Up and To the Right
It seems that in a sense we need to go back to the future. I would like to revisit a core strategy that we lay out for all of our coaching clients. As the years pass, it seems like more and more doctors leave behind the notion of controlling their overhead. It’s as if they think that a 50-60% overhead is a myth perpetrated by old dentists in a different time. They think that this notion of a well-run overhead is not possible in an age of increased competition and managed care. Nothing could be further from the truth. In fact, our largest producing clients are heavily involved in managed care and still maintain an overhead below 60%. So let’s take a look at benchmarks and overhead again. Get out your P&L from last year and figure out where you are today. 2013 is just beginning and you need to take control of where you end the year by making the tough decisions today. Oh, by the way, if you can’t find your P&L or your CPA (Certified Procrastinating Accountant) hasn’t gotten it to you yet, fire them and hire someone that actually knows something about the need of having timely financial information to their clients so they can act on it. You have got to do away with marginal people in your life to make 2013 the best it can be. Like donor and recipient practices, if you don’t have any marginal staff or professionals that you work with, then the marginal person in your life is you.
Steven Covey in “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. I see too many practices with bragging rights of huge production, but the truth is they take very little home. It has always been and will always be about net, not gross. You should be able to keep approximately half of every dollar you produce. One of our mottos at Summit is: Produce More, Collect Half, and Keep Half. 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. When working with young doctors to start a practice, we insist on a plan to make them debt-free within 3-5 years. When working with established doctors, we fight to get them to put their house in order, live within their means (spend less and produce more), and concentrate on the systems that guarantee increase in net and a decrease in overall overhead.
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 read 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 collect and what you spend). They do not use software like Quick Books to write checks and create a cash flow analysis. They 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 his clients. 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.
In pro sports today, the standouts are referred to as super stars. Howard Hill was a super, SUPER star. He is one of the few men to become a genuine legend during his own lifetime. Having died in 1975, Howard was referred to as the “World’s Greatest Archer”. He is the only person to win 196 archery field tournaments in succession. He would perform by doing difficult trick shots like shooting an apple off someone’s head from 60 feet and then top that by shooting a prune from the same distance. He was the archer who would split an arrow with an arrow in “The Adventures of Robin Hood” with Errol Flynn in 1938. You could say there was no target he could not hit. He could out shoot anyone, any time, in any conditions.
I would like to propose a bet. I can teach you how to hit a target better than Howard Hill in a matter of minutes. The trick: I would blindfold Howard, and you would be able to see the target. Silly bet, but every day I see doctors trying to hit a phantom target they cannot see or locate. No one can hit a target that is not there. That is why we all need benchmarks. We all need a target to hit: A goal to strive for. How are you going to know how you are doing if no one sets the bar? Benchmarks define the game we are playing. What does it take to win? Where are the goals, the yard lines and hash marks, and where are we starting from.
No matter how many employees on your payroll, or what your financials looked like last month, if you believe that “organized chaos” and creativity alone will drive your business toward success, it’s time to shift gears. Businesses without systems react. You want to forecast, measure, set goals and beat them. (And, of course, earn more money while doing all of this.) Benchmarks give you a ruler to measure your progress. They help you create black and white answers to grey questions. Let me give you a few benchmarks to help set a target for you General Dental Practice.
OVERHEAD: I tend to look at overhead from the perspective of cash flow: What comes in and what goes out. Not the way a CPA does it in a P&L statement with only deductible items listed. This cash flow statement creates a management tool to help you manage your practice day to day and should be shared with the staff.
Let’s take a look at overhead, 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 24-24%
• Facility 7-9%
• Lab 8-10%
• Marketing 3-5%
• Office Supplies 1-2%
• Dental Supplies 6-7%
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 means 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 3-5% 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 a mail order dental supplier to provide a free service of a buyer’s club. Go to their web site and tell them you want to sign up for the buyers’ club (Excellence in Dentistry). 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, club membership, trips and non-dental expenses. We are looking for a report that helps you manage your practice’s overhead.
Practice Benchmarks for a well-run General Dental Practice:
• $25-$30K production per operatory/month (5 Ops = $100K-$150K/month). If you are not at this production level, it does not mean you are a failure. It does mean you have room to grow, and there are no physical capacity problems. There is no need to add more room to produce more until you meet or exceed this ratio.
• $20-$25K production per employee/month. If you are not meeting this benchmark, you are either overstaffed, or under producing, or both. Once again, you have no staff blockages (not enough staff) if you fall short of this goal. It is possible to increase production without adding a single staff member.
• 50-75 new patients/doctor: (Remember: we are talking about a well-run general dental practice, not a “Boutique” practice.) Normal dental practices have a mixture of treatment and ages. As you and your practice age, it is normal to see fewer children. Along with this increase in age, confidence, and competence, comes more and more crown and bridge. The negative is that you have limited the size of the patient pool that you can vie for. Generally speaking, a dentist will only attract and inspire patients who are about 10 years on either side of the doctor’s age. Open up a practice and still be in the same location 15 years later and you are probably in the wrong location. Demographics will change and before you know it the neighborhood has gone downhill and there is a dentist on every corner (To help you compete, you need to have a ratio of 1 doctor for about 2000 patients). Go to www.zipskinny.com, put in your zip code and up will pop all of your demographic information. This will be a revelation for most of you, and an aid in getting more new patients from updated marketing for others. Then, go to www.aftco.net, and look under resources and dentists. Put in your zip code and see the number of dentist per population. Bottom line: There is no excuse for not getting your share of the new patient pool. You either grow or die. There is no way to just stay at a particular production plateau. Inflation, demographics and the economy slowly erode your business until it is too late. It is like cooking a live frog. You can’t drop him in boiling water because he will just jump out. Put him in cold water and slowly raise the temperature, and he never realizes his plight until it is too late. Welcome to the story of the average dentist. No one ever left dental school wanting to end up an average dentist. L.D. Pankey said: “The average dentist is either the best of the worst, or the worst of the best.”
• 2 Hygienists per doctor. This indicates a healthy recall, new patient flow, and shows that you have the back door closed. This is the life blood of a healthy practice. If you have been in practice for more than 5 years, and have not found the need to hire another hygienist, you are not inspiring your patients. With the average new patient flow of 25 new patients per month, you would need to add a new hygienist every 24 months just to service them. If you are not seeing this, then you have as many patients leaving as you have coming in. You have the back door wide open. This usually indicates a lack of systems, internal marketing, and the ability to inspire the patients you have. It is black or white: You are either growing or you are not. This is one of the reasons I believe that every practice needs to invest in a coach: Someone to fine tune you practice and help you to the next level. Without exception, everyone needs a mentor. I would have to say that the success of my own practices is directly related to practice management coaching, meeting with a mentor, and hiring for attitude. Practice consulting is not expensive, it is priceless. It is the best investment you can make in building a successful practice.
• Hygienists are producing $1100-$2500 per day unassisted. For our Summit clients we are now able to bring in one of my hygienist who regularly produces $25K-$45K per month unassisted at no cost to you. We will just let them replace one of our regular consultant visits.
• Hygiene department produces 33% of the total production of the practice. Whether it is 1 or 10 hygienists, you should be getting at least one third of your production out of your hygienist. If you are not monitoring this you will be surprised at how easy it is to lower your overhead and increase production when your hygiene department is running on all 8 cylinders.
• 60% of your day is filled with substantial cases. A substantial case is anything that is about the fee of a crown. For Example: Your production goal is $5,000/day. If a crown is about a $1,000, you would need to have 60% of $5,000, or $3,600 (3.6 crowns or their equivalent) booked each day to reach a significant goal. This is also true in hygiene, except the dollar amount would be different. A substantial case for hygiene might be quadrants of sealants, or soft tissue management patients, not normal every day recall patients. 60% of their day must be in substantial cases also. Fail to do this and you are guaranteed to not make a significant goal for you and your hygienist. Your hygiene department should account for about 33% of your total production. Each hygienist should produce at least 3 times what they are paid.
• Recall effectiveness of 80% (Nationally you see the average general practice at 42%)
• 50-60% of your new patients come from direct referrals from a patient of record. Practices that are not inspiring patients to refer, find themselves “marketing” driven. You are paying patients to come in the door, and they are leaving just as fast. If you are not growing you are not inspiring your patients. In a society that votes with their feet, you cannot afford to have a majority of your patients getting second opinions or not scheduling for treatment. You cannot get better at giving patients what they do not want. Change your direction and reap a new outlook for your practice.
• 98% or greater collection rate (The average practice does 94%. This will not do.)
• Consumer hours: 7-10am, 3-6pm, Monday-Friday, and Saturday hours. This is difficult without multiple doctors, but 9-5 Monday thru Thursday, do not meet your patient’s needs. Consumerism is a creed you need to adopt to prosper in any economic environment. Convenience is huge is today’s practice. Patients show up where their needs are met.
• A small incremental fee increase every January and July. Inflation and subsequent cost of operating a practice continue to climb. Review and update your fees on a systematic regular basis. A usual scenario would be to compare your fees to our fee survey and place them in the 85 percentile. You would then raise your fees a couple of percentage points every January and July. This would offset the effects of inflation and cost of living.
• Pricing: Keep comparables comparable: Do a fee survey (This is available to our Summit Clients at no charge. Just give us a call). Try to keep your fees in about the 85 percentile. Consumers shop and price is important. As a note: An increase of 10% creates a 9% decrease in overhead. Over the life time of a practice, millions of dollars are lost from having fees that are 5% too low. The cumulative effect could fund a substantial portion of your retirement.
• Production of $600-$750 per hour per Dentist.
• A goal of 15% growth per year in productivity. Growth is a sign of meeting your patient’s needs. No growth means you are not inspiring your patients. Lack of growth means there is something drastically wrong. Managing a practice by the numbers to establish goals to insure growth and the proper overhead is the only logical choice. Insurance company statistics tell us that 97% of the population at age 65 will either be “dead or dead broke”. Only 2-3% will become financially independent at that age. Failure to plan is a plan to fail. You must start from day one to lay out a strategy for financial success. No one else can do this for you. The one saving grace is that it is never too late to start. If you have reached that age where you are closer to your “do before date than your born on date”, or even a young doctor of midcareer doctor who has an entrepreneurial bent, we have the number one wealth building strategy to share with you. Ways to remove equity from your practice, while producing more and lowering your overhead to insure a comfortable retirement at any age. You cannot discount a life with “choices”. A secure financial future is the best choice you can provide for you and your family. Give me a call and let me show you how. (972-523-4660)
• Production of $2,500/New patient. (National average is $1,100/New Patient) Just divide the monthly production by the number of new patients and this will give you a ratio of production per new patient, not production on each new patient. The $2,500 per new patient is a lofty goal for a great general practice, but is very doable. Production over $2,500/New Patient puts you in the realm of a boutique practice. Along with a fee survey, we can help all our clients see how a failure to do a certain type or number of procedures indicate a lack of planning. We can help you restructure your fees and treatment modalities to maximize you demographics to create a lower overhead and increased production without more staff, facility or stress.
• 90% case acceptance. The “monkey score” is a case acceptance of 67%. The number one reason people do not have dental work done is that they were never told what they needed to do. Just tell them what they need and statistically 67% will say yes. Add in consumerism, and the scripts that Summit clients are given and it will always go up. (Clients should go back and reread “100% Case Acceptance”)
The title comes from business school jargon where “management by statistics” is a foundational premise towards good management. At Summit, we believe that every metric we measure creates a graph that as long as it is moving “up and to the right” everything will be doing well. Let’s get back to basics and begin to measure our overhead and benchmarks to another level of practice.
This should give you a place to start. Take your current P&L statement and arrange it to fit the overhead items as listed above. Give us a call if you have a problem. Take a look at each of the benchmarks and compare where you are to where you want to go. Take these goals and set a path for the next 12 months to improve in every category. It is no longer possible for us to just get by. We must set challenging goals and begin to run our practices like a business. Make the difficult decisions about staffing and when and how to work. Pay the price and take the prize. Good luck.
Michael Abernathy DDS