Financial black holes
A sage once noted that the easiest way to make money is to stop losing it. When enterprising dentists open their practices and venture into the business world, the name of the game is profit.
By Roger P. Levin, DDS, MBA, FACD
A sage once noted that the easiest way to make money is to stop losing it. When enterprising dentists open their practices and venture into the business world, the name of the game is profit. Advances in clinical and management technology have allowed dentists to achieve excellent profit margins. Compare, for example, the average 40 to 50 percent profit margin in dentistry to the 5 to 10 percent profit margin in most retail businesses. Before we congratulate ourselves, let's reflect on the fact that only 3 percent of dentists can afford to retire at age 60. This sobering reality raises the question of financial management on both the business and personal level. The problem is not generating income, but keeping it.
It's hard to predict a dentist's financial success strictly on practice revenues. Regardless of production, the missing link is systems that effectively convert cash flow into profit. These systems must recognize two critical factors:
• Cost control - Working for your money
• Investments - Making your money work for you
Overhead is a huge factor that influences profit. Take, for example, a general dental practice that collects $750,000 annually and has an overhead of 68 percent. By reducing overhead to 60 percent, the practice will gain a hefty $42,000 in profits. Overhead control requires that we determine optimal spending levels for expenses. "Optimal" means spending levels that support both the practice vision and quality of care. How do we determine these levels? Budgeting.
The most notorious enemies of budget control are not the obvious expenses, but the obscure "black holes" that silently devour profits. Let us study a few of these.
• Hidden costs: We often look at the bottom line of an expense without closely studying the itemized breakdown. A closer examination may reveal hidden charges that are unnecessary. For example, a $45,000 car, paid for in monthly installments of $1,300 over 4 years, actually costs $62,400. Of this, close to $6,000 may be due to non-nterest charges. What would your retirement plan look like with an additional $6,000 investment?
• Expensive money: Different sources of financing are available to dental practices. One of the most expensive is credit card debt. Surprisingly, this also happens to be one of the preferred short-term debt vehicles. This black hole is quite powerful. For example, converting a 12.5 percent interest, $30,000 credit card debt to a short-term bank note at 8 percent saves over $100 in interest charges per month and thousands over the over the term of the note. What would the return be on a $100 monthly investment into your retirement fund?
• Administrative charges: Recurring expenses, such as phone charges and insurance premiums, often display a wide assortment of mysterious charges. It is important to study these costs to be sure you are paying only for those services requested. A $50 savings per month, over the average 30-year dental career, will translate into an additional $18,000 in profits! Add to this the accumulation of interest and we may be looking at a tidy $50,000 added to your retirement fund.
Cost control and budgeting are only one side of the equation. Financial success demands that we salvage funds lost in those black holes; it also demands that we identify the appropriate vehicles for investing those funds. Failure to invest your savings wisely will rob you of significant contributions to your financial success.
A certified, competent financial planner should identify several of your financial patterns, including existing spending and saving patterns, short- and long-term financial goals, and risk tolerance. Based on this financial profile, an action plan can be developed and implemented. Progress should be closely monitored and the plan adjusted as goals and profiles change.
Roger P. Levin, DDS, MBA, president and CEO of The Levin Group and the Levin Advanced Learning Institute, provides worldwide leadership in dental management for general dentists and specialists. Contact The Levin Group at (410) 654-1234.