by Michael Dolby, DDS, FAGD
From the beginning, dentists have had unique ways of showing their superiority within the profession. Back in the days of Painless Parker, success was measured by the number of teeth you had strung around your neck by the end of the day. Today, boasting of high production numbers seems to be the new benchmark of success for a doctor's practice. This quest for larger and larger production numbers has directed many dentists to prematurely expand their offices to accommodate more chairs, build multiple offices, or add an associate dentist to contribute to the goal.
The association of higher production numbers as a direct measure of financial success could not be further from the truth. Managing staff, staying current with the latest dental techniques, and, of course, keeping your patients and team happy can often take dentists to their breaking point when they discover their so-called successful, high-producing dental practice is now experiencing financial challenges due to out-of-control practice overhead.
I often hear doctors say that what they really want is to "just do the dentistry" and not have to figure out the "numbers" part of the practice. Although it would be nice to be able to afford the luxury of a chief financial officer, this is not an option for the majority of practices. Mastery in the "numbers" area is an absolute must if you are to experience the maximum financial returns you have worked so hard to achieve.
Knowing your numbers
It has been estimated that less than 20 percent of doctors surveyed know the financial health of their practice, and a shocking 10 percent can explain only minor details of their financial position within the practice. With statistics like this, it's no wonder the majority of dental offices are not as profitable as they could be. The financial numbers of your practice are equivalent to the speedometer gauge in your car. This vital information lets you know whether your practice is growing or shrinking, whether your marketing efforts are meeting expectations, and can be useful in detecting trouble areas before they become too cumbersome to correct.
When asked how many new patients they saw last month, most doctors will say, "Well, I think as many as the previous month." Or when asked what their gross production number was, they often will say, "About the same as the previous month." The fact is, when we resort to guessing about financial details, the practice is most likely not as profitable as it could be. Mastering the financial health of your practice is the first step to creating a peak-performing profitable practice.
The Big 3
Controlling your practice overhead and the financial health of your practice is based on a few critical items I like to call the "Big 3":
1) Staff compensation
2) Dental supplies
3) Laboratory expense
These three categories play an extremely important role in successful overhead management and account for approximately two-thirds of total practice overhead. If you can commit to mastering control over the Big 3, you will soon reap the financial rewards for the rest of your career.
Converting the Big 3 categories into individual overhead percentages is very simple. Take the total in each of these categories and divide them by the total net collection number for the month or year to date. For example, if your total staff compensation for the year is $115,000 and your total net collections is $500,000, then your total staff overhead percentage would be 23 percent.
Staff compensation
The way most doctors begin to cut overhead is by trimming the number of staff members they employ. Sometimes this is a viable strategy, but not for the majority of practices. These practices are usually not overstaffed; they are simply underproducing for the amount of staff they have. When you have one hygienist, one front-office receptionist, and one dental assistant and you are still having trouble getting your staff overhead percentage under control, cutting the size of your team is not the answer. Discovering ways to increase the amount of production with the same team in place is the quickest, most efficient strategy for controlling this overhead category.
Staff compensation overhead control is probably the most controversial in regard to what is included in this category. I have heard every explanation and rationalization under the sun from "management experts" around the country about what should be included or, more importantly, left out of the equation. From my perspective, it's as simple as this: You include everything that it costs you to have every staff member on your team. Don't make it any more complicated than that! Include the salary or hourly wage, benefits, taxes, employee perks — everything that makes up their total compensation packages. Think of it like this — if it costs the practice money to have this person show up everyday, then include it in the total!
An appropriate overhead percentage for total staff compensation should be between 20 and 23 percent of total net collections each year. If you are experiencing challenges in controlling the percentage of staff compensation, the first and most effective line of defense is through increased production. If — and only if — you have reached the peak of your production potential with the current assembly of team members, then you may consider reducing the size of your team.
Dental supplies
In this advanced age of bonding, pressed ceramics, and high-tech gadgets, it's easy for doctors to be drawn into buying all of the latest and greatest materials and high-tech "toys," only to witness the supply room shelves grow with high-tech promises that did not live up to expectations. The incredible arsenal of supplies that is required for today's most routine dental procedure is amazing. Part of mastering overhead is not only to choose the best materials, but to obtain them at the best prices.
It's OK to try new products — I certainly recommend that all doctors do so to stay current with the best dentistry has to offer. However, making smart purchase decisions is the key to success. Don't be tempted to be the first on the block to use a new, "revolutionary" product. Use products that have a solid name behind them along with credible research. The first generation of most products tends to be more of a market test, with the more reliable, proven product emerging in the second and third generations.
Negotiating with dental supply companies is a must for all practices. Once you determine the core supplies you need in your office, find a reliable company that will give you a discount if you purchase all of your supplies through them. You will be surprised just how willing companies are to offer special incentives to have your business. If you don't ask, you'll never know!
I do not recommend having a team member spend hours trying to find the best deal on supplies, only to lose valuable practice time and possibly create unnecessary staff overtime. Saving a few bucks on Brand X bonding agent may end up costing you much more because of remakes and lost patient confidence. Managing dental supply overhead is important, but not at the expense of increasing staff overhead or losing precious production time.
An appropriate yearly overhead percentage for dental supplies is between 5 and 7 percent of total net collections. Some months may be over the allotted range, but the year-to-date percentage is the true indicator that you are managing this department well.
Laboratory expense
I have always been amazed that some doctors actually brag about paying incredible fees for a single restoration as if it were "successful" to increase overhead in this area. I know what you're thinking: But you have to pay to receive high-quality work. I'm not suggesting you start sending your work to the Far East for $39 PFM specials, but I am suggesting that you examine what you get for the money you pay. Like any good businessperson, ask yourself: Would it be possible to receive the same high level of quality at a reduced price?
Being on the faculty of the Pacific Esthetic Continuum in San Francisco, I have the opportunity to speak with many different laboratory representatives who are producing this high-quality dentistry. I have asked several if they would be willing to provide a discount for the rights to a $100,000 yearly lab account. To date, not a single person has said no! Think about it — wouldn't any smart businessperson be willing to provide some sort of incentive in return for a constant influx of work? The answer is most definitely yes.
Lab expenses can be an indicator for how well gross production is running in the practice. If you are having trouble with production, your lab expenses may be too low. To help increase gross production, diagnose more comprehensively with indirect restorations. This will more than likely solve the problem.
Total laboratory expenses should be in the 10 to 12 percent range. This figure may even be as high as 13 to 14 percent for very high-producing, aesthetic practices.
Take control today!
The management of practice overhead is not a biannual or quarterly event — it is a daily and monthly event. To control the overhead monster, we must be willing to step up and tame this beast everyday. Once the correct business systems are in place and a team is ready to support this goal, overhead control takes minimal effort with incredible results.
Don't get caught up in boasting about big production numbers. Know with absolute certainty that the creation of predictable production combined with the lowest overhead percentage possible is the true definition of financial success in the dental office. Once you have achieved control over the Big 3, you will have the tools to begin controlling the remaining overhead areas in your practice for maximum profitability. I urge you not to make knee-jerk decisions in your quest to tame practice overhead, especially when it involves the possibility of reducing the size of your team. Proper counsel with a highly trained practice-management coach can be most helpful.
Without a concentrated effort to manage practice overhead and master the "numbers," ultimate financial success will constantly elude you.
