It's the profit that matters!

April 1, 2002
Most of you are missing the point! Dentists talk constantly about gross revenues.

By Roger P. Levin, DDS, MBA

Most of you are missing the point! Dentists talk constantly about gross revenues. But gross revenue is merely a measure of "busyness"– not a measure of how much income or profit you will have. The bottom line: only practice income counts – not production, collections, or gross revenue. Dentists seek to increase their income to fund savings and retirement programs, since the stock market is no longer helping as much. Now, more than ever, it's practice income that will make the difference.

No more instant success

Most financial advisors these days tell investors to expect 8 or 9 percent returns in the market. It is a realistic view. If you keep in mind that at 7 percent growth, money doubles every 10 years, you only have so many "doublings"ahead of you in your lifetime. Also, keep in mind that, early on, you will likely have smaller amounts to invest than in your later, more productive years. That is why this column is focusing on income.

Your goal: Increase income

Plainly, dentists need to increase their income. Many dentists unfortunately are outliving their money. Not only must we protect ourselves financially for the remainder of our lives, but we also must ensure a good quality of life in our retirement years.

Maximizing the income from the practice is now the single most important quality of life factor for dentists. You may interpret this statement to mean that the idea is to work harder and squeeze in more patient visits. Actually, the opposite is true. Too many practices are run at a high volume and a high stress level with frustration and a lack of satisfaction as the result. Dentists mistakenly believe this is necessary to handle patients and increase practice income. The truth is that volume does not produce the higher incomes (except in orthodontics.)

High gross revenue does not guarantee success

Gross revenue is not the important number! Look at the following example:

o General practice with $625,000 in gross revenue and a 49 percent overhead. Income equals $318,750.
o 47-year old periodontist with a net worth of $3.5 million, not including house or practice. He has invested at least 22 percent of his income in the stock market since he started in practice. He rarely sells his stocks.
o General practice with $1.3 million in gross revenue and an 89 percent overhead. Income equals $143,000.

The first two dentists look pretty good. The third stated that he needed to increase income to fund his children's college tuition and begin a retirement program. He also stated that his practice was disorganized and experienced a great deal of daily breakdown.

Some dentists can maintain a high-volume, high-gross revenue practice. They know how to manage overhead without compromising income and time. Many high-revenue practices are nowhere near as healthy, however. The key, again, is to focus on profit, not just gross revenue. Dentists must budget in all categories.

They must also evaluate trends in their practices. For example, one current trend is a gradual increase in the labor percentage relative to total revenue. If you are in general practice and your labor percentage is over 25 percent, you need to have an excellent rationale for it and understand that the return on investment from your staff is not where it should be. While this is merely one of many numbers, it gives you an idea of how to evaluate the meaning of certain budgetary statistics in your practice.

Many dentists work extremely hard and and have very little to show for their efforts. Some will even outlive their money. Because I care about every dentist in our profession, I prefer instead that you be like one dentist who recently said to me, "I am so proud that I have done well enough to buy each of my two children their first home."

Roger P. Levin, DDS, MBA, president and CEO of The Levin Group and the Levin Advanced Learning Institute, provides worldwide leadership in dental management for general dentists and specialists. Contact The Levin Group at (410) 654-1234.

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