Benchmarks, Management, and Accounting by the Numbers
Steven Covey in “The 7 Habits of Highly Effective People” identifies the number one trait to make you successful in any endeavor: “Begin with the end in mind”. In other words, if you can define, or create a picture of where you want to be you will shorten the path and define the result. The same is true in overhead. Your overhead should be 50% to 55%. This is realistic in any practice that is 5 years or older. You should be able to keep approximately half of every dollar you produce. Remember: you should collect over 98% of all fees charged out. An increase in productivity is of no value if the cost of overhead is not contained. We also believe strongly that you need to be debt-free. It’s amazing how much less stressful every day is when you’re out of debt.
Looking at hundreds of practices and their numbers, I am too often surprised at the lack of information the doctor can lay his hands on. The profit and loss (P&L) statements are not available until 90 days after the closing of the month. The doctor cannot understand the P&L or glean the information that he needs to make decisions, and does not realize that a profit and loss statement does not reflect true cash flow (what you collected and what you spent). They do not use software like Quick Books to write checks and create a cash flow analysis. Doctors are being overcharged and underserved by CPA’s that do not understand the dental business and seem to be in no hurry about getting the numbers to the client (YOU). If you want to lower your overhead, manage your practice for profitability, and control your future, you must have accurate, timely, real world numbers to guide you.
Let’s take a look at overhead for a moment and the way we suggest you have your CPA organize a cash flow statement. Keep in mind, a cash flow statement is not used to do your tax returns. It is a minute to minute accounting of in-flow and out-flows of money. We believe all operating expenses should be contained in about 6 categories. Attached to the categories is an ideal benchmark to help you move toward that 50% overhead. These are the categories.
- Staff Compensation – 24-25%
- Facility – 7-9%
- Lab – 8-10%
- Marketing – 3%
- Office Supplies – 2%
- Dental Supplies – 6%
- Total – 50-55%
Staff compensation includes everything you spend on staff: Taxes, continuing education, bonus, trips, normal pay, benefits, uniforms, it includes everyone but the owner doctor. Hygienist and associates are included here.
Facility includes all the physical plant and its costs: Taxes, note payment of the building itself, maintenance, lease, servicing note for the purchase of a practice, utilities, equipment purchase or lease, repairs, etc.
Lab should include everything you spend on lab, including Cerec, supplies, outside lab work, and anything else related to that side of your practice. If the benchmark seems low, or you spend more on lab than the 8-10% you are probably limiting your practice to adults and a greater portion of you practice is C&B. This means your ability to market your practice is limited to a smaller more lucrative audience and should reflect these demographics. If your lab is lower, you may not be assertive enough in your case presentation or not clinically mature enough to present more ideal treatment. Each of these numbers mean something, and creates a picture of the health of your practice.
Marketing would include all internal and external things you do to inspire and reach your potential clients: Print ads, give always, signage, promotions, phone book, everything. It is said that everything you do, from answering the phone to staying on time communicates a message to your clients. You cannot, not market. While 3% is the benchmark, it is not unreasonable to do more. A higher end practice may spend more here and less in compensation. Do not cut back on putting your message out there. In providing a service or product: Do what you do so well that people cannot help but tell everyone they know about you.
Office supplies are self explanatory and are not usually a problem for most offices. Watch what you spend, and spend wisely. Only one person should be in charge of ordering dental and office supplies, and they should have a written budget that is adhered to.
Dental supplies and the money spent for them are often abused. Make a budget, monitor spending, have one person do the “buyers club”. Woody Oaks with Excellence in Dentistry partners with Darby to provide a free service buyer’s club. Go to their web site and call Darby and tell them you want to sign up for the buyers club (Excellence in Dentistry). They will give you 15% off their already low mail order prices and give you back 3% of your purchase on a credit card. That is 18% off one of the lowest mail order companies in the US. Do this tomorrow.
Remember: Every operating expense should fit into one of these categories. Your first question will be: What about all those things I run through the practice to write off? The answer: Everything below the line is yours. You choose to spend them on cars and whatever. This is not part of your true operating overhead. You can still write it off. We will just use the cash-flow report to manage our productivity and overhead.
We are going to offer a service for your practice at a reduced cost. You will receive a cash-flow statement along with traditional accounting and employee pay service and even tax preparation if you choose at a very competitive price from professionals who do only dental reports. You will finally have a specialist who understands your particular needs as a doctor and business operator. Give us a call at 800-252-0955 and we can give you the details and cost. You have nothing to lose and a productive practice to gain.