**Service Fees and Income**
This article is directed at prospective owners rather than experienced owners. Through our consulting business we often get asked why there is a difference between the income figure on the profit and loss statement vs the income (or total billings/receipts) from the practice management software. Often, prospective owners go as far as suggesting something untoward is happening. Although, it is great that this critical analysis is happening and there are definitely times that untoward things are happening (misrepresentation of income, profits etc.) most times these practices are running a service fee model.
What does this service fee model mean? At the most basic level it means the payments made to clinicians at the practice that are on a services and facilities agreement (SFA), which most dentists in a multi-clinician practice will likely be on now, will not appear in the profit and loss statement. For example, if a clinician is on a 60% service fee, it means that 40% is retained by the clinician and 60% comes into the practice profit and loss statement. The practice management software may show total billings of 1 Million but the profit and loss statement of that same practice shows 600K in the income section. Sometimes, only the income section of the profit and loss or services fee is available and one must work backwards to work-out the total billings of the practice.
However, it must be noted that it will unlikely be a simple split such as the above example as lab fees and employee clinicians muddy it. The lab fees will be split depending on the service fee % between the practice and the clinician. Further, 100% of any employee clinician’s income will come into the profit and loss statement and they will be paid via wages in the expense section. If all clinicians were employees then technically the profit and loss income and the practice management software billings/receipts should be the same. However, in practice this is not always the case due to the accounting setup, payment timing issues and accounts owing etc. Although the two figures should be similar.
We hope this helps prospective owners analyze profit and loss statements. We’ll add that not all practices, particularly single operator dentists, will run a service fee model.
Please feel free to comment or add to the discussion. However, we don’t want this to become a discussion on payroll tax issues, service fee percentages or the future of the service fee model. These are much more involved topics and beyond the scope of this article.
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Our next start-up and buying seminar is coming up in Brisbane on Friday April 19th and Saturday April 20th 2024. We’ll go through analyzing profit and loss statements in greater detail along with other aspects of starting-up and buying. Please register asap using the link below to avoid missing out.
https://practiceownership.com.au/dental-practice-startup-and-buying-seminar-2024/
We also offer expert guidance in various areas of practice ownership. Please see the below link for more information.