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10 STEPS to a financially healthy practice

June 1, 2006
In order to build a thriving practice, there’s no doubt that the dentist must be an excellent clinician...
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In order to build a thriving practice, there’s no doubt that the dentist must be an excellent clinician, and that helping patients get and stay healthy is a doctor’s top priority. But what about keeping the practice healthy? Within the practice the dentist has two distinctly different and challenging roles - clinician and business owner. Both are equally important. As a CPA who has specialized in working with dentists for 30 years and as president of the Academy of Dental CPAs, I have found that having a profitable practice enables the dentist to do the exceptional dentistry he or she has been trained to do and have more control and more choices. Most dentists receive comprehensive training in school on the clinical aspects of a practice, but business management courses, although often quite good, are not as readily available. In this two-part series, I will discuss the 10 steps it takes to build a thriving and healthy practice, and give you a clear, concise road map to success.

Step 1: Know what you don't know

Dental practices, when viewed as a business, have a built-in need from their “market,” or patients. Unlike the 60 or 70 percent of small businesses that fail in the first three years, most dentists will do well. But doing “well” is not the same thing as becoming “wealthy.” When dentists start their practices, the first thing they need to know is what they don’t know. Then find someone who does know. Instead of trying to reinvent the wheel and develop money management techniques on your own, find a partner who has the right experience and expertise - in other words, a CPA who has worked with a lot of dentists. The difference is that a CPA with a thorough understanding of the unique financial implications of a dental practice will be better equipped to act as a true advisor. He or she can provide an analysis of your figures, rather than merely print out reports. The CPA can not only make the numbers add up, he or she can also help you make decisions and adjustments to meet your financial goals. Otherwise, you will make financial decisions in the dark. If I asked you to cross a two-lane highway on foot, you could do it. But if I asked you to cross the same highway blindfolded, you’d quickly realize that having clear vision and as much information as possible makes the journey less stressful and more successful. So, know what you don’t know and hire someone who does know.

Step 2: Don't start off your career with a bang

Professionals who spend years in college often graduate with a diploma and significant pent-up desire for material things. After years of self-sacrifice and living on mac and cheese, they now are going to make at least $60,000 or $80,000 a year. They feel they deserve some rewards, and they know just a few years from now they’ll be making $150,000 a year or more, so they can easily pay for that new BMW. The banks know this, too, and happily loan large sums of money to new graduates to fund this dream lifestyle. Don’t get stuck in the trap of spending like you’re going to be wealthy. When you live two years ahead of your income, you begin to work to survive - to pay that car or house payment. You can actually sabotage your ability to make the kind of money you need to fund the very lifestyle you want. You become forced to accept all patients, instead of having the freedom to be selective in attracting the type of patients who want the kind of dentistry you dream of doing. Couple this with not having the luxury of investing time in a new patient consultation that results in larger cases and more production per hour. Instead, try to discard the need for instant gratification and live two years behind your salary. Get your priorities straight, get the financial engine of your practice running smoothly, limit debt to optimize choices, and plan for the future ... but spend wisely.

Step 3: Set personal and professional goals

Answer this simple question: How much would you like to make this year? Be realistic. To begin setting goals, both personally and professionally, you have to start where you are now. Sure, we’d all like to make $200,000 or more, but first examine what is usual and customary and grow from there. For example, if you currently produce $250 per hour and your expenses run around 70 percent, you can easily see what you’d make by multiplying $250 by the number of hours worked and taking 30 percent of that figure. If you don’t like that figure, you either have to work harder, faster, or longer, or increase your hourly production. Set your goal and then devise a plan to get there. What do you have to do to increase your production per hour? Do you need to increase your education so you can do more or different procedures? Do you need to become less dependent on insurance? Do you need to improve your communications skills so you can “sell” larger cases? Do you need to find a way to take cost concerns out of the picture so more patients can get the dentistry they need and want? Determine what your financial goal is, then write it down and look to your expert (see Step 1) to help you make the decisions that will enable you to achieve your dreams.

Step 4: Budget and spend wisely

When it comes to meeting your financial goal, on one side of the equation is production or your practice’s income. On the other side are all the costs of running your business - i.e., expenses. To meet your goals, you not only have to identify the income you would like to achieve, but you also have to set a budget for the expenditures and spend wisely. The biggest piece of overhead is your staff. You can look at the money spent on staff two different ways. First, you can think of it as an expense. Or you can look at it as an investment in your practice, patients, and success. I often tell doctors that 95 percent of their assets go home every night, and you’d better hope they come back to work the next morning. Get the right people on your team, give them the tools to deliver the productivity you need, and make it a win/win situation so you can achieve your financial goals. There is an easy way to identify how many people you need and what you should be paying them. Consultants can determine the number of team members you need based on your type of practice, number of patients, and mix of procedures. You can also survey your market to find out the “going rate” of pay.

When it comes to other expenses that make up your overhead, remember there is no silver bullet. Often several areas may be off a percent or two, but when you add them up, all of a sudden profitability is being impacted as much as 5 or 6 percent. I know practices that successfully contain overhead at 50 to 60 percent. Others run 60 to 70 percent. There are many variables, some of which you can control and some of which you cannot. Keep in mind, if the problem was so obvious, you would have caught it quickly. To budget, again look for historical data - what things have cost in the past - and then set expenditure limits by category and monitor them on a month-to-month basis. Look for abnormal activity, try to identify what is causing the abnormality, and then determine if the budget was inappropriate to begin with. You can make adjustments or fix the issue that’s causing overhead to increase. Your financial advisor or CPA can assist you with this process. Also, it is imperative that you eliminate products and programs that add to overhead without adding value to the practice, such as billing patients and carrying accounts receivable. Instead, outsource these to companies like CareCredit patient financing, which have the expertise and efficiency to minimize costs and enhance your productivity. Recently, the Academy of Dental CPAs did a study on the impact of CareCredit on key practice metrics and found that those with the program increased production an average of 25.3 percent and reduced accounts receivable by 37.7 percent. This is a significant increase and would go a long way in helping doctors meet their financial goals.

Step 5: Investing in technology - calculate the benefits

Larger capital expenditures are not part of your operating overhead. There is no magic formula to help dentists determine when and what to invest in when it comes to equipment and technology. When considering a large capital expenditure, you must evaluate the costs, potential savings, and the tangible and intangible benefits. You don’t want to be the first to put aside old, tested, and proven methods, nor do you want to be the last to adopt the new. So, have a restless curiosity and be proactively aware of what’s happening in the industry.

Some investments make absolute financial sense. For example, if you add a piece of equipment, such as a CEREC machine, that enables you and your staff to do something that you were paying another company or lab to do, then you are taking money out of one pocket and putting it in another. But if you are considering buying new equipment to replace existing technology that already works, the decision might not be as obvious; you would need to consider the intangible benefits. Will it save you time? Will it reduce stress on your team? Will it draw more patients to your practice? Will it enhance your clinical capabilities? Is it consistent with the model you want your practice to follow? Be very, very careful to critically evaluate these intangible benefits.

Being a clinician comes naturally to dentists. It’s the business aspects of the practice that can be frustrating and challenging. Even though there is no one formula for success, these first five steps will give you a financial foundation on which to build your practice. In Part 2 of this series, I will outline the next five steps that will get you on the road to a financially healthy practice.

Raymond “Rick” Willeford, MBA, CPA, CFP®, is president of Willeford Haile, CPA, PC, and Willeford CPA Wealth Advisors, LLC. As a fee-only advisor, he has specialized in providing financial, tax, and transition strategies for dentists since 1975. Willeford is the president of the Academy of Dental CPAs, a consultant member of AADPA, and is available as a speaker nationwide. Contact him by phone at (770) 552-8500, or by e-mail at [email protected].

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