PROACTIVE PRACTICE MANAGEMENT
I’ve been working my dental practice for several years now, and I’m just not making the money I would like to make. What should I be looking at in terms of my income and expenses, and how can I trim overhead to take home more money?
answer this question, let’s turn to some quick and basic fundamentals
of good business management and learn how to measure practice
profitability. But before we do, a small but direct disclaimer: The
author is not an accountant, and is not a tax advisor. This article is
not meant to provide tax advice or accounting advice. It is meant to
shed light on the concept of identifying cost centers and ways in which
a dental practice may improve profit.
dentists are not skilled in reading a Profit and Loss Statement,
similarly called an Income Statement, because their time and energy is
often put forth in learning to become excellent clinicians. This could
be construed as a fault of the dental schools, but is it really? Some
would argue that dental schools are credentialed to teach dentists in
the healing arts, not business management. I concur.
the other hand, in the real world dentists in the private sector are
privy to educational courses beyond dental school in business
management, but how many attend? Management consultants, like yours
truly, have the information and skills to teach dentists about overhead
control and profitability, but how many contact a consultant and make an
investment in their business education? This article will help clarify
overhead control and profitability, and at least provide help to those
who seek answers.
dentists use overhead as a measure of proficiency in business. True, low
overhead yields good profit, and proficiency in this area is a
measurement of business success. But overhead is commonly misconstrued,
in that it may not be measured consistently across all practices. Here
is a good way to consider measuring office overhead so that the
office’s ability to generate profit is enhanced.
Net Operating Overhead for a practice is derived from the Profit and
Loss Statement, or Income Statement, by calculating all operating
expenses and dividing it into the practice’s income. The result is in
the form of a percentage, usually less than 100%; if it’s more, we
need to talk!
first step is to have an accountant prepare a Profit and Loss Statement,
or generate a P&L from an in house accounting program such as
Quicken or QuickBooks. Use the feature if it’s available, that
calculates expenses as a percentage of income. This will come in very
next step is to identify expenses not included in operating overhead.
These expenses occur in the P&L but are not part of operating the
business, per se. Expenses such as doctor compensation and his or her
payroll taxes, interest paid, depreciation, amortization and taxes. In
addition, any discretionary expenditures taken on the doctor’s behalf
not related to practice operations must be included, such as automobile
expense, life insurance premiums paid, medical insurance for the owner,
disability insurance premiums, and so on. Again, these expenses are not
related to operating the dental practice and are part of the owner’s
all of the above mentioned expenses would help arrive at a number that
represents operating income. The difference between this number and the
total collections is the operating overhead. Divide the operating
overhead dollar amount into the total income dollar amount of the
practice and voila! Overhead Percentage!
an example. Our fictitious dental practice collects $1,000,000 in our
make believe year. Doctor’s compensation and payroll taxes are
$230,000, Interest Expense is $25,000, Depreciation is $15,000,
Amortization is $10,000, Taxes are $5000, Life Insurance premium is
$7500, and Automobile Expenses are $7500. Total non-operating expenses
and doctor’s compensation: $300,000. The difference between $300,000
and $1,000,000 is $700,000. $700,000 divided by $1,000,000 is 70%.
that good? Bad? Okay? So-So?
a large pool of comparable data is not available to measure against the
“averages”, it isn’t possible to say 70% is good, bad or
otherwise. It’s relative to the income needs and financial plan of the
30% operational profit on $1,000,000 in sales would satisfy a good
portion of working dentists in the marketplace. What’s important here
is that we now know how to calculate net operating overhead. Take that
one step further and begin to study the key cost centers of a dental
practice, make budget decisions, and set goals that will decrease
overhead and increase profit going forward.
control overhead and increase profit, I suggest concentrating on four
major cost centers of the practice and their target levels to ensure
overhead is managed. The percentages are related to income (collections)
rather than production. This discussion is focused on general
restorative dental practices, not specialty practices such as pediatric
dentistry, oral surgery, endodontics, periodontics, prosthodontics, and
with a target of 5%
order to reduce this cost center, or reduce the percentage of the cost
relative to income, one may have to re-negotiate a lease or improve
income. More often than not, leases are locked in for a period and the
alternative is to focus on increasing income. To do this, improve
communication skills in order to boost case acceptance and increase
productivity by having patients better understand their dental
conditions and the benefits of proper treatment. Keep in mind, case
acceptance is also related to the practice’s ability to help patients
understand that the decision to undergo treatment for diagnosed
conditions is theirs to make. Ultimately, improved productivity will
increase income and bring this line item into a healthy range.
with a target of 10%
this cost center depends on how well the office can increase case
acceptance where lab related work is focused. That’s not to say, “Go
sell more crowns!” Rather, improve productivity by following the
suggestions previously stated.
5-7, with a target of 5%
you find your systems are inefficient, integrate a Dental Supply Cost
Containment program by setting a budget for dental supply ordering and
establish a tracking mechanism to monitor expenditures monthly. Have the
person who is responsible for ordering supplies in the office manage
ordering so that they do not exceed the budget. For example, in our
$1,000,000 practice, if the goal is to keep supplies at 5% of income,
then the office would not want to spend more than $50,000 a year in
disposable supplies and materials. On a monthly basis, keep track of
ordering and attempt not to spend more than $4200 per month for
not to be penny-wise and pound-foolish. If towards the end of the month
materials are needed for scheduled production, such as impression
material for a large crown and bridge case, then order what is needed so
as not to run out.
Payroll/Staff Salaries: 25%; Employee Benefits: 5%
and clinical staff may be allocated 12-16%. The remaining 9-13% could be
salary for hygiene. Payroll taxes and cash paid benefits, such as bonus
and paid time off are included in these numbers.
is a saying in dentistry: “You’ll never get rich on the money you
aren’t paying your team.” But the income of the practice must be
able to support a well-paid team of people that produces results and
appropriate net income for the doctor.
some cases, a high salary percentage may be the result of over-staffing
in certain departments. For instance, a practice with one doctor may
employ two full-time hygienists and not produce enough revenue to offset
hygiene salaries. And, a practice may employ extra front office to
handle a high traffic of low-revenue insurance patients, there again
perhaps not generating enough revenue to offset the cost.
Benefits, such as medical insurance premiums, retirement contribution,
profit sharing, continuing education, are separate and could range from
1-3% depending on the practice.
keep payroll at a healthy level, make sure the team is well-educated in
patient services, well paid for their excellent work, and track the
income and expense results periodically to be sure revenue is supporting
the salaries paid to your great dental staff!
total of these four cost centers is 43% to 56% (when including employee
benefits). Consider that there could be another 25 or so remaining cost
centers in a dental practice that will make up anywhere from 10% to 25%
of income. These include Advertising, Credit Card Fees, Bank Charges, Professional Development,
Dues & Subscriptions, Legal Fees, Accounting, Consulting, Office
Supplies, Postage, Repairs & Maintenance, Computer, Internet,
Utilities, Meals & Entertainment, Collection Expense, Interest,
License & Permits, Printing, Gifts, Medical Waste, and Storage. One
can see how confusing this exercise is when each of these expense items
is tracked regularly.
It is prudent to establish a budget for each of
the rest of the expense categories, but first control the
four major areas discussed in this article. Once a practice has the four
major areas under control, the rest of the expenses can be evaluated
individually to see if work must be addressed in other areas of the