By Guest Expert: Jennifer Schultz, RDH
We've all heard the saying, "it’s not how much you make, it's how much you keep." This is true in Dentistry, as well. I have worked with million-dollar practices that actually see less net profit than $500,000-practices. And all due to higher overhead. Understanding practice expenses is essential in reducing decreased profitability.
When assessing profitability in a practice, it is essential to understand expenses as well as collections. Most Doctors know their collection numbers. However, overhead is more difficult to calculate. Receiving up-to-date expense information is challenging because expenses require data entry. When Doctors use a third party to enter their expenses, it is typically a month or two before the information is even available. That means expense reports tend to be a month or two behind.
The best way to calculate practice overhead is to run a report for all expenses and collections for a twelve-month time span. A profit and loss report from QuickBooks or an accountant can easily provide this information. Group the expenses into a few large categories. Some categories to consider are staff compensation, Dental supplies, facility, Doctor compensation, office supplies, Dental equipment, repairs, and loan or lease payments. Subtotal each category. Total all the expenses with the exception of Doctor compensation. This total is your practice overhead.
Add Doctor compensation to the practice overhead and divide that number by twelve (or the number of months you are reviewing expenses for). This is the practice’s break-even point. The break-even point is very important because it is the minimum amount that needs to be collected each month. The break-even point is also the number that should be used when calculating team bonuses. This ensures the bonuses are paid out of the profitability of the practice.
After calculating totals for each category, it is important to calculate percentages as well. Divide the category totals by total office production or collections. There are valid reasons for using either production or collections for this calculation. For the purposes of this article we are not going to discuss that here. Analyzing practice expenses as a percentage is helpful when comparing progress from year to year. For example, when a practice’s salary expenses increase by 2% and their production (or collections) did not increase at the same rate (given the number of team members has remained constant) then they are decreasing in profitability. If an expense percentage drops, that either means that the practice spent less on that expense category or the production/collections increased as well, making it a lower expense percentage.
Tracking expenses is essential to determining profitability in a practice on a monthly and yearly basis. It also will uncover practice successes to celebrate and untapped potential to address and this is the perfect time of year to get started!
About the Author: Jennifer Schultz, R.D.H. has spent over 20 years in Dentistry working in and with Dental practices as an employee, software trainer and practice management consultant. She is also certified with Bent Ericksen and Associates for human resource management and employment compliance. Jennifer understands what it takes to create an office that runs smoothly and her vast experience in Dentistry enables her to effectively and efficiently manage Dental practices. Jennifer’s passion for Dentistry is contagious and she enjoys the uniqueness of every practice she works with. Contact her at Jennifer@VirtualDentalOffice.net or by phone at 563-582-4762.