The short answer is absolutely maybe. It always starts with a short email from a doctor asking me how to structure his/her bonus. I always answer: “Give me a call, because it will take too long to type it, and you will end up sending me six more emails all starting with “Yea but, what about ….?”. It happened again so I decided to go ahead and type an answer that should clear up the myths, misconceptions, and outright lies about when, where, and how to start or fix a bonus system.
To help us all get on the same page, I have included an article that I had written on profit and overhead in a successful general dental practice. It creates benchmarks and helps you manage your practice through statistics. A bonus should only be considered when the numbers make since. Incentivizing staff can take many forms. Money is just one of them. You must put your house in order before utilizing a bonus plan to incentivize your staff. Get the right people on the right bus and in the right seat. This often requires you to make the “harddecisions” about keeping great staff members, or “freeing up the future” of marginal staff. There are only two types of employees: Ones that need more training and those who should leave. It is far more expensive and stressful to keep marginal staff compared to letting them go. We are not looking for super stars. We are building a team. It is no longer a good idea to have just good employees. Each and every one of your staff must be great, and great in the sense of working well as a team. You will never go any further than the one staff person with the lowest commitment to your office’s goals and vision. Don’t wait. Act now.
Benchmarks, Management, and Accounting by the Number
Steven Covey in “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 55%. 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 they take 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. One of our mottos at Summit is: Produce More, Collect Half, and Keep Half. Remember: You should collect over 98% of all fees charged out. 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 save more), and concentrate on the systems that guarantee an increase in net and a decrease in overall overhead.
Looking at hundreds of practices and their numbers, I am very often surprised at the lack of information the doctor can lay his/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 he/she needs to make decisions, and does 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 Quick Books 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 the client. If you want to lower your overhead, manage your practice for profitability, and control your future, you must have accurate, timely, real world numbers to guide you.
In pro sports today, the standouts are referred to as super stars. 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 would split an arrow with an 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, under 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. 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 is 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 you General Dental Practice.
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 deductable 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 the in-flow and outflow of money. We believe all operating expenses should be contained in just 6 categories. Attached to the categories is an ideal benchmark to help you move toward that 50% overhead. These are the categories.
- Staff Compensation – 24-25%
- Facility – 7-9%
- Lab – 8-10%
- Marketing – 3%
- Office Supplies – 2%
- Dental Supplies – 6%
- Total – 50-55%
Staff compensation includes everything you spend on staff: Taxes, continuing education, bonus, trips, normal pay, benefits, and uniforms. It includes everyone but the owner doctor(s). Hygienists and associates are included here. They are employees.
Facility includes all the physical plant and its costs: Taxes, note payment of the building itself, maintenance, lease, servicing note for the purchase of a practice, utilities, equipment purchase or lease, repairs of equipment or building, 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 you 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 aways, signage, promotions, telephone book — 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% 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 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”. Woody Oaks with Excellence in Dentistry partners with Darby to provide a free service of a buyer’s club. Go to their web site and call Darby and tell them you want to sign up for the buyers club (Excellence in Dentistry). They will give you 15% off their already low mail order prices and give you back 3% of your purchase on a credit card. That is 18% off one of the lowest mail order companies in the US. Do this tomorrow.
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 them on cars, club membership, trips and non-dental expenses. We are looking for a report that helps you manage your practice’s overhead.
Practice Benchmarks for a well run General Dental Practice:
- $25-$30K production per operatory/month (5 Ops = $100K-$150K/month). If you are not at this production level, it does not mean you are a failure. It does mean you have room to grow, and there are no physical capacity problems. There is no need to add more room to produce more until you meet or exceed this ratio.
- $20-$25K production per employee/month. If you are not meeting this benchmark, you are either overstaffed, or under producing, or both. Once again, you have no staff blockages (too few people) if you fall short of this goal. It is possible to increase production without adding a single staff member.
- 50-75 new patients/doctor: (Remember: we are talking about a well run general dental practice, not a “Boutique” practice.) Normal dental practices have a mixture of treatment and ages. As you and your practice age, it is normal to see fewer children. Along with this increase in age, confidence, and competence, comes more and more crown and bridge. The negative is that you have limited the size of the patient pool that you can vie for. Generally speaking, a dentist will only attract and inspire patients who are about 10 years on either side of the doctor’s age. Open up a practice and still be in the same location 15 years later and you are probably in the wrong location. Demographics will change and before you know it the neighborhood has gone downhill and there is a dentist on every corner (To help you compete, you need to have a ratio of 1 doctor for about 2000 patients or 1:2000). Go to www.zipskinny.com, put in your zip code, and up will pop all of your demographic information. This will be a revelation for most of you, and an aid in getting more new patients from updated marketing for others. Then, go to www.aftco.net, click on “Resource Center”, and then “Dentistics”. Enter your zip code and get the General Dentist to Population Ratio. Bottom line: There is no excuse for not getting your share of the new patient pool. You either grow or die. There is no way to just stay at a particular production plateau. Inflation, demographics and the economy slowly erode your business until it is too late. It is like cooking a live frog. You can’t drop him in boiling water because he will just jump out. Put him in cold water and slowly raise the temperature, and he never realizes his plight until it is too late. Welcome to the story of the average dentist. No one ever left dental school wanting to end up an average dentist. L.D. Pankey said: “The average dentist is either the best of the worst, or the worst of the best.”
- 2 Hygienist per doctor. This indicates a healthy recall, new patient flow, and shows that you have the back door closed. This is the life blood of a healthy practice. If you have been in practice for more than 5 years, and have not found the need to hire another hygienist, you are not inspiring your patients. With the average new patient flow of 25 new patients per month, you would need to add a new hygienist every 24 months just to service them. If you are not seeing this, then you have as many patients leaving as you have coming in.You have the back door wide open. This usually indicates a lack of systems, internal marketing, and the ability to inspire the patients you have. It is black or white: You are either growing or you are not. This is one of the reasons I believe that every practice needs to invest in a coach: Someone to fine tune you practice and help you to the next level. Without exception, everyone needs a mentor. I would have to say that the success of my own practices is directly related to practice management coaching, meeting with a mentor, and hiring for attitude. Practice consulting is not expensive, it is priceless. It is the best investment you can make in building a successful practice.
- Hygienists are producing $1100-$2500 per day unassisted. For our Summit clients we are now able to bring in one of my hygienists who regularly produces $25K-$45K per month unassisted at no additional cost to you. We will just let them replace one of our regular consultant visits.
- Hygiene department produces 33% of the total production of the practice. Whether it is 1 or 10 hygienists, you should be getting at least one third of your production out of your hygienist. If you are not monitoring this you will be surprised at how easy it is to lower your overhead and increase production when your hygiene department is running on all 8 cylinders.
- 60% of your day is filled with substantial cases. A substantial case is anything that is about the fee of a crown. For Example: Your production goal is $5,000/day. If a crown is about a $1,000, you would need to have 60% of $5,000, or $3,600 (3.6 crowns or their equivalent) booked each day to reach a significant goal. This is also true in hygiene, except the dollar amount would be different. A substantial case for hygiene might be quadrants of sealants, or soft tissue management patients, not normal every day recall patients. 60% of their day must be in substantial cases also. Fail to do this and you are guaranteed to not make a significant goal for you and your hygienist. Your hygiene department should account for about 33% of your total production. Each hygienist should produce at least 3 times what they are paid.
- Recall effectiveness of 80% (Nationally you see the average general practice at 42%.)
- 50-60% of your new patients come from direct referrals from a patient of record. Practices that are not inspiring patients to refer,find themselves “marketing” driven. You are paying for patients to come in the door, and they are leaving just as fast. If you are not growing you are not inspiring your patients. In a society that votes with their feet, you cannot afford to have a majority of your patients getting second opinions or not scheduling for treatment. You cannot get better at giving patients what they do not want. Change your direction and reap a new outlook for your practice.
- 98% or greater collection rate (The average practice collects 94%. This is unacceptable.)
- Consumer hours: 7-10am and 3-6pm, Monday-Friday, plus Saturdayhours. This is difficult without multiple doctors, but 9-5 Monday thru Thursday, will not meet your patient’s needs. Consumerism is a creed you need to adopt to prosper in any economic environment. Convenience is huge is today’s practice. Patients show up where their needs are met.
- A small incremental fee increase every January and July. Inflation and subsequent costs of operating a practice continue to climb. Review and update your fees on a regular, systematic basis. A usual scenario would be to compare your fees to our fee study and place them in the 80-85th percentile. You would then raise your fees a couple of percentage points every January and July. This would offset the effects of inflation and cost of living.
- Pricing: Keep comparables comparable: Do a fee analysis (this is available to our Summit clients at no charge — just give us a call). Try to keep your fees in about the 85 percentile. Consumers shop and price is important. As a note: An increase of 10% creates a 9% decrease in overhead. Over the life time of a practice, millions of dollars are lost from having fees that are 5% too low. The cumulative effect could fund a substantial portion of your retirement.
- Production of $600-$750 per hour per Dentist.
- A goal of 15% growth per year in productivity. Growth is a sign of meeting your patient’s needs. No growth means you are not inspiring your patients. Lack of growth means there is something drastically wrong. Managing a practice by the numbers to establish goals to insure growth and the proper overhead is the only logical choice. Insurance company statistics tell us that 97% of the population at age 65 will either be “dead or dead broke”. Only 2-3% will become financially independent at that age. Failure to plan is a plan to fail. You must start from day one to lay out a strategy for financial success. No one else can do this for you. The one saving grace is that it is never too late to start. If you have reached that age where you are closer to your “use before date than your born on date”, or even a young doctor or midcareer doctor who has an entrepreneurial bent, we have the number one wealth building strategy to share with you. Ways to remove equity from your practice, while producing more and lowering your overhead to insure a comfortable retirement at any age. You cannot discount a life with “choices”. A secure financial future is the best choice you can provide for yourself and your family. Give me a call and let me show you how. (972-523-4660).
- Production of $2,500/New Patient. (National average is $1,100/New Patient) Just divide the monthly production by the number of new patients and this will give you a ratio of production per new patient, not production on each new patient. The $2,500 per new patient is a lofty goal for a great general practice, but is very doable. Production over $2,500/New Patient puts you in the realm of a boutique practice. Along with a fee survey, we can help all our clients see how a failure to do a certain type or number of procedures indicate a lack of planning. We can help you restructure your fees and treatment modalities to maximize your demographics to create a lower overhead and increased production without more staff, facility or stress.
- 90% case acceptance. The “monkey score” is a case acceptance of 67%. The number one reason people do not have dental work done is that they were never told what they needed to do. Just tell them what they need and statistically 67% will say yes. Add in consumerism, and the scripts that Summit clients are given and it will always go up. (Clients should go back and reread “100% Case Acceptance”
Now that we have looked at the benchmarks for overhead and practice management, I would recommend that you try to get as many of these benchmarks in line as possible before enacting any “bonus” system. You should consider this as a cautionary prerequisite for a successful bonus plan. While having them all in place would be nice, but difficult, there is a way to make a modified monetary bonus until your benchmarks show improvement. In other words, each and every benchmark or overhead item need not be perfect, but you should share these with the staff and establish a plan to add each one to your goal list. I say this so that you understand that a bonus or profit sharing scheme must be a strategic step that insures a decrease in overhead,while inspiring your staff to raise productivity. Without most of these benchmarks in place, you will struggle and probably fail to make this a successful strategy. With that being said, let me add one warning. Be sure that whatever system of bonus or profit sharing you implement is actually less than you are willing to give. What I mean is that this money must be an amount that will not need to be modified or taken away from your staff in the future. It is far easier to give something thanit is to take it away at a later date. You can always increase the amount if it proves successful, but it is devastating to the morale of your staff if you are forced to revoke it due to poor planning or any other reason. If you decrease the amount or change the conditions by which it is obtained in a way perceived as unfair by the staff it will create a very negative, perhaps even hostile, scenario. We will give you a step by step approach. I assure you that each step is important. Get it right the first time, and this will be a cornerstone to taking your practice to the next level. Stumble and you enter the ranks of most offices who have failed in an attempt to inspire their team by sharing in the increase of production and profitability. It is very difficult to recover from mistakes in a strategic plan like this. Fail and you will see an increase in stress, staff turnover, overhead, and a general loss of esprit-de-corps.
Successful Bonus Principle
- Money is a reward, not an incentive. For someone to own this process, and they must own it to make it work, they must understand the “Business of Dentistry”. Your Cash Flow Statement and Profit and Loss Statement should be shared with the staff each month. They need to start to develop an “ownership” mentality. This is one important way to make them feel that this is their practice and a career, not just a job. They decide when people are hired or have their future freed up. You consult with them on overhead and profitability. You constantly revisit the reason for the “bonus”, and why and how it is paid. They are your partners in this business, and as a partner they should share in the perks that success brings. The bonus is their monetary reward for going the extra mile (not just what they have always done). Money is not an incentive, your mission and purpose as a team is the incentive. Money is just a way of measuring the amount of service you deliver to your clients. Don’t be misled into thinking that you can inspire your staff with just money. You have to become a great leader and a better manager. Like it or not, if a practice is floundering, it is always the doctors fault. Forget the economy, demographics, facility, staff, patients dental IQ, etc. It is always the doctor who is at the center of any challenge in your practice. By commission or omission the doctor has created the situation he finds himself or herself in. It is my job to put a mirror in front of each doctor and for many of you, for the first time, to help you see the real reasons and solutions to your practice challenges.
- Staff must feel in control of practice development. Your job is to hire for attitude, train for a skill level, give them the authority and permission to do their job, and get out of the way. What’s funny is that most of you will hire for skill level or number of years in a dental office, only to be disappointed again. Dentistry is a small consumer driven business. Our staff’s main job is to handle people, not suck spit. Sucking spit and using a computer is just what takes place while they are doing what I hired them for. They were hired to escort my patients through our practice and their appointments in such a way as to create a bond with a patient who always shows up, pays us, and refers everyone they know. Some of my worst hires have been thosewho on paper looked great because of years in the profession, only to find out that they were constantly changing our successful systems back to the way that they did it in their previous office, and had extremely poor people skills. Most of my best hires were those with incredible people skills and the desire to learn. No preconceptions, no changing our systems, just a hard worker whose goal in life is to make our patients love us.
- No way to manipulate the plan. Our profession is littered with offices that started a bonus plan, set a goal, and then after the staff successfully completes the gauntlet, finds that the doctor changes the rules so that they get no bonus. Kind of like playing cards when you were a little kid with your older brother or sister. No matter how you think you understand the rules to win, you always lose because the older sibling changes the rules after the fact. You must think this thru and make sure you never, ever manipulate the outcome of your bonus plan.
- Doctor is accountable as a team member. You are not above the law. You are one of the troops. I was always the first one there everymorning and the last to leave in the evening. At the end of the day, I was taking out the trash and helping to suck that soapy solution thru the vacuum lines. We were a team, and I held up my end of the deal. I never asked anyone to do something I had not done or wouldn’t domyself. If you let the team down you need to apologize, and do better. The yardstick you use to measure the performance of your team should be even more challenging for you. Leadership and enthusiasm filter down from the top, not up from the bottom. I always thought that if I was flying back from a speaking engagement, and the plane went down, they would go the funeral and be back the next hour producing just as much without me as they did with me. I was just a pair of hands and a member of the team. You can always tell when the staff embraces your bonus system and owns the process. When this happens, they push you to produce more and they come up with ideas to manage the practice. They will even be upset when you take time off from the practice. A successful bonus system is built on a new commitment from the doctor. You have to show up and deliver every day. It is “show time” all day long. The staff will take their cue from you. Don’t start this process if you don’t have the energy and commitment to take it all the way.
- Doctor places the bonus ahead of his/her income. Remember the overhead chart at the front of this article? If not, go back and memorize it. You get everything below the line. Our bonus check was always paid by the 10thof every month. Their normal checks were cut on the 1stand 15thof every month. That bonus check was paid separately so that the staff would understand that itrepresented an effort and skill that went beyond their salaries. That bonus check should be something you look forward to writing. We had a doctor from Chicago a few years back who went fromcollecting $30,000/month to over $90,000/month after implementing our bonus plan. I got a call about 9 months into this super successful strategy from her: “This bonus thing is just not working at all. I had to pay $7,000 in bonuses last month. I’m paying way too much money to my staff”, she said. I asked her if she was following our bonus strategy exactly. I reminded her that while the amount she spent on her staff was increasing, the percentage of the collections dedicated to staff compensation was actually going downand lowering her overhead. She said: “Yes, but that is just way too much to pay a staff. They do not deserve it. No office I know paysthat much.” I asked if she was just paying 15% to the staff above their base or BAM number. She said: “Yes”. I reminded her that while she was giving them 15%, she was adding 85% to her take home pay. Even though I tried to show her the insanity of removing the very strategy that tripled her production, stopped staff turnover and dropped her overhead by 17%, she did away with the bonus. It only took 45 days for her production to drop back to about $30,000/month. The money you spend on a successful bonus system will be the best return on investment you have ever made. Make sure there is no way you can mess this up.
- Doctor has the goal of having the highest paid staff in town. I modified it so that my staff was one of the highest paid in the United States. I was proud that my staff helped me maintain a low 50% overhead while allowing them to make more than any staff I have seen. They were averaging over $3,000/month/employee in additionto