There is a fairly new and concerning trend in dentistry: practices that are increasing their annual production but decreasing their annual practice income. Although this has occurred in a small number of practices over the years, it is now becoming more prevalent, and a larger segment of practices is experiencing this situation.
So why would a practice that has increased production have lower income at the end of the year?
The answer is a simple financial concept: if production grows slower than overhead, income will decline. This means that overhead has grown faster than production, and the increase in overhead is creating a decrease in practice income. Consider the following facts:
- Income is the goal.
Income is the single most important number in a practice because, in the end, it is what you take home, invest, or spend. Without income, practices will not be able to invest in new training, technology, office décor, improvements, or other areas that help the practice remain strong and keep production growing.
Furthermore, doctors cannot fund their lifestyles or retirement accounts without income. Given that Levin Group data now shows that the average age dentists retire is 70, maintaining strong income and funding retirement is more important than ever.
- The overhead battle has begun.
In the last few years, we have seen a skyrocketing increase in staff labor costs. Whenever there is a shortage of labor, compensation costs tend to rise disproportionately as businesses compete to hire new people.
Our national survey data shows that 64% of practices are currently seeking at least one team member. We expect this number to decrease in the next few years as more people return to the workforce, some individuals lose the option of working remotely, and other industries reduce staffing levels.
So, staff longevity is key. However, keep in mind that staff members want to work in positive, energized environments. They may not stay long if the practice does not have the right culture or if the office manager lacks strong leadership skills.
- The cost of supplies and materials is part of inflation.
There is always inflation, whether it is low (0.5%) or higher (4% or more). One thing I have noticed over many years is that dental inflation is usually higher than general inflation.
If the national inflation rate is 3.6% or 4%, dental inflation is often closer to 4.5% or 5%. This means that practice production must increase by at least 5% simply to remain flat in terms of practice income. Understanding, monitoring, and tracking the cost of supplies and materials therefore becomes a critical part of managing and increasing practice income.
Three strategies for increasing practice income
- Bring your current staff up to the right compensation level.
We have seen cases where a new employee is paid more than a long-term, dedicated team member. When other team members become aware of this, they often begin seeking jobs elsewhere. Remember that team members can easily see compensation levels in their area simply by looking online.
- Implement bonuses.
Bonuses are powerful. The right bonus system can motivate the team and provide them with additional compensation. Bonuses must be properly designed to be positive, reachable, and achievable only when the practice performs better as well—which means higher income for the doctors.
- Look for ways to lower costs.
Do not be afraid to talk with your sales representatives about options they may have to help lower costs. This is happening more frequently, and you should not feel embarrassed or hesitant about having these conversations. Just because a sales representative has worked with you for years does not mean you should avoid discussing creative ways to save money for the practice. At a time when higher production does not always lead to higher income due to increasing overhead, managing costs becomes essential.
Any practice can increase production. The best combination, however, is increasing production while controlling overhead. We still see practices growing production by 18% in a year and increasing practice income by taking the right steps to create a model that is efficient, effective, and cost-controlled.
Editor's note: This article originally appeared in The Bottom Line with Dental Economics, the newsletter that will elevate your inbox with practical and innovative practice management and clinical content from experts across the field. Subscribe here.
