The path to financial success
Providing excellent patient care is a dentist’s prime purpose.
Providing excellent patient care is a dentist’s prime purpose. Quality care has many components, including a practice’s commitment to superior dentistry, the clinical excellence of the doctor and team, an awareness of new materials and technologies that can improve treatment, and a customer service philosophy that treats every patient like a VIP. Levin Group also believes strong practice-management skills are critical to providing the best care possible to patients. A well-run practice with data-driven systems allows you to spend most of your time chair-side with patients rather than on administrative matters. Hence, practice management is critical to the success of any practice.
Key performance indicators
One of the innovations we began in the mid-1990s was the use of key performance indicators, or KPIs. While this management technique had existed in the business world for some time, many dentists were attempting to review huge reports generated from new software systems to understand practice performance. Other doctors were looking only at a few statistics, including practice gross revenue and doctor income. Before the use of KPIs, the information needed to properly understand practice performance was not well understood by most professionals. That type of actionable information also was difficult to access in software programs, often resulting in poor decision-making by dentists.
KPIs are no more than 12 to 15 key financial factors that drive a practice. They represent a statistical snapshot of how a practice is doing, and they can be evaluated in minutes. Reviewing 12 to 15 KPIs weekly allows dentists to see if their practices are moving toward their goals, visions, and profitability. When all KPIs are within acceptable ranges, no further action is needed. If a KPI is below or above a range, then further evaluation of that area should occur.
KPIs act as early warning signals. By using KPIs, you can quickly access information about positive or negative trends in your practice and make necessary adjustments. KPIs eliminate the need to sift through 40 pages of reports to find 45 statistics. Once reviewing KPIs becomes a habit, you will have a better sense if your practice is heading toward success.
Examples of KPIs
The following KPIs are standards for most dental practices and many of the indicators also apply to most businesses:
❏ Adjusted production
❏ Production/collection ratio
❏ Number of new patients
❏ Total of accounts receivables
❏ Accounts receivables 30-, 60-, and 90-day aging
These are top-line statistics that provide a quick snapshot of overall practice performance. Still, there are secondary levels of KPIs that can be equally important. These might include:
❏ Average production per patient
❏ Average production per new patient
❏ Staff labor cost percentage of revenue
❏ No-show and last-minute cancellation rates
❏ Number of ____ procedures performed
Changes in each of these KPIs will have a specific impact on your practice. For example, increased no-shows and last-minute cancellations can negatively affect scheduling and waste 5 percent or more of practice production annually.
Next, identify any other areas of interest or concern. For example, you might want to know the amount of cosmetic dentistry your practice performs. If this is a key driver representing a significant portion of practice production, it may be added to the KPI list.
Nevertheless, the list should not include more than 15 items. If KPIs grow beyond that number, you probably are looking at less-than-vital information.
Translating KPIs into income
One of the most important KPIs to evaluate is doctor income. Levin Group defines doctor income as all salary, benefits, and profit paid to the doctor(s) as an owner. While there are many ways to define this, we have a specific budgeting model that reflects doctor compensation and profit paid to the owner, who is usually the doctor, as well. This KPI is critical to the doctor’s becoming financially independent.
Many dentists are still unable to retire comfortably by age 60. Practices must monitor the goal of doctor income. During the stock market bust in the late 1990s and early 2000, many doctors experienced significant losses that they still have not fully recouped. Top economic advisors think stock market returns during the next 10 years will be relatively low, and a conservative approach needs to be taken. Based on these projections, KPIs become more important, especially in evaluating and monitoring doctor income.
I think that most dentists view their practices as extensions of their personal lives. A well-run practice using data-driven systems will provide an excellent quality of life for the doctor and a path to financial independence. Our definition of financial independence is when work becomes a choice rather than an obligation. We do not advocate you retire because you can, but rather choose to practice because you have passion for your work, practice, and patients. To reach financial independence, monitor KPIs in your practice and your personal financial life. One way to start is to create a comprehensive financial plan.
Once your practice is growing and you have developed your business KPIs, go through the same process in your personal life.
“The creation of a personal financial plan is the first step in being able to monitor progress toward financial independence,” says Michael C. Smith, vice president of Levin Financial Services Inc.
The plan should be a starting point from which you can set benchmarks, measure progress, and develop personal KPIs. Your financial plan should include an analysis of your current assets, liabilities, tax burden, investment portfolio design, savings level, life and disability insurance needs, estate tax burden, and other relevant factors in your life.
Using these broad categories, you can examine the pertinent numbers and design personal KPIs. We think the simplest and most important one is personal net worth - total assets minus total liabilities. This number will be at the center of your financial plan and will be one of the considerations in developing personalized strategies. Personal net worth is also a critical number for gaining financial independence. A financial planner can help you determine what amount you will need to achieve financial independence.
Finding your magic number
Using the net worth number from today along with your magic number for financial independence, you can determine the rate of increase you need to achieve in annual personal net worth. For instance, if your current net worth is $2 million, you need $5 million to reach financial independence, and you plan to work an additional 10 years, you will need an additional $3 million in the next decade, or an average of $300,000 per year. This might seem like a huge number, but if you were contributing $40,000 per year into a retirement plan, you would need an increase in net worth of 81⁄4 percent annually to reach your $5 million target. You would set a KPI of 81⁄4 percent increase in net worth each year and measure this with your annual update of your financial plan.
Other KPIs that you could quickly measure and track would be:
❏ Annual level of saving
❏ Level of debt reduction
❏ Effective tax rate
❏ Expected vs. actual investment return
❏ Retirement plan balance growth
You can develop a set of seven to 12 personal financial KPIs that, when combined with your business KPIs, will provide you with tremendous insight into the performance of your practice and personal financial situation.
In the economic era that greeted the beginning of the 21st century, dentists knew that operating a dental practice was no guarantee of success. By maintaining a constant analysis of the KPIs, your practice can remain aware of practice-management performance and be nimble enough to change when economical and technological trends deem it necessary. KPIs also can be used in your personal life as you move forward on the path to financial independence. By monitoring and tracking progress, you can make necessary adjustments to achieve both professional and personal goals.
Roger P. Levin, DDS, MBA, is founder and CEO of Levin Group Inc., a leading dental-management consulting firm specializing in implementing documented business systems into dental practices. Levin Group can be reached at (888) 973-0000 or at www.levingroup.com.