Return on investment (ROI)is a significant component of running a successful dental practice. Success is much more than money in, money out. The longevity of a practice relies on smart, strategic, long-term planning and strong ROI on assets brought into the workplace, including human capital and equipment.
To help encourage a large purchase, often a sales representative will drop off an ROI analysis. According to these numbers, the ROI looks incredible! Who wouldn’t invest? But there are other factors that might be forgotten or possibly difficult to quantify that you’ll need to review to be able to predict the investment’s return and overall impact on the practice.
While all the calculations provided by the sales representative will be in favor of whatever they are selling, many dentists don’t realize such great bottom line benefits as they aren’t correctly calculating the long-term ROI. So, what are some common factors that dentists forget when calculating ROI? The most common are implementation investment, cash turnover, opportunity cost, and, if things go sideways, the sunk cost fallacy.
There are very few investments that are plug and play. In fact, most investments have an upfront cost in the form of training or implementation. This is as true for purchasing a CAD/CAM system as hiring a new hygienist. When you receive pricing from a third-party sales representative, does it include costs for training and support to implement the new equipment? If you’re looking at hiring a new staff member, do you have a documented onboarding and training process? If the answer to either of these questions is no, it is worth looking critically at the investment you will have to make to implement it (whether equipment or human capital).
If training and onboarding are not factors that you have expert access to, how do you start to quantify what it will take? Start by answering the following questions and evaluating the impact they will have on your bottom line: who will be learning the new equipment or onboarding new staff? What is their current capacity? How will their contribution to production and collections be affected by this investment? If you hire a new administrator to help with scheduling and delegate training and onboarding to your billing department, you can expect your collections to decline during this phase.
Diving deeper into the scenario of hiring, let’s say you create a forecast. While the new employee is being onboarded, you know that you will lose money, but as soon as they are trained and working at capacity, they will double your revenue. From your historical data, this looks like a great investment. But historicals will lead you astray, as your billing department may be spending half of their time onboarding the new administrator. As such, you can expect your cash flow to decrease since the billing department has less time to collect money. If you’re not sitting on a lot of cash, you can go from an uncomfortable situation to an impossible one very quickly.
When we look at an investment, we know it is important to consider the net effect on the practice’s bottom line. Something else to consider is cash turnover, which simply measures the efficiency of the dollars you spend on an investment compared to its ability to generate dollars in the bottom line (note: it does not measure production which is different from collections). So, the less you invest and the more money that investment brings in (or saves), the higher and more favorable your cash turnover will be.
This ratio is especially important when you want to improve your cash position. If this is the case, you need every dollar invested to put dollars back into your bank account as quickly as possible. This could mean that you forgo a very profitable but long-term investment for a short-term gain, as the immediate returns (or lack thereof) on a long-term investment mean you do not have the cash to operate.
From the higher potential profit, we see that hiring a hygienist will have a greater effect on your bottom line. But when we factor in the annual cost it takes to realize that profit, the scanner is significantly more efficient with a turnover of 18.44. If you are looking to improve your cash flow with as little risk as possible, the scanner is the better option.
The market is laden with opportunities, and many of them are good. How do savvy practice owners get the most out of their time and money? You make sure to compare opportunities against each other. This can be as simple as the comparison in figure 1, where we see cost, profit, and efficiency, or an in-depth analysis of many options on the market. The important thing is to consider what else you could realistically do with the time and money you are about to invest. When you look for a comparable opportunity, you will either validate your original plan or find a better investment, both of which are great scenarios.
Sunk cost fallacy
Everyone who has ever owned or invested in a practice knows that surprises happen. No matter how detailed our forecasts and projections may be, there will be something that changes the game. When this happens, it is important to consider the investment you are making in the future, not what you have spent in the past. It may be a small bump in the road, or it could be the release of the iPod to your MiniDisc.
The sunk cost fallacy is what shackles good clinics to bad investments after analysis and reason says you shouldn’t. It is the idea that because you have already spent money on something in the past, you should continue to do so in the future. Let’s use the example of a scanner. Whether you use it or not, you have to pay the monthly installment. But let’s suppose it takes up an operatory and you continue to try to enforce its use, even though team members gripe about using it and constantly express preference toward impressions (the culture of such a situation is beyond the scope of this article). You haven’t seen the ROI that the sales representative showed you. In fact, you’re less profitable than you were before, and now your staff members are not happy with the workflow. Because you spent the money on the scanner, it is easy to think, “Well, we spent the money so we will continue using the scanner.” Even though you will be making a monthly payment on the scanner for the next seven years, rerun the ROI analysis with what you know. Oftentimes, practice owners will realize it is more profitable to let go of bad investments rather than double down.
When the next sales representative gives you an ROI analysis or you consider adding a hygienist, take a deeper look at what implementation would require in your clinic. Consider the time and money it will take to implement as well as the effect on your cash position. Once you have a clearer picture of what it will take to get started, compare against other opportunities and always remember to review your forecast to actual numbers. Every practice owner has made investments that didn’t go as projected, but the most successful ones are prepared to pivot.
Editor's note: This article appeared in the September 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.