Profit and Loss

One essential key to understanding the financial health of your business is the profit and loss (P&L) statement, sometimes referred to as an income statement. Think of the P&L as a financial report card for your business. It simply tells you how your business is doing within a particular time period. While a P&L can be prepared and reviewed quarterly or annually, most businesses prepare monthly statements because it offers the greatest benefit.

Sales revenue for the period being examined goes at the top of the statement. This monetary figure can be expressed as a single number, or if you want more detail, you can break it into categories—crown and bridge, dentures, implants, etc.

In a separate section under sales revenue, list direct expenses. First, write down the materials you purchased in order to make the restorations you sold (ie, ceramics, gold, and teeth). Second, record the amount you paid for the labor used to manufacture those products. These expenses are totaled and subtracted from the sales revenue to arrive at your gross profit.

To determine the infamous “bottom line” or net profit, you must go one step further by detailing and subtracting your total indirect expenses. In short, indirect expenses include any expenditure required to run the business that is not directly a part of the finished product (ie, rent, insurance, utilities, and phone bills). Subtract your indirect expenses from your gross profit to reveal your net profit.

P&L statements enable business owners to compare revenue and cost for the current month with those same figures from the previous month or from the same month of the previous year. Percentage comparisons can also be helpful. If sales are up 10%, but labor costs are up 15%, then you have a problem. If you take action to solve the problem, you will see the results in the next period. If net profit is up and cost of materials is down, then you know that buying smarter or reducing waste is probably a contributing factor.

P&L statements are easy to prepare and often standard in accounting software packages, such as Intuit QuickBooks or Sage Peachtree. QuickBooks also offers a companion program called QuickBooks for Dental Labs. If you do not feel up to preparing a P&L yourself, contact an accountant or bookkeeper to help you.

If you want to get on the growth track for sales and profit, invest a couple of hours each month in preparing and understanding a P&L. It will not make your decisions any easier, but it will help you make the right ones by providing a clear, comprehensive picture of your business’s financial landscape.

Chuck Yenkner is president and founder of Business Development Associates in Glastonbury, Connecticut.