Seldom do doctors ever ask me for help with their personal financial habits. With that said, I see hundreds of doctors every year that literally are held back by financial captivity in their practices. The spending habits within the practice and resulting high overhead prevent them from any aggressive strategic actions that would actually grow their practice. The margins are so tight as to make it impossible to have flexibility to spend any additional funds for marketing or improvements in the facility. It s strange, but I find that the very doctors who struggle with finances in their practices also struggle at home. I m not so sure that the practice struggles aren’t just the symptoms of a lack of personal knowledge and discipline.
Let s make the assumption that the average dentist works 200 days a year, 8 hours a day, for a total of 1600 hours per year. That s what the ADA says. Allow me to take four different production levels and run a few numbers in order to really see what we take home from our efforts under various conditions.
|Prod./Hr.||Prod./Yr.||Gross Profit||After Overhead||Per Year|
Let’s now assume just an average total tax liability of 33% (It could be a little more or slightly less)
Net After Tax (Doctor Take Home)
Now let’s go back and look at our net hourly production.
Net income per hour in each overhead % category
Now we have one last thing to look at. The average practice doesn’t collect 100% of what it produces. It collects 94% (again, this is an ADA stat). Let’s look what this does to our actual spendable income in each overhead category.
94% Collection Affect on “Hourly” Spendable Income
Now let’s put feet to our figures. As far as overhead, it is somewhere between 67%-74% and the trend is increasing to a higher level each year. The average collections are 94% and this is even before we make adjustments for managed care. If we had actually factored in the affects of third party discounts in addition to other adjustments, the numbers might be 25%-50% lower. Bottom line: If you are an average dentist your take home is just a little less than a good plumber who, according to the internet, makes $65-$85/hour, and more if your state allows collective bargaining and unions.
Let s next take a look at how the realization of these numbers might affect your spending habits, and those of your spouse married to that “rich” dentist.
You go out and purchase a reasonable car at $30,000. You re rich, and this happens to be for one of your kids that just turned 16 from the previous marriage you successfully ended as a wealth building strategy. There is no trade in, and you do a 100%, 60 month loan through Ford Credit at your local dealership. Currently, according to Ford, you would pay $579.98 per month or a total of $34,798.80 with a total interest payment of $4,799.08 at the end of the 60 months. The scary thing is that most of you reading this have put down the article to go internet shopping for a Ford with this type of financing. Not an expensive car, not a lot of interest, but it may have been a very expensive decision.
What if we hadn’t purchased a car at all and actually put away $30,000 at age 35 until we retired at age 65. How would this have affected our retirement plan? Let s assume a 6.5% return compounded annually. That $30,000 dollar investment would be an extra $210,823.51 in your pocket at retirement. What if you could only get 3% return for the entire 30 years? It would still be an extra $73,785.33 in your account. If you think about it, that car wasn’t a $30,000 dollar car, it was somewhere between $74,000 and $210,000. Let s look at it one more way. We all have the same 24 hours a day. We all are willing to invest those eight hours a day some 200 days a year for thirty plus years before we retire. For some that retirement will never come. Insurance statistics show us that at age 65 only 4T5% of the population will be financially independent. The rest will be dead or dead broke. Take a moment and look again at the first calculations we did. Pick out your overhead and don t fudge. You remember overhead, that s what you have left over after all the taxes and other practice costs that erode your ability to save and spend. If you were one of the “average” dentists in an average overhead category of about 70%, you just traded 989.30 hours of your life to purchase that car on credit over time. That comes down to 41.22 eight-hour days, or almost one and a half months of working for nothing but that new car in order to purchase it. In essence you buy “things” with hours of your life. Now think of all the things you purchase in a lifetime and remember the day you leave this earth, none of them are going with you (unless you want to be buried in your daughters Ford, which she will probably total sometime within the first month of ownership). The scariest thing that I see is a doctor who is in their fifties, living beyond their means, no money saved, a declining practice, physically and emotionally beaten down when they call me to help them “fix” this situation by showing them how to market. The problem here is not the size of your practice or production level, it is the fact that these doctors have failed to understand and embrace practical habits of saving and life style control. There is no hope for this doctor. The best they can hope for is great health in order to practice into their eighties or beyond.
Let me go one more place before we end. Email me and let me send you an article on “Benchmarks and Overhead”. Read it and then come back and read this article again. I sometimes forget that we have hundreds of doctors joining our newsletter each month and they have not had the luxury of reading the articles or books we have published in the past. The referenced article will give you another perspective on the cost of doing business and help you understand what a wellT run dental practice should look like. If you could lower your overhead by 9% in an average office, you could count on an increase of 10% in take home pay. If you were the rare office working at a 50% overhead it would be leaps and bounds better return. Some years ago the Kodak Study was completed in which they analyzed the effect of increasing or decreasing fees on profitability and work load. They found that in a typical 70% overhead office that took on a managed care PPO at a 20% decrease in fee, you would have to increase your production by 300% to take home the same amount of money. This should give you pause. In the same 70% overhead practice, a 5% increase in fees would result in a 16.5% increase in Net Income.
Hopefully you find this somewhat sobering in the climate of a “new emerging economy”. Change and uncertainty will surely prevail over the next decade or so. With this in mind let me suggest that you go to www.mint.com and take a look at a simple strategy to finally control and help you understand your spending. It costs nothing but the time to actually fill in some blanks so that it can begin to help you save, spend responsibly, get out of debt, and create a secure future with options.
Call me and let me know if we can help you make the future brighter by creating systems that move you toward 100% collections, 50% overhead, and an intentionally balanced approach to growing your practice 15 to 20% per year for the rest of your careers.
Michael Abernathy DDS