How to Calculate Free Cash Flow for Your Dental Practice (and Why Most Owners Get It Wrong)
One of the most painful things I see is a dentist owner who's working really hard and has no cash to show for it. They're overwhelmed. They can't grow. And they don't understand why.
Or it's a dentist who says to me, "Man, I want to get out of the chair. I want to get to the next level. What would that take?"
Both of those conversations start with the same number. It's the most important number in your business, most of you are calculating it incorrectly, and it's free cash flow.
How do you calculate free cash flow for a dental practice?
Start with your doctor collections for the month. Subtract what you'd have to pay an associate to do your clinical work, then subtract your overhead and your debt payments. What's left is your free cash flow, and for a lot of owners it's way smaller than their P&L makes it look.
Why your practice looks healthier on paper than it feels
Let's walk through an example. I'm keeping it simple here. You'd normally have hygiene income and maybe other sources like specialists, but for this calculation, just look at doctor collections. If you're a specialist, that's your collections along with your other doctors. If you're a general dentist, it's your collections.
Say you collect $100,000 a month.
Most of you are S-corps, so you pay yourself a lower salary, somewhere around $10,000 a month. Then your team, marketing, leases, and the rest of your overhead come to about $60,000 a month.
A dentist in this spot looks at the numbers and thinks, "All right, $10,000 is coming to me, $60,000 goes to overhead, so I've got $30,000 in net income."
Then they ask, "Why am I struggling so much if the business is this healthy?"
It's because they're doing the math incorrectly.
I have dentists come to me all the time and say, "Emmet, $30,000 over $100,000. I'm taking home 30%. I'm doing great." Or they'll add their salary back in and say, "No, I'm taking home $40,000. That's a 40% net margin."
On paper, both of those sound great. The real picture looks very different.
Step 1: Pay yourself like an associate
Same $100,000. The first thing I want you to calculate is this: what would we pay a dentist if they were an associate in our practice?
Whether this represents one owner or two, run this every month. Ask yourself, if I had to hire a dentist to do what I'm doing, what would I need to pay them to keep them in my practice?
In this example, I'm using 30%. That's $30,000 a month.
Your overhead doesn't change. It's still $60,000. So now when you do the math, your net income is $10,000 a month.
Step 2: Subtract what's not on your P&L
Now let's say this dentist is also paying $7,000 a month in debt. That doesn't show up on your profit and loss statement, but it still comes out of your bank account.
Take that out, and you're down to $3,000 in free cash flow.
Now say you need to spend more on marketing. Or you have some turnover and need to pay a recruiter. You can see how fast this goes to zero or turns negative.
The free cash flow formula, step by step
- Start with your doctor collections for the month.
- Subtract what you'd pay an associate to produce those collections (30% in this example).
- Subtract your overhead: team, marketing, leases, and the rest.
- Subtract your debt payments and anything else that isn't on your P&L.
- What's left is your free cash flow.
Should you change how you pay yourself?
No. Paying yourself through your S-corp is usually the better way for tax reasons, so keep doing that.
This calculation is a different lens. It shows you what's really going on in your business from an operations standpoint.
In a lot of ways, the P&L view overstates your profit. That $30,000 is a mix of two things: the active income you earn by working as your own associate, and the passive income the business actually produces. When you pull those apart, you see how much the business makes without you in the chair.
What happens when you bring in an associate?
This is where the calculation really pays off.
Now you can see that if you brought an associate in tomorrow, unless they were bringing in additional income, they would eat up all of the passive income you thought you had. You'd quickly realize your business is much tighter than you thought.
Better to find that out on a spreadsheet than after you've hired someone.
Why passive income is the number to watch
Passive income is the goal in any business. Free cash flow tells you how much of it you really have.
It's also the starting point for the big decisions: how to get out of the chair, how to get the most out of your associates, and how to grow your passive income over time. If you want to see how to grow your profits from here, this number comes first.
What to do this week
Pull last month's numbers and run the calculation.
Take your doctor collections. Subtract 30% for what you'd pay an associate. Subtract your overhead. Subtract your monthly debt payments. Write down what's left.
That's your free cash flow. Run it again every month so you always know where your business really stands. Getting this number right is the first step toward real financial clarity.
Frequently asked questions
What's the difference between net income and free cash flow for a dental practice?
Net income on your P&L usually mixes your own clinical pay with the profit your business makes, and it leaves out debt payments. Free cash flow is what's left after you pay yourself like an associate and cover your debt. It's the number that shows how much your business makes without you.
What percentage should I use for associate pay?
In this example, I use 30%. The question to ask is what you'd actually need to pay a dentist to keep them in your practice, and use that number.
Does hygiene income count in this calculation?
To keep it simple, this version looks only at doctor collections. If you're a specialist, use your collections along with your other doctors.
Why does my practice feel tight when my profit margin looks good?
Because your margin is probably counting your own clinical work as profit, and it doesn't include debt. Once you pay yourself like an associate and take out debt payments, a 30% or 40% margin can turn into a few thousand dollars a month.
Should I stop paying myself through my S-corp?
No. That setup is usually the better way for tax reasons. This calculation is a separate monthly check that shows how your business is really running.
Want help running these numbers in your practice?
If you want to learn how to do these calculations in your own business, schedule a Growth Accelerator Call with one of our team members. We'll walk through where you are and see if DEO is right for you.
Adapted from Emmet's YouTube video, Your Dental Practice is Profitable. So Where's Your Cash?
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