By Michael Warm, DDS 

The profession of dentistry has suffered a myriad of practices lost to short sales and bankruptcy.  An industry viewed by lenders as penultimate of least risk (next only to funeral homes) has seen default rates rise from a minimum of .4% (several years ago) to current levels as high as 5%. 

This report has been compiled based on 20 years of dental practice ownership and six years of  engaging in dental consulting and coaching.  Every dentist believes they have a unique array of challenges in their practice.  The reality is that all dentists face the same issues and obstacles, only varying in scale. 

Each failed practice has its story to tell, a familiar story as they share common threads that led to their demise.  This report examines these common mistakes and how they contributed to practice failure.

Correcting or improving any one of these facets will result in elevated practice performance and reduction of stress.  This article could be entitled, “The Five Main Reasons that Dental Practices Succeed”, building on these factors to create a highly successful practice.  Are you the kind of person who would rather take action and learn how to increase your net profit?  Or are you too busy reacting to your current business to take the time to learn new skills to improve performance?

Let’s start with the Number One reason any practice struggles:

Inadequate Cash Flow/Working Capital

It’s obvious that if you have unlimited capital you could keep the doors open indefinitely.  Most dentists receive some working capital with their start-up or acquisition loan.   Most viewed this as a sense of security, not having to worry about negative cash flow in the early months of the new practice.  

Working capital is intended to be just that-capital that is working for you.  Putting that capital to work for you in the form of effective advertising is perhaps the best use, but the least evident choice.  We will discuss this initial use of working capital shortly. 

Most businesses that fail will point to the fact that they were undercapitalized.  The money is always finite, so unless you can generate more than you spend in a short period of time, the working capital will be depleted. 

We encourage our start-up clients to market aggressively (marketing drives new patients that helps create greater revenue) and try to keep their working capital balance near its original value and replenish when possible.  Keeping that available working capital will ease the financial stresses.  There is no dentist alive that hasn’t worried about making payroll at some point in their career due to strained cash flow.  Strive to keep a reserve balance equal to two weeks practice expenses.  If you have to dip into those funds, replenish that account as soon as you are able to keep that cushion in place.

Inadequate cash flow is caused by two factors, the first of which is:

Poor Treatment Plan Acceptance Rate

Most dentists I have interviewed claim that their treatment acceptance rate is “around 80%”.  In reality the average acceptance rate for dental practices is in the 30% to 40% range.  It may seem like acceptance rate is higher as depicted in this example:  You present 9 cases in a row, each of which is $1,000 of treatment and each patient agrees. Your 10^th case is a $9,000 treatment plan that the patient declines.  It feels like 90% acceptance but in reality it is only 50% acceptance by quantity of treatment. 

Do you know your treatment acceptance rate?  It is very difficult to improve a value which you don’t know.  Your practice management software can provide this value (which may or may not be accurate based on inputting skills of your front desk).  We advocate tracking this value on a daily basis.  By some mystical force, statistics that are tracked improve.  This is the premise of Pearson’s Law, which states, “That which is measured improves”. 

Treatment plan presentation works best with the doctor explaining the benefits of treatment and the treatment plan coordinator (TPC) negotiating the payment options.  In most practices the TPC is also the office manager, and already has many responsibilities and may not see treatment presentation as a priority.  Consider providing an assistant for your office manager so that she can spend uninterrupted time with the patient presenting treatment.  The assistant can act as a utility person in the practice as well, answering phones and scheduling, setting up and taking down treatment rooms, and filing insurance claims. 

Most dentists think the major reason that treatment isn’t accepted is that the patient cannot afford it.  That may be a factor, but it isn’t the primary one.  Even your wealthiest patients won’t accept treatment because 1) They don’t trust you; and 2) They do not perceive the value of the treatment.  You spent years learning your profession but your success will parallel your ability to build strong relationships with your patients.  If your patients truly understand how they will benefit from accepting your treatment recommendations, they will go to great lengths to find the money to pay for it.

The second factor that causes negative cash flow is:

Insufficient Stream of New Patients

One statistic you cannot measure is patient attrition in your practice.  Most patients that leave your practice will not inform you.  In order to assure steady growth in your practice, you must strive to consistently attract new patients either by referral (word of mouth) or by external marketing.

The referral new patient is typically the best new patient.  They come into your practice based on the recommendations of someone they trust and routinely will accept twice as much treatment on average compared to new patients that are generated by your external marketing efforts that do not possess that initial level of trust. 

External marketing is the great mystery to most dentists.  Spending money for marketing seems as risky as going to Vegas and throwing money at the blackjack table.  In reality, marketing is an art based on the science of numbers.  Follow the lead of Fortune 500 companies- if you want to market effectively, hire a professional marketing company.  They will brand your office and tailor a plan that will provide consistent results.   

A good return on investment (ROI) is greater than 3, meaning that for every dollar you spend on your marketing, you get three dollars back.  If you are running multiple marketing campaigns, do you know the ROI for each campaign?  This is critical information necessary to determine the best allocation for your future marketing dollars. 

How closely do you monitor you marketing?  You should know the origin of each new patient so that you can track your marketing ROI and thank your referral sources with notes or even movie tickets or restaurant gift cards. 

Our clients have enjoyed excellent results working with a professional marketing company.  Your marketing is too important to be let out to the cheapest print and mail outfit.  A professional marketing company provides value added features such as monitoring all of the phone calls generated by their marketing and pin point demographics to get your marketing into the homes of your ideal patient.  Call me if you would like to learn more about professional marketing that really works. (my cell number is at the end of this report)

Earlier we discussed how to use working capital.  In a start-up or acquisition, the best immediate use of working capital is in an extensive marketing campaign.  This will drive more new patients which will drive revenue and quickly grow the practice and its value.  The tendency for a new doctor is to leave their working capital in the bank as a cushion against negative cash flow.  When this is depleted, now you have lost the luxury of having money funds available for the marketing you should have done in the first place.  Many practices have failed for this very reason.   

One other factor that can lead to negative cash flow is lack of sound financial policies.  The best policy is collecting fees before services are rendered.  Offer a courtesy discount of 5% for your pre-paid customers.  Use third party lenders such as Care Credit and Chase to help your patients finance their treatment. 

Patient referrals are the direct result of your internal marketing efforts.  This leads to the next major reason for practice failure, which is:

Lackluster Customer (Patient) Service

Has this ever happened to you?  You go into a doctor’s office and stand at the front desk waiting for someone to address you.  The person behind the desk is on the phone and oblivious to your presence.  After a couple minutes another person sees you and asked if you been helped.  You tell her you are a new patient and she hands you a clipboard filled with forms you must fill out. 

Does this happen in your office?  What kind of first impression does that leave?  A better first impression would be greeting the new patient at the door and giving them a quick tour of the practice, then letting them fill out their paperwork in the comfort of your consultation room.  You can create a great first impression by having the doctor call the new patient the night before their appointment and welcoming them into your practice. 

A clean, friendly environment is better received by patients than the high-end, sterile practice with granite countertops, travertine tile and water features.  Treat your patients like guests in your own home.  Make sure that you and your staff ask for referrals (most patients think that all practices are busy and do not accept new patients!).

Most of your patients are nervous going to the dentist anyway, and if they aren’t treated well in your practice, they will never refer their friends and family to you.  New patient flow coupled with treatment acceptance is the main focus of a successful practice.  Every other facet of managing your practice is mere subsets to attracting new patients and having your treatment plans accepted. 

The fifth major reason dental practices fail is:

Lack of Business Systems Monitoring

How do you measure the performance of your practice?  Collections?  Cash flow?  It doesn’t really matter how much revenue you generate; what does matter is how much you get to keep.  As mentioned earlier, it is important to track your treatment acceptance rate, the origin of your new patients, and the ROI of your marketing campaigns.  What else should you track in your business?

Do you know how much you have in Accounts Receivable?  Generally your total receivables should be less than one month’s revenue.  If total receivables exceed monthly revenue, your office may not be doing a very good job collecting money. Do your insurance receivables exceed your 30 day receivables?  If so, perhaps your insurance claims need to be followed up. 

What is your overhead expense as a percentage of revenue?  Well managed practices can usually keep their overhead less than 60% of revenue.  Of course the best way to decrease overhead as a percentage of revenue is to increase practice revenue.  Increased practice revenue is the result of: 1) increased number of new patients or 2) increased treatment plan acceptance.

What percentage of your patients has periodontal disease?  According to the ADA, 80% of people over age 35 have some form of periodontal disease.  If your patient median age is 35, statistically you could expect that 40% of your patients have perio problems (most offices we have analyzed have far fewer periodontal patients than the national average). 

What is the value of your practice?  What could you do to increase its value?  What percentage of your production is attributed to your hygiene department?  What percentage of your production is generated by new patients each month? 

Our company has created a simple business management program designed to monitor all these aspects of your practice and provide performance analysis with proven methods to improve your vital statistics.  This program is called Practice Hawk (www.practicehawkpro.com).  The Daily Trak module allows your front desk to track new patient origin and treatment acceptance which will allow you to generate month end reports to track the ROI of each marketing campaign and accurately determine your treatment plan acceptance rate.

The Analytics module is inputted each month with profit and loss values and data from reports generated by your practice management software.  You receive a snapshot analysis of your practice performance and using the Dental Profit Wizard, discover the path of least resistance to greater profitability. 

Earlier we stated Pearson’s Law, “That which is measured improves”.  Benchmarking your vital practice statistics will allow you to focus on those areas of your practice that need improvement.  The other half of Pearson’s Law states, “That which is measured and watched improves exponentially”.  Your data on Practice Hawk will be monitored by our professional team to make sure you are inputting data correctly and getting the most out of the program.  Practice Hawk is an online program, so you can access your practice data from home or even your smart phone.  Our low subscription price makes this dental business management program affordable for every practitioner. 

Despite the economic downturn, some of your peers are enjoying record months.  Of course they are working harder than they worked several years ago, but they are also working smarter.  Are you the kind of person who would rather take action and learn how to increase your net profit?  Or are you too busy reacting to your current business to take the time to learn new skills to improve performance? Take the five major reasons practices fail and strive to make them the five great strengths of your practice.  You have chosen a great profession and with your dedication and hard work you deserve a rewarding career.

As part of a special promotion, we are offering in-office analysis of your practice and consultation to improve net profit at a reduced fee.  Please visit the "Special Promotion" page by clicking here.

If you would like to provide feedback for this article, you may reach me at (602)-702-1218 or email at mike@murraywarm.com 

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