DIAGNOSE YOURSELF: PART 3
Get your spreadsheet, P & L Statement, and a copy of one week’s schedule and let’s take a look at page two of your Growth Analysis Spreadsheet concerning the bottom 7 line items (questions).
1. How old are you? When looking at where you are while strategizing on where you want to go, age and timing are everything. The decisions you make today create your financial future and dental legacy. Mistakes are common but I want to mention a few as we delve into how age affects your practice and plans. Too many of us think that everything will work out and that when you get older you will swing for the fence and compensate for all the poor decisions you made in the past. It just doesn’t happen. If you are in your fifties, understand that unless you make a drastic change, your sixties will not be any better. You can’t even buy disability insurance after age 64 because insurance companies know that statistically you will have a disability at 65 or older. How many of your patients really want to go to an “old” dentist? Probably less than you think. Most dentists attract patients about 15 years on either side of their age. Captain obvious: When you hit 60+, on one side of your age they are dead or dying. So, age is important. From the time you begin to practice you have to start saving. For the first 5-7 years, I would save at least $1,000 dollars for every year of your life. If you were 27, you would save $27,000 that year and $28K the next and so on. After these first few years, you should begin to save 20% of your take-home income a year or you will not be able to retire. The retirement age 20 years ago was about 62. That has jumped to age 70+ today, and that still is not retirement receiving what you made when you were working. Only 4% to 5% of dentists retire financially secure. That outcome is decided the day you begin to practice. There are two questions I ask every doctor that we do coaching with: When do you want to retire? How much money do you need to feel financially secure? For most of us that will be in the range of 60+ years with no debt and cash in the bank of at least $2,000,000 to $6,000,000. The actual number depends on your “burn rate”. How fast and how much do you currently spend?
2. Graduated Dental School what year? I want to know how long you have practiced. Some of us had previous careers. If so, that doctor age 40 might have only practiced 5 years. Big difference when we look at a 40-year-old doctor who is in his/her fourteenth year of practice. Different strategies, goals, different family considerations, etc.
3. How many years in current location? If you have been there over 10 or 15 years, your location may be holding you back. Demographics change as well as competition. If I run into a doctor in a poor location that has 10 years left in their career, I may ask them to move. It is still possible to salvage a less than stellar career in ten years and leave with no debt and millions in savings.
4. Are your hygienist(s) hourly or commission and what is the rate? I won’t go into this in depth here, but I definitely have strong opinions on this. We in dentistry have seen our income and profitability plateau since 2007. The average dentist, when adjusted for inflation, has actually taken home less each year since 2008. Even with decreased doctor income, plateaued production, and ever decreasing reimbursements from third parties, our employees have continued to ask for and receive more pay. Currently, the dentist is the only one that suffers. This is not sustainable. Employees that can control their production, recall, and schedule need to have some risk. I prefer to pay my associates and hygienists on a commission or at least a hybrid. But not hourly. Hourly pay creates hour-long appointments, lack of engagement, and most often, marginal results. Add up all you pay your hygienist: Pay, taxes, benefits, workman’s comp, uniforms, continuing education, staff food, etc., and you should expect the hygienist to produce at least 3 times what they are paid. Since most of you reading this are still paying by the hour, I would like you to do some homework. Run a production by provider report (not by procedure) for the last 12 months. This will give you (by name or position) the production amounts for that period of time for the dentist and hygienist. Now get the employee pay records including all of the benefits, taxes, and other things you pay on their behalf and divide that number by their production. Dividing their total pay by their total net adjusted production (production minus any adjustments) will give you the percentage of what they produce that is paid to them. It’s like a conversion formula. Most of you will be shocked that you are paying your hygienist hourly but when converted to a percentage it is 35%-60%. Certainly, it is more than the percentage of your production that you are paying yourself. This is not sustainable and contributes to most offices having staffing costs exceeding the recommended percentage of 25%.
5. Is your associate hourly or commissioned and what is the rate? No associate should have an hourly or daily rate for any longer than 90-120 days. This will only breed an employee mentality rather than an ownership culture. I want to get them on a straight commission as soon as possible. So, what is the correct percentage? It is not 30% or 35% (or more). In fact, there is no standard pay percentage. It should be an algorithm established by your overhead. When hiring an associate, I think any owner would expect to make at least 5% to 10% profit above and beyond what you pay the associate and his/her staff. If your overhead was 70% before the hire (keep in mind that you will need to fix up that op that you never use and hire at least an assistant for the new associate), and you planned to make a 5% to 10% profit on their work, the most you could pay is 20%-25% of their collections. Surprisingly, most new doctors wouldn’t work for that but even more important is that the office that has a 70% overhead or even a 63% overhead is not ready to have an associate. The overhead, systems, and protocols come up far short of what it takes to incorporate another doctor.
6. Do you own your building? This is important to consider in conjunction with questions 2 and 3 above. It is certainly easier to relocate if you currently lease. But if you own the building, it could possibly be easier to expand and add ops, etc. Many times we see doctors that own their building but are not “leasing it back” from themselves at the proper rate. And maintenance costs are typically higher when owning the building. All of these are factors that influence the practice P&L and also have numerous tax implications as well.
Take the time to do your homework and reflect on your numbers and your self-analysis of what you will need to do to make some corrections. Call if you need help or have a question. That is how you Summit.
Michael Abernathy, DDS
PS. The Revised and Expanded 2nd Edition of The Super General Dental Practice book is now available. If you liked the original, you’ll really love this one. If you missed the original, you don’t want to miss this one. Order yours today by clicking on this link.