You are a world-class clinician, a dentist par excellence, with advanced dental training and skills. You can read radiographs and charts and diagnose, but can you analyze your business’s health just as well as you can a tooth? If the answer is no, and keeping more of the money you work for is important to you, then you better learn quickly. The good news is that the accounting world has a gift for you, a tried and true diagnostic to assess the health of your business: the Profit & Loss Statement.
What is Overhead and Why is it Important?
Overhead, also known as indirect or burden cost, is a crucial part of any business’s overall functioning. Overhead includes the daily costs of running a business. Overhead is important, especially in a dental office because, in the current competitive market, managing overhead can help increase the profit margin of practice and help you make smarter decisions about how to grow and improve.
What is a Profit and Loss Statement?
A Profit and Loss (or P & L) statement is a complete financial statement that reports the revenue, costs, and expenses of a particular business for a specific period. P & L statements usually report these values for each quarter or on an annual basis. P & L statements provide valuable information about the capacity of a business to turn a profit.
Understanding the P & L statements can help you in your dental practice’s revenue and cost management, especially the overhead. With this statement, you will no longer be shooting from the hip when it comes to directing and managing the office.
After reviewing the P&L for the dental office you can determine what the overhead for the office is overall and drill down deeper by individual departments or areas of the business.
First, all personal expenses for the Doctor need to be removed from the office expenses such auto, healthcare, CE classes, doctor’s salary and payroll taxes, etc. All these things can be a deduction on your income taxes which should be discussed with your accountant. For the purpose of determining true office overhead, these items are not considered as they are not part of what keeps your office running.
Sometimes depreciation and amortization show up on a P&L, and these need to be removed from the expenses. Again, this is part of your income tax deductions, but it is not real money spent to run the office.
The income is the net collections minus any patient refunds. All cash should be added to the net collections. If the cash is not added to determine overhead, the percentage will be off as it will have the true expenses and not the accurate true collection amount.
Fixed Costs Versus Variable Costs
Fixed costs are those that remain constant and steady over a period of time no matter what the output levels are of the dental practice. Fixed costs are items like rent, debt payments, or business insurance. Variable costs, on the other hand, are those that correlate to the changes in the dental practice’s activity and levels of output. Thus, variable costs change in accordance with the changes in the business. This would be items like lab fees, supplies, electricity, or payroll.
I’VE SEEN DOCTORS TAKE TWO APPROACHES TO THESE.
EITHER, THEY’RE COMPLETELY OBSESSED WITH THEM AND BURY THEIR NOSES IN THE NUMBERS
OR THEY TOTALLY IGNORE THEM LIKE AN OSTRICH WITH THEIR HEADS STUCK IN THE SAND.
EITHER WAY, YOU COULD DO BETTER
IN THE FIRST WAY!
YOU’RE JUST MOST LIKELY GONNA BE TRIPPING OVER DOLLARS TO GET TO PENNEY’S AND THE OTHER
WELL, YOUR HEAD’S BURIED.
YOU HAVE NO IDEA WHAT’S GOING ON.
SO LET ME TELL YOU SEVERAL WAYS ON HOW WE CAN APPROACH YOUR OVERHEAD EXPENSES
IN A BETTER WAY FOR STRATEGICALLY,
THAT WILL EMPOWER YOU TO MAKE BETTER DECISIONS FOR THE FUTURE OF YOUR DENTAL PRACTICE.
OKAY, THE FIRST THING I WANT YOU TO KNOW IS YOU CANNOT CUT YOUR WAY TO PROSPERITY.
THERE IS ALWAYS A BOTTOM, AND IT’S CALLED ZERO.
WHAT I’D RATHER SEE YOU FOCUS ON IS GROWING THE TOP LINE.
THAT’S YOUR COLLECTIONS.
IF YOU CAN GROW THE TOPLINE THAN YOUR OVERHEAD EXPENSES WILL FALL INTO ALIGNMENT.
REMEMBER, IF YOU KEEP CUTTING YOUR WAY, JUST BECAUSE YOU FEEL LIKE THE AMOUNT, YOU’RE
ON MARKETING OR ON SUPPLIES OR EVEN PAYROLL JUST SEEMS TOO MUCH, IT FEELS TOO HIGH.
YOU’RE MAKING HAPHAZARD DECISIONS, AND IT’S NOT GONNA HELP YOU TO IMPROVE YOUR
YOUR ROLE IS TO BE A CEO AND A CFO AND COO AND LOOK AT THOSE NUMBERS IN A SMART, LOGICAL
AND AGAIN, GROWING THE TOPLINE IS A MUCH BETTER WAY TO GET YOUR EXPENSES INTO
ALIGNMENT THAN JUST TO SLASH AND BURN
AND THROW A HAND GRENADE INTO THE MESS AND END UP WITH EVERYTHING SPLATTERED AGAINST
ALL RIGHT, THE SECOND IDEA.
STOP TRIPPING OVER DOLLARS TO GET TO THOSE PENNIES.
SO WHAT I MEAN BY THAT,
ALL TOO OFTEN WE JUST TAKE ACTION FOR THE SAKE OF TAKING ACTION.
OR WE’RE PLACING OUR ENERGY AND EFFORT INTO THE WRONG PLACES,
PLACES THAT WON’T PRODUCE AS MUCH OF A RETURN AS IF WE PUT HIM SOMEWHERE ELSE.
WHAT DO I MEAN?
FOR EXAMPLE, YOU SEND YOUR ASSISTANT TO SPEND HOURS ONLINE SEARCHING
BETTER DEALS ON GLOVES AND GAUZE AND WHATEVER ELSE YOU NEED FOR THE OFFICE.
WHEREAS, THAT TIME, ALL THAT EXPENSE OF THE PAYROLL THAT YOU’RE PAYING THAT PERSON TO
LOOK FOR SAVINGS?
A FEW CENTS PER UNIT
COULD HAVE BEEN PUT TOWARDS REACTIVATING SOME YOUR BIGGEST TREATMENT PLANS
OR GETTING YOUR HYGIENE PROGRAM FILLED OR DOING A NEW MARKETING CAMPAIGN TO BRING
IN MORE CASES AND CLEAR ALIGNERS,
WHATEVER IT MAY BE, THESE ACTIVITIES AND THIS EFFORT WILL PRODUCE MUCH BIGGER RESULTS
THAN TRYING TO GO OUT ON YOUR OWN AND BYPASSING YOUR SUPPLIERS, YOUR VENDORS AND
SOURCING YOUR OWN MATERIALS.
TRUST ME, STOP TRIPPING OVER THOSE DOLLARS TRYING TO GET TO THE PENNIES.
KNOWING YOUR FINANCIAL NUMBERS AND EXPENSES IS LIKE ANYTHING ELSE IN YOUR PRACTICE
BEFORE MAKING A TREATMENT PLAN WITHOUT DOING PERIOD CHARTING FIRST.
TAKE A LOOK AT X-RAYS AND OTHER DIGITAL IMAGERY
THAT’S DATA INFORMATION THAT YOU TAKE IN. THE SAME THING APPLIES TO MAKING DECISIONS FOR
TAKING THE INFORMATION, THE OVERHEAD EXPENSES AND LOOKING WHERE THEY HIT ON
AND KNOWING WHERE WE CAN HELP MAKE A CHANGE BEFORE YOU MAKE A DECISION.
WE DON’T WANT TO WING IT, SO WHAT YOU’RE GONNA DO IS GO LINE BY LINE LOOKING YOUR FIXED
AND VARIABLE EXPENSES.
SO, THINGS LIKE MORTGAGE AND, DEBT EXPENSES AND ALL OF THOSE THINGS THAT ARE MORE SET
WILL KNOW WHAT THOSE ARE NOW, AS A PERCENTAGE WE’LL SEE, WILL DROP AS YOU
YOU CAN’T CHANGE THOSE UNLESS YOU RE-NEGOTIATE YOUR RENT OR YOU GO AND RE-FI AND
RESTRUCTURE YOUR DEBT.
HOWEVER, THINGS LIKE BACK OFFICE SUPPLIES, FRONT OFFICE SUPPLIES AND MARKETING ARE A LOT
AND THEY WILL CHANGE AS YOU MAKE CHANGES IN THE PRACTICE.
SO KNOW WHAT THOSE COSTS ARE AND FIGURE OUT THOSE PERCENTAGES.
THE GREAT THING IS, ONCE YOU HAVE THOSE PERCENTAGES IN PLACE, WE JUST SIMPLY COMPARE
THEM TO THE BENCHMARKS THAT WE KNOW TO BE TRUE.
AFTER LOOKING AT HUNDREDS AND THOUSANDS OF PRACTICES YEAR AFTER YEAR,
WE WILL SEE WHERE YOU FALL OUT, AND THEN YOU CAN START TO MEASURE HOW WELL YOU’RE
AND WHICH DIRECTION YOU’RE MOVING WITH YOUR OVERHEAD EXPENSES.
SO WHAT DO YOU DO WITH THOSE PERCENTAGES?
HOW DO YOU UNDERSTAND WHERE YOU FALL OUT?
A FEW SIMPLE STEPS YOU NEED TO TAKE
GATHER YOUR INFORMATION, SO FIRST YOU NEED YOUR COLLECTIONS FOR THE GIVEN PERIOD YOU’RE
WHETHER IT’S A MONTH, QUARTER OR THE YEAR, HOWEVER, ELSE YOU WANT TO BREAK IT DOWN.
YOU NEED THE COLLECTIONS FOR THAT TIME PERIOD, AND THEN OBVIOUSLY YOU NEED YOUR
EXPENSES FROM THAT TIME PERIOD.
TO GET THOSE, RUN A PROFIT AND LOSS STATEMENT, YOU COULD DO YOURSELF IN QUICKEN
AND YOU CAN GET IT FROM YOUR BOOKKEEPER OR YOUR CPA,
WHOMEVER YOU WORK WITH ON YOUR FINANCES AND THEN SIMPLY CRUNCH THE NUMBERS.
OF COURSE, LET’S MAKE THAT A LITTLE BIT EASIER FOR YOU.
I AM HAPPY TO GIVE YOU MY PROFIT AND LOSS MONITOR, AN AMAZINGLY SIMPLE BUT POWERFUL
SPREADSHEET THAT YOU CAN USE.
YOU TAKE ALL YOUR EXPENSES; YOU ENTER IT IN. IT WILL CALCULATE IT AGAINST YOUR COLLECTIONS
AND THEN ALSO COMPARE IT TO WHAT WE KNOW
TO BE THE BENCHMARK STANDARDS AS FAR AS WHAT YOUR PENAL EXPENSES SHOULD LOOK LIKE
RELATIVE TO YOUR COLLECTIONS.
I’M GIVING THAT AWAY FOR FREE.
I DON’T WANT ANYTHING IN RETURN FROM IT OTHER THAN FOR YOU TO BE HAPPY AND BE MORE
IF YOU WANT THIS, PING ME BELOW, SEND A NOTE IN THE COMMENTS, SAYING YES OR SEND ME AN
EMAIL YOU WOULD LIKE IT.
I WILL SHARE IT WITH YOU.
WE’LL TAKE A LOOK AT IT AND I WOULD LOVE TO HAVE A CONVERSATION WITH YOU ABOUT YOUR
WE CAN TALK THROUGH IT AND SEE WHAT WE CAN DISCOVER.
REMEMBER NO MORE SHOOTING FROM THE HIP.
PULL YOUR HEAD OUT OF THE SAND.
DON’T GO TOO DEEP WITHOUT KNOWING WHAT YOU’RE GOING FOR AND BE STRATEGIC IN YOUR
TO DO THAT, YOU GOTTA BE SMART ABOUT YOUR NUMBERS.
DON’T BE AFRAID OF THEM.
DON’T HIDE FROM THEM.
IN THE MEANTIME, BE WELL.
These are guidelines for % of total net collection for a healthy dental practice:
Depending on the stage of growth needed for the practice. It can be higher as long as there is a good ROI (return of investment) for each marketing source.
Staff Payroll – 20% to 25%
Staff expenses include all wages, retirement, health insurance, vacation and sick days paid, temp assistants wages, and bonus. Staff expense does not include Doctor or associate salary or taxes.
Back Office Supplies 4-6 %.
This does not include any expenses for equipment, repairs, or supplies for ortho, clear aligners (e.g., Invisalign, ClearCorrect), or CEREC blocks (which should be categorized under Lab Expenses).
Front Office Supplies 1-2%
This is for the necessary goods for operating the front desk to include paper, printer ink, telephone service, and postage.
If this percent is too low, it is a flag that there are not enough crowns or inlays performed in practice. Too low of a number can correlate with a low case acceptance of crown and bridge with patients having fillings done instead of a lower rate of diagnosis. This would be lower if there is CEREC, and blocks are not being accounted for here.
The BIG question: What should my overall overhead be?
The overall overhead of the Office should aim for no more than 40-50%. Historically, somehow it got out there that 60% is the target, but we know this can be much lower with the right strategies to grow collections per hour while having systems to maintain appropriate spending.
How to Manage and Decrease Overhead Costs
Due to the competitive market, dental practices need to manage their overhead costs to increase their profit margin. Monitoring the spend on dental supplies as a percent of revenue is important and can be augmented with careful planning and strategizing. Some strategies that can be adopted include:
- Understanding how much is spent over specified periods. It is important to check on expenditures over a period of one week, one month, and that quarter. Knowing your normal spend is like having a sixth sense, you will notice when there’s a chance.
- Once the variable costs have been monitored, a budget should be created for them.
- This budget should specify amounts for the front office and the back office.
- Separate sections should be dedicated to each expense and an allocated budget should be laid out.
- Manage and monitor the inventory to ensure that nothing is going to waste. Also, managing inventory will allow you to order only what is needed when you see inventory is running low.
- Seek alternative products and materials at a lower cost, assuming you are not sacrificing the quality of care.
- As a last resort, you can cut payroll or the office headcount. However, this is a very serious step that should be done with a thorough evaluation and weighing options. Unless there is an obvious “bad apple” on the team to be removed, I believe the best way to improve payroll expenses is to grow your top line, which means to do more valuable dentistry. You can’t cut your way to prosperity.
As the CEO of your office, it is important to understand your dental practice’s financials as you lead your office. The balance between your revenue and expenditures is an essential part as this is what will help you generate a profit and make decisions on what and how to improve.
Profit and Loss statements need to be read and understood, not just glanced at, as they can tell a story. Owning your own dental office is not an easy task, and being financially stable is difficult enough as it is, so arm yourself with information that will make a difference, get a grasp on your P&L and become financially literate.
Send me an email, and I will give you an easy to use a P&L monitoring tool to evaluate how you are managing your expenses.