This is a follow up to the previous week’s discussion on “The Extortion of Pay at the Cost of Profit”. We defined the trends, their history, and the likely outcome. Here is the rest of the story. Your practice is a business, and as such, needs to make a profit, satisfy your customers, and encourage long-term employees with fair compensation, a safe work environment, and the ability to grow and thrive in their position. Dentistry is competitive due to the density of dentists in a particular area, employment is competitive in the sense of salaries and work environment with many offices available for them to work in, and profit is elusive if we do not know our numbers and stick to a sensible business strategy of pay reflecting profitability. If you read last weeks article, you would have to admit that the facts are weighted against you making a profit especially if you do what everyone else does (The Herd Mentality for “sheeple”). This has to be a full court press with a huge dose of reality and accountability.
Last week we took a deep dive into the history of pay, demand, supply and competition. There is another aspect, based on habit and false information that has driven this crisis from the perspective of what the dentist does and thinks. Either by habit, misinformation, or just a “duh” moment, doctors hire before they need staff. Your goal is to produce at least $20,000-$25,000 per employee per month. It starts when you opened that first office and hired a front desk, assistant, and a hygienist with $0 production per employee. This is a formula that is going to take your profit right out the window for the next 10 years. You should have started with one employee. He or she would assist, answer the phone, do front desk and be by your side until you can produce $20,000+ per month. You, the doctor, would clean teeth. The second hire would be a more full-time front desk that could help in the back or a full time assistant while the current hire works the front desk. This goes along until you can hit $40,000/month or greater. You are still cleaning teeth. About the sixth month or so, you might need to hire a part-time hygienist on Fridays or Saturdays. Oh yea, you are working consumer hours and open every Friday and Saturday, and you are still cleaning teeth until the hygiene schedule is 90% full. The first hygienist will be part time on Friday and/or Saturday and is a great time to learn how to work with a hygienist and use this time like a long-term working interview. This goes on until you fly past $60,000/month collections. Do this and your pay formula will automatically follow your profitability to the point that you have such a good overhead that you can institute a long-term bonus in the form of profit sharing while doing away with longevity-based raises, and cost of living raises. This fundamental shift in thinking about performance, pay, and overhead will be sustainable throughout your career.
Next, we need to discuss a more accurate way of looking at how you, the doctor, fit into this “reality pay formula”. Follow this closely because it is essential to understand the legal and tax implications of your practice being a corporation. If we talk about owner doctor pay, you need to understand a few things. As the sole shareholder of a corporation, you own 100% of the shares until you sell part or all of your practice (corporation). Being a shareholder allows you to take a distribution from the profits of the corporation in the form of a dividend. This would be the first way you are paid and it has less tax consequences than your salary or commission as a dentist performing services within the corporation. You are also an employee of the corporation and as such, you need to have a written and signed employment agreement with your corporation. This document will detail how you are paid: Salary, commission, hourly, etc. As a reference point take a look at an “average” practice: $640,000 collections a year with an overhead of 67%-75% or about 72%. This means the average doctor would take home about 25%-33% of the collections or $128,000 a year. In this example the salary or commission pay of 28% represent no profit at all in this practice. It is merely what you earned by your labor and would probably be the approximate amount you would have to pay some other doctor to do what you do. If you look at the numbers, profit occurs if your overhead is below 70% and represents money that is left after you take about 30% out. To be clear, in this example if the overhead was 67%, then your earned pay was about 30% and the profit is 3%. If this does not make sense, be sure and reread this or give me a call. NOTE: There is no profit in a 70% overhead practice. This is why your target overhead needs to in the 50% range.
Let’s go back to the staff. I want to restate this again. I know how short most of our memories are. Once again, you just opened the practice and you have no patients and it is day one. How many staff do you have? If you thought any more than one you would be wrong. You need at least one, just from the medical/legal standpoint of a witness. One of the greatest errors in profitability is hiring without the expectation of productivity to the business. If you approach staffing from this perspective and respect the formula, you will be able to drive your overhead down, while paying your staff at the upper levels of a competitive pay scale. Fail in this, and you will face a career of chasing your ever shrinking profit while you watch overhead creep destroy any chance of doing away with debt and accumulating wealth. You have heard it twice, so when you call to discuss this, it will not be misunderstood.
Next week will finish strong. Get ready to be accountable, know what you should do first, and we will end with an outline to smash overhead creep. This is how you Summit.
Michael Abernathy, DDS