Identifying Overhead Expenses

In the last 10 years, overhead has been plaguing most practices. For some reason, as professionals, we still don`t understand that every dollar saved is the same as a dollar earned. I have seen practices that literally were able to increase their profits by $40,000 to $50,000 annually by reducing unnecessary overhead and waste.

Roger P. Levin, DDS, MBA

In the last 10 years, overhead has been plaguing most practices. For some reason, as professionals, we still don`t understand that every dollar saved is the same as a dollar earned. I have seen practices that literally were able to increase their profits by $40,000 to $50,000 annually by reducing unnecessary overhead and waste.

Dentistry will be changing rapidly in the next three to five years. Some of those changes will be positive and some will work against practices. To be prepared for these changes and to take advantage of new opportunities, you must have the lowest possible overhead now.

Low overhead gives you:

- Higher profits

- More cash to invest in opportunities

- The ability to buy, rather than lease, new equipment, etc.

- The ability to retire sooner

These are just a few of the benefits of having a lower overhead. Most dentists should be able to retire at least four to five years prior to their actual retirement date. However, extended overhead prohibits them from doing so.

Overhead is like cancer: It tends to grow and spread if not dealt with firmly and immediately. But to reduce specific overhead factors, you must know your numbers and statistics. Set a goal today. Do you want to reduce your overhead by 5, 7, 9 or 11 percent? Whatever you select, make that your goal for the next 12 months.

To identify your overhead expenses, you are going to have to dig into your financial information. Measure your expense categories against national models or those of consulting organizations with overhead targets.

In general, overhead in most practices is approximately 8 to 10 percent too high for several reasons:

1. Inefficient systems. This includes scheduling, hygiene, case presentation, practice financial management and patient financial options/insurance/collections.

2. Lack of evaluation of each expense category - no one was willing to "shave" any unnecessary expenditures.

3. Overspending: Many practices tend to overspend in categories without evaluating opportunities for pricing considerations, volume purchasing or bad decision-making.

4. Purchasing outdated technology: Everyone wants state-of-the-art technology to enhance his/her practice. Purchase only what you need, not what you want.

5. Lack of evaluation of staff salaries relative to total revenue.

All of the above have a major impact on the expansion of overhead in the practice. Over time, most practice systems are not designed to tightly control finances. Therefore, the smaller, less obvious expenditures become infected with overhead due to lack of attention and lack of focus. This often will result in an overhead that is significantly higher than it should be. Pay close attention to detail all the time. If you don`t, you`ll find yourself panicking when the problem is too large to handle.

For example, many dentists load up on inventory when they attend seminars or meetings. They go to a meeting and buy everything in sight. Not only do they have trouble storing it, but they now have spent hundreds of dollars for supplies and materials that they may not use for six months or ever.

This does not mean you should not buy what you need. But most of the good distributors today are able to supply your products within seven to 10 days. This means that you can order on a weekly or bimonthly basis and maintain a much stronger cash flow with less expense up front.

Evaluating your staff

I recently had a client who employed three full-time hygienists. We analyzed the schedule and realized that only 2.2 hygienists were needed based on the number of appointments that were being scheduled on a monthly basis. This meant that 0.8 hygienists were being employed and paid at full salary, although those services were not needed. The dentist misunderstood that needing an extra 0.2 hygienists necessitated hiring a full-time employee.

This made a significant difference in the overhead, as hygienists are highly trained individuals who command fair compensation relative to their skill. Therefore, the third hygienist outweighed the 0.2 hygienist capacity and served as an unnecessary cost factor. It also led to a lot of sitting around since the excess was spread over three hygienists, resulting in the staff wasting time sitting in the staff room.

The old saying is true that "when you have one staff member doing nothing, you have two staff members doing nothing." Most staff report that they would rather be busy than bored, and this tends to be a good management philosophy.

Summary

Overhead could be dentistry`s No. 1 enemy. As practices become more like corporate businesses, they will find that they need to streamline and slim down. This does not mean you should not invest in opportunity and growth, but that you should always analyze every dollar spent. If your overhead is not 10 percent below the national average, you may want to hire a professional consultant to keep you from losing as much as $40,000 to $50,000 per year in net income. Over 10 years, that is a significant amount of money when it is invested at a reasonable rate of return.

Dr. Roger Levin is founder and president of The Levin Group, a national, dental-management and marketing-consulting firm. He can be reached at (410) 654-1234.

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