We have reviewed the importance of Gross Profit Percentage in our previous Data Snapshot, but there’s a further step in understanding your practice’s finances: True Profit.
Your true profit is the money you have left over after you’ve covered overhead, provider compensation, tax obligations, and any “below the line” expenses. In other words, it’s what goes into your personal bank account after you’ve taken care of all other cash requirements. It lets you pay your house mortgage, cover your kids’ sports costs, and go on vacation, but it also helps you plan for the future, because it’s what you use for investments, retirement preparation, and life insurance. I honestly cannot overemphasize the importance of True Profit; after all, it’s the link between your practice’s success and your personal financial success.
Understanding this metric requires you to think beyond your Profit and Loss statement, because while it contains your Net Profit, there are a number of expenses that don’t show up on it:
- Loans
- Distributions
- Tax payments
It’s easy to glance at your Net Profit and assume you’re doing better than you are, but those missing line items can paint a very different picture. If you’ve ever felt like you should be more profitable, chances are it’s a cash flow issue. The only way to see it clearly is to print and analyze your Cash Flow Statement.
To make things trickier, those cash flow expenses are paid with profit, which doesn’t lower your taxable income. This is where many dentists miscalculate or are unsure of how much they’ll owe in taxes. Sit down with your CPA and determine your monthly taxable allocation so you can set that money aside and avoid surprises come tax time.
Remember, revenue alone is not success. Profitability is the real measure. This is not a subject that can be understood in a day, but the sooner you get started working with your CPA and utilizing amazing tools like the Best Practices Association, the sooner you’ll become truly profitable.
