4 reasons why your dental practice overhead is out of control

Here are some of the reasons why overhead can be out of control.

A survey of dental practice revenue and overhead appeared in the August 2015 issue of Dental Economics.1 The survey reported that, on average, dental practice overhead for 2014 was almost 75% of revenue, and specialty practices fared only slightly better.1 This was shocking to me, as it seemed that only a few years ago overhead averaged 60% of revenue. While the dental practices we work with have overhead percentages well below 75%, I felt that I would share some of the reasons why overhead can be out of control.

Not looking at the numbers

I find that most dentists are focused on some, but not all, of their important practice numbers. By focusing on cash in the bank, production, and collections, they overlook the impact of overhead on their net income. A practice can experience consistent growth through increasing revenue, but all that extra income can be absorbed by an increase in overhead costs.

There are industry averages that a dentists can use to compare overhead percentages to their practices. For example, the industry standard for the cost of dental supplies as a percentage of collections is 5% to 7%. If a practice has a higher percentage, I recommend looking into the purchasing system in the office, inventory control, and supply usage. A 1% decrease can mean thousands of dollars added to net income.

Too many appointment cancellations and no-shows

When a practice reserves time for a patient and the patient misses his appointment, that time is lost forever. More importantly, income is also lost because much of the overhead associated with the time is still incurred. Therefore, when production is lost, employee wages, rent, utilities, and other fixed costs inflate overhead percentage. Find ways to help your patients keep their appointments, and your overhead percentage will likely fall.

Employee theft

Statistics reveal that dentists are vulnerable targets for embezzlement. Estimates vary, but it's safe to say that approximately two in five practices will fall victim.2,3 This is because many dentists do not know how to protect their assets.

The most common form of embezzlement is the theft of collections. The theft of cash and checks is relatively easy, especially for an experienced embezzler. I say "experienced embezzler" because most embezzlers are not prosecuted. They simply move on to their next victims.

Embezzlement of cash and checks reduces the income of the practice and increases the overhead as a percentage of collections. Embezzlement through the unauthorized use of credit cards or the overreporting of hours worked can also increase overhead.

The implementation of controls to prevent embezzlement can raise trust issues with employees. I recommend that all employees be informed of the implementation of new controls as a way to protect them from unwarranted accusations.

Work more or make less

In many practices, there is an expectation by employees that each year they will receive an automatic pay increase. If an employee receives a raise, how does the dentist pay for it? Unless patient fees are raised, the dentist will have to work more or make less money. From my perspective, neither is a healthy option.

Some costs are bound to increase, such as rent and utility expenses. I believe fee increases are warranted annually to cover the rising cost of these items. Increases do not have to be substantial. Currently, I am recommending fee increases for fee-for-service patients of about 2% to 3%. Even if the practice is an insurance-based practice, the increase in the UCR (usual, customary, and reasonable) charges will put your insurance provider on notice that fees are increasing in your area. I understand this may require more record keeping when adjusting for insurance reimbursement, but I believe it is better than having to work more or make less.

References

1. Levin R. How does your overhead compare to national averages? Dental Economics website. http://www.dentaleconomics.com/articles/print/volume-105/issue-8/macroeconomics/how-doesyour-overhead-compare-to-national-averages.html. Published
August 26, 2015. Accessed September 16, 2016.
2. Schiff AM. Protection from embezzlement. Dental Economics website. http://www.dentaleconomics.com/articles/print/volume-106/issue-2/practice/protection-from-embezzlement.html. Published February 11, 2016. Accessed September 19, 2016.
3. Dental practice embezzlement is increasing. McGill & Hill Group website. http://www.mcgillhillgroup.com/content_display.asp?id=1246. Published July 2013. Accessed September 19, 2016


David J. Goodman, MST, CPA, is managing director of Lawrence B Goodman & Co. PA (lbgcpas.com) in Fair Lawn, New Jersey. As a member of the Academy of Dental CPAs, Mr. Goodman provides a unique perspective for dental practices. He can be reached at david@lbgcpas.com or (201) 791-8300.

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