More Revenue Does Not Always Mean More Profit. Here Is Why That Matters.
When practice owners talk about growth, the conversation usually starts with revenue. Are billings increasing? Is the appointment book fuller? Are more patients being treated than this time last year?
These are important questions, but they do not tell you whether the practice is actually becoming more profitable.
A practice can increase its revenue considerably and still leave the owner with no meaningful improvement in their financial position. In some cases, the practice becomes busier, employs more people and requires significantly more management, while the amount retained at the end of the month remains almost unchanged.
This happens because every increase in revenue comes with a cost. More patients may require additional clinicians, support staff, laboratory work, consumables, equipment, administration and longer operating hours. If those costs rise at the same rate as revenue, the practice may be doing substantially more work without generating a stronger return.
Industry data suggests that total overheads commonly absorb between 59 and 62 percent of a dental practice’s revenue. In practical terms, this means approximately 60 cents of every dollar generated may already be committed to operating the business before the owner receives a return.
Another industry survey found that 64 percent of practices had experienced rising overheads, with half of those practices reporting increases of at least 10 percent. When expenses are increasing that quickly, additional revenue can disappear into the cost of running the practice before it ever reaches the bottom line.
This is why revenue should never be reviewed in isolation. It tells you how much money has come into the business, but it does not tell you how efficiently that income was generated or how much the practice has actually retained.
What Your Profit and Loss Statement Is Telling You
Your profit and loss statement is one of the most useful financial reports available to you, but only when you understand what each section is showing.
Income appears at the top of the report and represents the revenue generated during the period. This may include clinical treatment, product sales and any other income earned by the practice.
Below income are the direct expenses involved in delivering that treatment. These are sometimes referred to as cost of goods sold and may include clinical wages, superannuation, laboratory fees, consumables and clinical supplies.
Operating expenses then show the broader cost of keeping the practice running. These may include administration wages, rent, software, insurance, utilities, marketing, professional fees and other overheads that are not directly linked to an individual treatment.
Once all of these costs have been deducted, the amount remaining is the practice’s profit.
It is easy to look at the revenue figure at the top of the report and feel reassured when it is increasing. However, the figure at the bottom is the one that shows whether the business is genuinely improving.
Consider a practice generating $800,000 in annual revenue with expenses of $780,000. It may appear successful because of the level of income being produced, but it is retaining only $20,000 before tax.
Another practice may generate $500,000 in revenue but retain a much stronger percentage of that income because its wages, overheads and operating costs are better controlled.
The second practice may be smaller, but it is likely to be more stable, more sustainable and more rewarding for its owner.
Revenue measures activity. Profit measures what the business has achieved after paying for that activity.
Why Percentages Matter
Dollar amounts are useful, but they do not always show the full picture. Percentages make it much easier to see how efficiently the practice is operating.
For every dollar the practice earns, how much is being spent on clinical labour and treatment delivery? How much is being absorbed by overheads? How much remains once all expenses have been paid?
A useful starting point is to think about the practice’s financial structure in broad thirds. Approximately one-third of revenue may be allocated to direct costs, one-third to operating expenses and one-third retained as profit.
This is not a fixed formula, and the right percentages will vary depending on the size, structure, location and service mix of the practice. A specialist practice will have a different cost structure from a general practice employing multiple dentists, hygienists and oral health therapists.
The value of the benchmark is that it gives you somewhere to start. It allows you to identify whether one part of the practice is consuming more revenue than expected and beginning to place pressure on the overall margin.
For example, direct costs may increase from 30 percent to 38 percent of revenue over six months. If you are only looking at the dollar amount, the increase may not appear concerning because revenue has also grown.
When viewed as a percentage, however, it becomes clear that the practice is now spending an additional eight cents from every dollar earned on delivering treatment.
That change may be caused by wages increasing faster than production, higher laboratory fees, increased reliance on temporary staff, inefficient rostering or changes in the type of treatment being provided.
The percentage does not give you the answer, but it tells you where you need to start asking questions.
Gross Profit and Net Profit
Two figures every practice owner should understand are gross profit and net profit.
Gross profit is the amount remaining after direct treatment-related expenses have been deducted from revenue. It shows whether the practice is delivering its services efficiently and whether the income from treatment is sufficient to cover the direct cost of providing it.
Net profit is what remains after operating expenses and overheads have also been deducted. This provides a broader view of what the practice has actually earned after paying the full cost of running the business.
Both figures should be reviewed monthly.
Waiting until the end of the financial year may tell you what happened, but it gives you very little opportunity to change the result. By the time the annual accounts are completed, the wages have already been paid, the subscriptions have already been charged and the purchasing decisions have already been made.
Monthly reporting allows you to identify changes while they are still manageable.
You may notice that wages have increased without a corresponding rise in production, laboratory costs are reducing the margin on a particular treatment, or software subscriptions have continued to accumulate without delivering measurable value.
These issues are usually much easier to address when they are identified early. Left unnoticed for six or twelvemonths, they become part of the practice’s normal cost structure and are much harder to unwind.
Profit Is Not the Same as Money in the Bank
One of the most common financial mistakes practice owners make is assuming that the bank balance represents available profit.
It does not.
Money sitting in the practice bank account may already be committed to GST, PAYG withholding, superannuation, supplier invoices, loan repayments or income tax.
Depending on the entity structure, a company may be required to pay income tax of approximately 25 percent on its taxable profit. This tax liability does not usually appear as an operating expense on the profit and loss statement, which means the reported net profit can include money that is already committed.
The same applies to cash flow. A practice can be profitable on paper and still experience cash flow pressure if patients, health funds or debtors have not yet paid. Equally, a practice may have a healthy bank balance at a particular point in the month but be operating on a very narrow profit margin.
This is why the profit and loss statement, balance sheet and cash flow position need to be considered together.
Your financial reports should help you understand what the practice has earned, what it owes, what it owns and how much cash is genuinely available after upcoming commitments have been allowed for.
Better Reporting Creates Better Decisions
Better reporting will not increase profit on its own. It will, however, give you the information needed to make decisions that can.
It may show that one area of the practice is carrying a much stronger margin than another. It may reveal that an increase in staffing has not produced the expected growth in revenue, or that a cost category has gradually increased without anyone questioning it.
It can also provide reassurance. When you understand your monthly figures, you are less likely to make decisions based on how busy the practice feels or how much money happens to be sitting in the bank on a particular day.
A useful monthly financial review does not need to be complicated. At a minimum, you should be reviewing revenue, direct costs, operating expenses, gross profit, net profit and the percentage of income being absorbed by each major expense category.
These figures should then be compared with the previous month, the same period in the previous year and the practice’s current budget or forecast.
The purpose is not to spend hours examining every transaction. It is to identify patterns, understand what has changed and decide whether action needs to be taken.
Has revenue increased without improving profit? Have wages risen faster than production? Is one service generating strong income but very little margin? Are overheads gradually absorbing a larger percentage of every dollar earned?
These are the questions that help practice owners move beyond simply knowing how much money came in.
A successful practice is not necessarily the one with the highest revenue. It is the one that understands the cost of generating that revenue, manages its expenses intentionally and retains an appropriate return for the work, responsibility and risk carried by the owner.
Because being busy and being profitable are not the same thing.
That level of financial clarity is what we aim to build with every practice we support.
If you would like to discover more about building your budget Book a free, no-obligation call with Chris Stenhouse, Managing Director of Professional Bookkeeping Service.
Sources
- Stride by Sting, Dentist Salary Australia: The Truth About Dental Practice Profits, March 2026.
- Dental Economics / Levin Group Annual Practice Survey 2024, referenced by Porter Kinney PC.
This article is general information to help you understand your numbers — it isn't personalised financial advice. Every practice's situation is different, so if you'd like help applying this to your own books, Professional Bookkeeping Service is here to walk through it with you.
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