Financials 101: The Profit & Loss

This month in my Financials 101 series, we'll understand your Profit & Loss Statement. By watching my video, you’ll learn how to interpret your statements and use these insights to make smarter, more informed decisions.

Financials 101: Understanding the Profit & Loss Statement

The Profit & Loss Statement

Let’s get straight to the heart of it: the Profit and Loss (P&L) statement is the MVP of financial reporting for medical practices. Also known as the income statement, this trusty document is your clinical-grade snapshot of what’s coming in, what’s going out, and whether you’re left with a healthy profit.

The basic formula is straightforward enough: Revenue – Expenses = Profit

But here’s the twist: not all profit is created equal, and medical practices need to dig deeper to get the full picture. Sure, your accountant would never brave a meeting without the P&L in hand (they know better), but as a practice owner, you need to go beyond the basics.

Gross Profit vs. EBITDA

• Gross Profit: Think of gross profit as the pulse check for day-to-day operations. It’s your total income from sales minus direct costs related to those sales. For example, if vaccine revenue is substantial, gross profit is the amount remaining after subtracting vaccine-related expenses.

• EBITDA: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is your business’s “pure performance” metric. Stripped of external factors like taxes or loan structures, EBITDA lets you compare apples to apples with other practices or even benchmark your own growth over time.

I lean on EBITDA when analysing how practices perform, especially during valuations or when buying/selling shares.

Here’s a simplified version of what your P&L might look like:

• Trading Income: Includes patient fees, registrar income, and facility service fees.

• Direct Expenses: Registrars’ wages and superannuation, medical supplies, and vaccines.

• Gross Profit: Revenue minus direct expenses, your immediate margin.

• Other Income: Room rental or government incentives.

• Operating Expenses: Cleaning, advertising, rent, admin wages, etc.

  
  

From here, subtract operating expenses from gross profit to calculate EBITDA. Easy enough, right? But here’s where things get tricky: expenses like medical supplies or rent don’t need to spike very much to shrink the profit margin faster than a vaccine shortage on flu season’s first day.

A few key standards for general practices:

• Medical Supplies: Less than 1.5% of billing.

• Rent: Ideally, 5-7% of billing.

• Admin Wages/Super: Around 18%, though creeping above 20% is a red flag signalling inefficiencies.

Why You Should Care

Here’s the thing: not understanding your P&L is like practising medicine without reading lab results. Sure, you can make some educated guesses, but you’re risking misdiagnosing what’s actually happening under the surface, and that’s the last thing you want in your practice’s financial health.

The Profit and Loss statement isn’t just paperwork; it’s your practice’s lifeline for strategic growth. Sure, it’s easy to summarise as “revenue minus expenses,” but knowing which profitability metrics to focus on (like EBITDA) and spotting trends in expenses could mean the difference between stagnation and sustainable growth.

So, why should you care? Because a healthy bottom line fuels a healthy practice, and allows you to focus on the part you love most: patient care.

Stay tuned for my next video, which will explain the cash summary report for medical practices.