Is overhead bad?

May 1, 1998
There is a myth in dentistry that has been around for quite some time. The myth is that overhead is bad - really bad.

Roger Levin, DDS, MBA

There is a myth in dentistry that has been around for quite some time. The myth is that overhead is bad - really bad.

What is overhead?

Overhead is dollars spent during the pursuit of performing dentistry. It includes everything that is directly applicable to a practice to allow you to produce some dental service for your patients.

For years, many consultants, including myself, have continually promoted that overhead should be kept as low as possible. However, there is a clear misunderstanding between the intention and the perceived meaning of this statement.

Types of overhead

Bad overhead is the first type. This type of overhead is dollars wasted because of poor expenditure decisions, inefficiency in the practice and a host of other reasons. Up to 7 percent of many practices` overhead is dedicated completely to actions that are wasted and that do not help to enhance the practice.

The second type is good overhead. This type includes dollars spent to help the practice grow investment in technologies, new leading-edge services, better management and marketing systems, customer service, etc. All of these lead to practice growth and tend to be positive if the new investment tool is properly implemented.

The third type is natural, everyday overhead. This is the overhead that grows as the practice grows. These expenses are variable and increase every time the practice grows. It means that the total dollars spent at any given time are increasing and for a very good reason.

The reason that natural, everyday overhead is wonderful is that it only increases when the practice grows. Many dentists misunderstand this concept and are dedicated to simply keeping overhead as low as possible. They do not realize that they are choking off potential growth in the practice.

How to grow

Increasing total overhead (dollars spent) can be very positive. In fact, I like to see clients of The Levin Group increase their total overhead (total dollars spent) annually. If the total overhead increases without increasing bad overhead (wasted dollars), the practice itself must be growing. If a practice is going to achieve The Levin Group`s model of 15 to 30 percent growth per year, total dollars spent must increase.

Overhead percentage

What I mean by keeping overhead low is keeping the actual overhead percentage low. Overhead percentage is the total overhead divided by the revenue, multiplied by 100. A healthy practice typically has an overhead percentage that is not rising and may be decreasing. Because overhead percentage reflects overhead relative to practice revenue, it is quite different from total overhead or total dollars spent at any given time.

We do not want the overhead percentage to increase as the practice grows.

As a practice grows, its overhead percentage should remain flat or decline. The overhead percentage is a reflection of the health of the practice in regard to dollars spent in dentistry. If the overhead percentage is higher than the national or Levin Group average, there is waste in the practice that must be eliminated and often can be curtailed through improving management systems.

In contrast, as revenue increases and waste is eliminated, overhead may rise. Please keep in mind that the total dollars spent or total overhead may rise, but the overhead percentage should decline. Because an increase in overhead can result in a decrease in overhead percentage, increasing practice overhead can actually be positive.

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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