hygiene.
Don't include continuing education, worker's compensation, or team meals. Although they are expenses related to your team, they are not part of compensation and benefits. They belong to other categories. Job ads are the only exception.
Clinical Benchmark 12-14%
Clinical Costs include dental supplies and laboratory fees.
Expense Accounts Included:
Dental Supplies
Laboratory Fees
Gross Pay - Laboratory Tech (in-house)
Payroll Taxes - Laboratory Tech (in-house)
In-house Laboratory:
If you do a lot of lab work in-house and have a lab tech employee, you'll want to put the lab tech compensation in the Clinical category because the majority of practices outsource lab work, which is the Laboratory fees expense account.
Common Mistakes:
Dental equipment and its financing are often misplaced in the dental supplies expense account, especially if the financing is through Patterson Dental and the transaction looks similar to dental supplies.
However, any equipment over $2,500 should be recorded in your Dental Equipment fixed asset account on the balance sheet, not in dental supplies expense. Watch out for that; it happens a lot in dental practice bookkeeping. Our bookkeepers check specifically for that mistake each month we review our own work.
Facility & Equipment Benchmark 10%
Expenses for the space of the practice or equipment in the space.
Expenses accounts included:
Equipment Rental
Insurance - Building
Insurance - Equipment
Interest Paid - Loans
Janitorial Expense / Cleaning
Rent Expense (and storage rentals)
Security Alarm Expense
Repairs & Maintenance
Landscaping Services
Small Equipment/Furniture ($500-$2,500)
Taxes - Property
Taxes - Real Estate
Utilities & Waste
Amortization Expense
Depreciation Expense
Start-Up Expenses
Gain/Loss from Asset Disposal
Common Mistakes:
Don't include computer IT services here. Although you may, understandably, consider them part of the equipment, these days, they're more about business software and data security, which is a general business expense rather than a cost for equipment and space.
The same (as above) applies to internet, cable, and telephone expenses. These expenses are general business costs, not part of the space and equipment. Old-school wired cable and telephone are soon to be extinct because they have been replaced by online software applications.
However, your electricity, water, gas, and waste management (utilities) are part of having that space.
General Business Benchmark 11%
The General Business costs are what you’d probably find in any business. It includes things like Merchant fees, advertising expenses, business insurance, and office supplies.
Expense accounts included:
Advertising & Marketing
Bank Fees
Merchant Fees
Computer IT Support
Data, Software, Apps
Dues & Prof Memberships
Insurance - Practice
Interest & Fees - Credit Cards
Licenses & Permits
Pension Administration
Postage & Delivery
Accounting Fees
Bookkeeping Fees
Practice Consulting
Legal & Professional
Phone, Internet, Streaming
Office Supplies/Expense
Payroll Service Fees
Taxes - Sales Tax
Taxes - State & Franchise
Taxes - Other
Uniforms & Laundry
Common Mistakes:
Sometimes, office equipment valued between $500 and $2,500 is recorded in the Computer IT services or office supplies category. Try to catch any single piece of equipment valued between $500 and $2,500 and record it in your small equipment expense account. Then, the equipment will be included in the Facility & Equipment benchmark category.
Discretionary Benchmark 0-2%
The General Business costs are what you’d probably find in any business. It includes things like Merchant fees, advertising expenses, business insurance, and office supplies.
Discretionary costs are the expenses that are really at your discretion with how much you want to spend, and it's not part of running the practice. This will be things like an auto lease and business gifts. If you need to cut practice costs short-term, Discretionary costs would be the first place to look.
Our discretionary category would also include the costs you would pull out of expenses when doing an EBITDA valuation.
Expense accounts included:
Automobile Expense
Automobile Lease
Parking Expense
Business Gifts
Learning & Development (Continuing Education)
Charitable Contributions
Fines & Penalties
Business Meals
Team Events
Entertainment
Travel Expenses
Common Mistakes:
The Discretionary costs category includes items that many will think are part of running the practice and put them in General Business costs instead. But discretionary costs will inflate your General Business costs, and it's important to get these in their own category so you can measure them separately of everything else.
Continuing education for the owner is not part of the Owner's compensation/expenses. It belongs here in the Discretionary category.
Owners, Doctors, Other & Profit Benchmark 35-40%
This category includes the compensation and benefits for the doctors and owner, plus other income that isn't patient fee income, such as state grants or interest income. It also includes the practice's Net Profit, which is at the very bottom of your Profit and Loss report.
Also, highlight any other income, such as state grants or credit card rewards income.
Remember to highlight the very last line on your Profit and loss report, which says NET INCOME.
Doctors and associates aren't included in the personnel category; instead, they are grouped in this category, which includes all doctors and their benefits.
Expense accounts included:
Gross Pay - Owner
Gross Pay - Associates
Gross Pay - Spouse
Gross Pay - Family
Payroll Taxes - Owner
Payroll Taxes - Associates
Payroll Taxes - Spouse
Payroll Taxes - Family
Contractors - Doctors
Health Insurance - Owner
Health Insurance - Associates
Health Insurance - Spouse
Pension Expense - Owner
Penson Expense - Spouse
Pension Expense - Family
Pension Expense - Associate
Insurance - Owner Disability
Insurance - Owner Life
Other Income included in Owners, Doctors, Other + Profit:
Interest Income
Other Income
State Grants
PPP Loan Forgiveness
Employee Retention Credit
Credit Card Reward Income
NET INCOME (automatically calculated on the last line of your Profit & Loss report.
Common Mistakes:
Don't include draws or distributions in this category. As tempting as it is to put draws in an expense account, draws don't belong on your Profit & Loss report as an expense. Draws belong on your Balance Sheet as an Owner's Equity account.
Consider draws as just a transfer of funds between bank accounts; they don't impact your overhead or Profit and Loss report.
Did you miss anything?
Great job! 🙌 You've successfully grouped your expenses into their benchmark categories to compare the total percent of income for each category against other practices.
Please review your Profit & Loss report to ensure that all accounts have been categorized (except for the Patient fee income and patient fee refunds at the top of the report).
Finding the Percent of Income for each category:
Now, it's time to calculate the percentage of income for each category. Once you have added up the total dollar amount in each category, you need to turn that total dollar amount into a percent of your collected revenue.
For those of you who really hate number crunching. Here is the formula:
Expense / Collected Revenue = % of Income
The expense divided by total collections equals your percentage of income for that expense.
Example: Clinical category is $80,000 / Total Collection Income $600,000 = .13 or 13% of income (.13 x 100% = 13%)
Checking Your Math:
When adding your expense accounts to these categories, there is a way to check everything is correct, and you included all accounts. Add up the percent of income for all six categories; together, they should equal 100% of your income.
If they don't equal 100% of your income, then either your Chart of Accounts wasn't set up correctly for your Profit & Loss report, or you forgot to add expenses to your categories.
There is also the possibility that you transposed a number when you wrote it down, so check for that, too, but do that last because it's the most time-consuming.
Download our free Dental Overhead Benchmark Template:
Discover how your practice spending compares against other practices without paying the high cost of a Dental CPA. Just drop your numbers right from your Profit & Loss report into the spreadsheet.
