Practice overhead is one of the most critical metrics to track. What is your net profit? Where should it be? How you get this number is what truly matters.
General practices should be at a net profit of 40% (higher is possible), yet reports show dentists are lucky to see 30% net profit these days. I find these reports quite confusing for dentists because they show the industry average, but that doesn’t mean that’s where it should be or could be. It just means that’s how much most dentists spend (or should I say overspend), and as of recent, it’s high for many reasons including practice owners not tracking and controlling expenses.
It’s simple. First it is very important to keep personal expenses separate. This is what your overhead benchmarks should look like:
Knowing and understanding your overhead expenses every month not only results in better profit and better control over your business but also reduces the probability of certain embezzlement in your practice.
The following three expenses (Laboratory expenses, Advertising Expenses, and Employee wages) can tell you much more about how your office is running than what you’re spending. Let’s take a closer look.
Laboratory expenses – 8%
Your laboratory expenses should include any costs associated with CAD/CAM. CAD/CAM should not be categorized as dental supplies. Is your lab expense above 8%? If yes, are you doing many implant cases? Practices with high implant cases usually tend to have higher lab expenses. Rarely does high lab expense mean your lab fees are too high, but it never hurts to compare lab fees. Remember to never compromise quality over cost.
Is your lab expense below 5%? If so, this could be possible if you have a CAD/CAM. This is a normal range for those offices.
If you are experiencing consistently low lab expenses (2-3% range), this is usually a red flag for a low case acceptance rate in your practice. Unless you are referring out most of your major dental treatments, you will want to focus on implementing new systems in your practice to train team members in treatment planning and case presentations. When lab expenses increase, it will prove that more major work is being done. You should expect to see an increase within three months.
Advertising expenses – 3%
If your advertising expense is higher than 3%, it may indicate that certain marketing forms are not generating enough new patients. Are you tracking new patients? What is your most valuable source? It may be time to cancel your weakest avenue. From when I started in dentistry almost thirty years ago until today word of mouth referrals were and still are the best source for new patients. All we had to do was ask our patients for referrals of their family and friends. Guess what? It worked and still does! Yes, I understand times have changed significantly with social media, so be creative. Incorporate digital media with your referral program.
Get your patients to talk about you, your practice, and your staff. Please give them the best experience that they will want to share with their family and friends (it’s free!). I always put myself in the shoes of patients/clients. Imagine this (let’s change it up and not make it dental-related): if I was looking for a laser hair technician. I see hundreds of paid social media ads, the most giant billboard, or even a tv commercial of every local salon offering laser hair removal. Still, while mindlessly scrolling through my social media, my friend Tracy mentions in her post that she just finished her laser appointment with Cathy from ABC Salon; guess who I’m calling? It’s time to maximize your word-of-mouth referrals. It costs the least and still gives the greatest return: long-term loyal patients.
Payroll expense – 25% (Your largest expense)
You should exclude any doctor’s salary, family salary, and associate wages. Be sure to include any outsourced services and software that employees usually do—for example, answering services, appointment reminder services/software, bookkeeping services, collection services, and any contract labor (temps).
What if your payroll is consistently low (around 20% or lower)? This is not a good thing; let me explain. A low payroll shows your team is being very productive. But they may eventually feel overworked and seek employment elsewhere. Customer service will be affected. They cannot operate to their fullest potential. Systems will eventually start breaking down, affecting overall practice productivity. Usually, you will see a fall in hygiene production and an increase in accounts receivables (especially over 90 days).
My recommendation benchmark is around 22-23%, allowing a budget for bonuses. Everyone loves financial appreciation. It allows budget for continuing education, which will strengthen your team, and allows budget for raises. Now you can schedule regular performance reviews without team members having to request them. Please know that employees don’t like to ask for raises, especially those who genuinely deserve them.
What if your payroll is high? Above 25% consistently? It’s usually not because you’re overstaffed. So before you start to eliminate positions or cut hours, your first plan of action should be to increase production with the same team in place and find the answers to this high overhead.
The following are the most common reasons for high payroll expenses.
1. Treatment acceptance is too low. Review your lab expense. Does it correlate as discussed earlier?
2. Downtime may be out of control. The industry average is 5%. Where is your downtime at? Everyone knows downtime is the great destroyer of profit, so we must focus on eliminating and reducing downtime. If there is any, utilize this time strictly with revenue-producing duties (recalls, treatment planning, did I mention recalls?). This will hopefully counteract your loss. Explain to your team (especially your admin department, who receives the most heat for downtime yet doesn’t ever get downtime themselves) how much it directly affects them personally by consuming the payroll budget to leave nothing for raises, bonuses, and continuing education.
3. Providers underproducing. Review each provider’s hourly production regularly. Are they billing accordingly to scheduled chair time? I’ve experienced many times where hygienists underproduced up to $75 per hour of chair time. Let’s do some simple math. I’ll even be conservative and say a full-time hygienist (working 40 hours/week) is underproducing $40/hour. That’s an annual production loss of $83,200. And this is how it directly affects your payroll expense.
4. Payroll fraud. For years I’ve watched staff manipulate hours while dentists are too busy (understandably so) to do anything about it. That’s all finally about to change! Embezzlement is usually committed by your most trusted and long-time employees who happen to be the same person responsible for preparing and processing your payroll. Since your payroll expense is the largest, it’s the easiest to steal from without being easily detected and without proper systems in place, but rest assured that the solution is on its way.
In the meantime, here are the most common types of payroll fraud:
- Time theft: buddy punching (clocking in for co-workers), adding extra time not worked (early clock-in or late check-out).
- Overtime is not being controlled.
- Adding fictitious names (family members) to payroll.
- Increasing hourly rate or salary, adding extra benefits or vacation time.
In the meantime, be sure to have only one person prepare payroll total hours. Review payroll before and after it has been processed. Verify employees’ names and rate of pay. Verify with your Payroll service provider that no employee be added without your written approval.
And finally, implement systems to prevent time theft. Technology can and will give you back the control and peace of mind you need.
Scheduling minutes in your day each month to review the health of your practice is crucial. I say this repeatedly: “No one will care about your business as much as you do,” and never forget it’s your profit being lost, not theirs.
About the Author
Lori Margiotta is the owner of Bookkeeper For Dentists and founder of I Work Dental Inc. She specializes in the organization and analysis of your numbers and how they directly affect the success of your practice. With over 29 years of experience in dental practice management and financial management, Lori prides herself on guiding dentists to build profitable practices. You can reach Lori Margiotta directly at 416.729.4438 and by email at lori@bookkeeperfordentists.com
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