NOTE: If you are reading this without first studying the previous 3-4 articles on associateships and partnerships from the perspective of the young doctor and owner, please go to www.summitpracticesolutions.com/blog/ and use the Quick link or Search feature to access these. This will not help you without following the string of articles in their respected order.
Let me give you a few benchmarks to help set a target for your General Dental Practice before you take the leap at adding another dentist. Failing to quantify whether or not you are ready is the number one reason a practice fails when considering a transition.
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 with a P&L statement with only deductible items listed or other Generally Accepted Accounting Principles. To be clear, a Profit & Loss Statement is not true “profit and loss”. It does not have debt payments or money spent that has no tax consequence, which in any business scenario would drastically affect your profit unless you were debt free. A Profit & Loss Statement is basically used for tax purposes, but it is not a document that you should use to actually “manage” your day-to-day business decisions. You cannot manage what you do not measure. It is this point of finding an adequate timely document that summarizes the real cost and profit of doing business that we need to create. A cash flow statement creates a management tool to help you manage your practice day-to-day and should be shared with the staff. You must have updated access to this information any hour or day. Without this knowledge and access, you will not know when you need to step up your game or correct a poor trend in your office. Here is a link to a webinar with me and CPA’s Duckett & Ladd to help you reorganize and create a management document that gives you a fast and easy way to make management decisions in a dental practice: https://youtu.be/Ffg9h69NAFs
Let’s take a look at overhead, and the way we suggest you require 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. While this type of document does not fall into the preferred GAAP documents, it is a real world, can’t miss way of knowing where you are and where you need to go. By keeping all of the line items in just 6 categories with dollar amounts as well as percentage summaries, you can easily monitor your progress at any moment during the month. Attached to the categories is an ideal benchmark to help you move toward that 50%-60% overhead. These are the categories.
- Staff Compensation 27-28%
- Facility 7-9%
- Lab 8-10%
- Marketing 3%-5%
- Office Supplies 2% or less
- Dental Supplies 5-6%
Staff compensation includes everything you spend on each and every employee: Taxes, continuing education, bonus, trips, normal pay, taxes, benefits, uniforms, etc. It includes everyone but the owner doctor(s). Hygienists and associates are included here. When making decisions about overhead and what you might pay a doctor employee, consider the added equipment, staff, and other ancillary costs associated with their hiring. I also include any outside group that acts as a part-time employee: Attorney, CPA, bookkeeper, insurance verification from a third party, etc. If we leave out this last category, you should be able to keep it at about 25%; included it will rise to about 28%.
Facility includes all the physical plant and its costs: Taxes, note payment on the building itself, maintenance, lease, servicing note for the purchase of a practice, utilities, equipment purchase or lease, repairs, security, etc.
Lab should include everything you spend on lab, including Cerec or E4D 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, give always, signage, promotions, phone book, website, 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 spend more. A higher end practice may spend more here, and less in compensation. If you have made the grave error of officing in a multilevel professional building, you can add about $5,000/month for the lack of access, visibility, and poor location. 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”. Today the play is finding a “group purchasing” company that has aligned themselves with various vendors to get their members great discounts on supplies, services, and equipment. Keep in mind that if you are purchasing from one of the “big three” national dental distributers, you are paying 15% to 45% more than you should. We no longer need to pay the cost of dental showrooms and overinflated prices based on paying a salesperson a commission. On-line purchasing will save you money. Allowing the big three to shop your wallet while inflating your costs is no longer an option for most of us.
Owners Pay in any form: Pay, benefits, taxes, auto, continuing education for the owner doctor, entertainment, trips – everything and anything that you benefited from. You can still write off or deduct anything you did before, but now you know where all your money is going.
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 it on cars, club memberships, trips and non-dental expenses. You can still write them off, but you need real world transparent numbers to “manage” your practice. We are looking for a report that helps you manage your practice’s overhead.
I have included a short template to measure the top 12 numbers every practice should follow consistently on a weekly basis for success. Take the time to not only collect these benchmark numbers but share them with your team every few weeks. You can’t manage what you don’t measure.
Michael Abernathy, DDS
INCOME & EXPENSE SUMMARY
COLLECTIONS __________ PRODUCTION _________ YEAR-TO-DATE __________
MONTH YEAR-TO-DATE IDEAL GOAL
EMPLOYEE COSTS: ________ _________ 27%-28%
FACILITY COSTS: ________ _________ 7%-9%
DENTAL SUPPLIES: ________ _________ 5%-6%
MARKETING: ________ _________ 3%-5%
LAB: ________ _________ 8%-10%
OFFICE SUPPLIES: ________ _________ LESS THAN 2%
TOTAL EXPENSES: _________ _________ 52%-60%
MONTH YEAR-TO-DATE IDEAL GOAL
COLLECTION %: ________ _________ 100%+
PROD/EMP/MO: ________ _________ $20,000-$25,000
PROD/OP/MO: ________ _________ $25,000-$30,00
NEW PATIENTS: ________ _________ 40-60NP/DOCTOR
DIRECT REFERRALS: ________ _________ 50%+
HYGIENE %/MO: ________ _________ 33%+
PROD/NEW PATIENT: ________ _________ $2,500 PLUS