Roger P. Levin, DDS, MBA
What determines your financial success as a dentist? It is not production, collections or even gross revenue that charts your success. With many dentists seeking to increase their incomes to fund savings and retirement programs, it is important that this point be understood. Although you can measure practice financial performance many ways, only one really counts — your take-home income.
High gross revenue is no guarantee
Gross revenue quantifies the level of production the practice generates, but it does not provide any information on the practice's income. Relying on gross revenue as the most important financial number can greatly diminish the chances of reaching financial goals. Look at the following scenarios, culled from Levin Group data:
Gross revenue: $625,000
Annual gross (pre-tax): $256,250
Net worth: $1.3 million
Gross revenue: $1.3 million
Annual gross (pre-tax): $187,000
Net worth: $221,000 (w/ no retirement fund)
Obviously, Dentist A is doing well in terms of net worth, but Dentist B is not on solid financial ground. Dentist B clearly stated that he needed to increase his income to fund his children's college education and begin a retirement program. In addition, he told us that producing at this level was very stressful, because his practice was disorganized and the few systems in place would often break down due to the frantic pace.
We frequently find those dentists with the least income operate high-volume, stressful practices with no fixed budgets or retirement programs established. Even though the second dentist has more than twice the annual gross revenue of the first, his annual income is a startling $35,250 lower. The culprit is a lack of practice- management systems and controls, resulting in the high overhead rate of 83 percent. General practice overhead should be under 60 percent.
Production doesn't tell the whole story
Dentists need to focus on the right financial measurements if they wish to correctly evaluate financial performance and income. Keep in mind that income — not gross revenue — is the key indicator. A $1 million, high-volume, single-tooth general practice and a $1 million, well-systematized, efficient practice focused on comprehensive quality care are traveling very different paths. The first will probably be a high-overhead, low-profitability, high-stress practice with many years to go before the doctor retires. The second will likely enjoy low overhead, high profitability, and low stress.
As the dentist begins to focus more on income to create wealth and financial independence, two variables must be accounted for. Although both pertain to the management of money, one applies to the practice and the second concerns personal finance:
1) Overhead — Income is the balance between gross revenues (collections) and practice overhead (total expenses). The more efficient and effective systems a practice has in place, the higher its production capacity. Higher production leads to lower overhead. Every reduction in overhead immediately translates into gains in the dentist's income. Levin Group data shows this can lead a dentist to financial independence eight years earlier.
2) Personal Budget — Dentists have complete control over how to spend and allocate their incomes. Lifestyle choices and financial priorities will have a significant impact on their ability to reach financial goals, such as funding their children's education and providing for retirement. Every dentist should have a clear financial plan.
Make the right choices
Too many dentists endure overly busy, stressful days without having nearly enough to show for it. Focusing more carefully on income is only the first step in gaining control over your financial future. The second critical step is to make the right choices to improve practice productivity, manage overhead, and create a budget.
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 is dedicated to improving the lives of dentists via proven dental-practice management and marketing consulting programs to achieve success and profitability. Levin Group can be contacted at (888) 973-0000 or at www.levingroup.com.