Steven Covey, in his bestselling book 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 60%. 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 the owner takes 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. You should collect at least 98% and have a goal of collecting over 100% of your net adjusted production. 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 both an increase in net and a decrease in overall overhead.
Looking at hundreds of practices and their numbers, I am often surprised at the lack of information the doctor can lay his or her 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 they need to make decisions, and they do 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 QuickBooks 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 their clients. If you want to lower your overhead, manage your practice for profitability, and control your future, you must have accurate and timely real-world numbers to guide you.
In pro sports today, the standouts are referred to as superstars. 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 actually split an arrow with another 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 or they can’t see. 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 are 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 your General Dental Practice.
Wouldn’t it be great if there wasn’t a cost to doing business. I remember my first job where the company took out taxes. I knew what I made per hour: $1.00 an hour in 1963. I worked forty hours a week and sometimes more and was looking forward to that check. To my consternation and surprise, forty hours times $1 is not $40.00 on a pay check. Low and behold, there was a 20% tax that destroyed my visions of financial independence. Yikes, I can still remember feeling like I had been taken advantage of and it just wasn’t fair. Like most of you, I want to kiss and hold hands before I get taken advantage of. You really never know the score until we subtract the cost of doing business.
PV x PEV x CP – O = P
Just so we are straight, our equation represents the cold, hard, black and white facts of a business. It is never about gross production (gross production without adjustments or discounts, insurance adjustments, etc.) or even adjusted net production (production after adjustments). Your business is based on what you collect. Insurance fee schedules, senior discounts, pre-pay discounts, etc., all affect your bottom line of what really goes in the bank to pay your overhead.
I have written countless articles on overhead and benchmarks. I have offered to send you a book on the culture and business of successful dental practices at no charge: www.superdentalpractice.com, and I have asked you to read chapters 16 and 17 as we move through this equation. If you have done so, great, but if you have somehow fallen behind or were waiting for the perfect time to get around to it, here it is.
In addition to the actual break down of overhead and a way to track these key practice numbers, you will need a system to design a document that actually shows true overhead on a monthly basis. As most of you know, a Profit & Loss Statement is not true profit and loss. It does not include debt and primarily deals with expenses that have a tax consequence. What we want is a very simple, can’t miss document that gives us a minute-to-minute update on profit. I am including a You Tube video link below where we discuss and give you the details on how to arrange your QuickBooks software in order to actually create this necessary document that will allow you to make financial and practice decisions using this one document. Your CPA will not like this, but what do they know. Their argument will be that a P&L Statement is a GAAP (Generally Accepted Accounting Principles) document and shouldn’t be altered to do what we want them to do. Fire them and call my CPA: Duckett & Ladd Dental CPA & Advisors, 417-883-6590. Jarred and Bill are incredible and know as much or more about a successful dental practice as I do. Here is that link to the video: https://youtu.be/Ffg9h69NAFs
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-flow of money. We believe all operating expenses should be contained in about 6 categories and the 7th category would be anything spent on the owner doctor. Attached to the categories is an ideal benchmark to help you move toward that 50% overhead.
1.Staff Compensation: 25%-28%
5.Office Supplies: 2%
6.Dental Supplies: 6%
Staff compensation includes everything you spend on staff: Taxes, continuing education, bonus, trips, normal pay, benefits, uniforms, etc. It includes everyone but the owner doctor. Hygienist and associates are included here. This does not and should not include any owner doctor. The owner’s overhead will fall below the line.
Facility includes all the physical plant and its costs: Property taxes, note payment of the building itself or rent, 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 your 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, giveaways, signage, promotions, phone book, web sites, social media; 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 is self-explanatory and 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 through purchase orders, and have one person do all of the purchasing for the office.
Remember: Every operating expense should fit into one of these categories. Your first question will be: What about all those personal things I run through the practice in order to write off? The answer: Everything below the line is yours. You can choose to spend it on cars, club memberships, trips and non-dental expenses. We are looking for a report that helps you manage your practice’s overhead. We are trying to create a BAM (bare ass minimum) overhead number for management of your practice. Anything that belongs to the doctor would go under the 7th category and can include, but is not limited to: Pay, benefits, insurance, continuing education, vehicle, uniforms or other perks, file storage rental where you keep your bass boat, what you pay your kids to clean the office or your spouse to write the checks. Just be honest and include all those grey areas under the 7th category so that you can see that it represents your entire pay, regardless of what you call it for your tax returns. This is a real eye opener when we talk about actual profit (P) in our equation next time. Sit down, revamp your Profit & Loss Statement, use our design and be glad you did when we talk about the real profit in our practices.
Michael Abernathy DDS