OVERHEAD EXPENSES

Overhead Expenses as a Percentage of Gross Revenue

It is not how much you make; it is how much you get to keep that matters.   Early in my career I purchased a practice that had 28% overhead!  Of course I didn’t understand how valuable that business model was at the time and with a little meddling I worked it up to 67%.

Practices with higher overhead expenses as a percentage of revenue generally suffer more in times of economic downturn than those practices that already appropriate their expenses efficiently.

If your overhead is high, it is probably due to one of the following:

1. High wages or more employees than you really need
2. High lease or mortgage payment
3. Paying too much for dental supplies
4. High end lab fees
5. Your gross revenue is too low

1)  Generally speaking, your staff wages as a percentage of gross revenue should not exceed 26%.  This percentage should be lower for higher earning practices (over $840K a year) and possibly higher for lower earning practices (under $360K)

Regarding wages, review the job descriptions of all your employees and determine if some of the tasks can be re-delegated to more valuable employees and perhaps eliminate a position or two.  I would advise you not to lower pay for any employees, but perhaps you can shorten their hours.  Avoid ever giving raises--a better way is to create a bonus program that rewards the staff based on performance of the practice.  I have seen long term employees who have gotten a raise year after year and are being compensated far higher than their level of contribution to your business.

2)  Renegotiating your lease can be challenging. You agreed to the terms and you are playing to the landlord’s version of the Golden Rule; ie, they own the gold, they make the rules.  It never hurts to ask and if necessary ask repeatedly to see if your rate or terms can be modified to help your bottom line. Consider hiring a real estate agent experienced in lease negotiations and pay them directly as your representative (otherwise your RE agent may be looking for a commission from your landlord or property manager where ultimately you will pay anyway in the form of higher rent)

3)  Paying too much for dental supplies is a simple one to explore.  In a general dentistry practice your dental supplies as a percentage of gross revenue should not exceed 6%.  The exception may be the practice that uses a Cerec unit (those material blocks are expensive).  I suggest that if possible, you categorize your Cerec expenses under your lab category of expense instead of dental supplies. 

Here is a simple solution if your dental supplies exceed 6%--go online and perform a web search for discount dental supplies. You will only find about 3,000 companies that sell dental supplies at a discount.  Take note of their prices and share them with your dental supply rep the next time they visit your practice.  

Most of the time, your rep will match or beat these discount competitors because they certainly do not wish to lose your business. Tell your rep that you need to get your dental supply bill to 5% or less of your gross revenue.  You know how much your practice brings in every month--take 5% of that and try to make that your supply budget each month.

4)  Most practices I have worked with have lab expenses around 10% as a percentage of gross revenue.  Having your lab expense in excess of 12% may indicate that you use a higher end lab who charges more per unit than the average. The per-unit charge from dental labs ranges from $39/unit to $400/unit. 

I do have concern when I see lab expense dip below 7%. This may indicate that the dentist may be overly conservative and is recommending large restorations instead of crown coverage. This may save your patient some money in the short term, but it may create problems if the restoration fails in a year or two. 

It is not my place to try to dictate your professional judgment. I did learn from experience that you present treatment to your patient based on what they need and not what they can afford. You can learn more about this subject in the section on treatment planning acceptance by clicking here

As for increasing your gross revenue, you are already on your way by utilizing Practice Hawk. Our hope is that this program will increase your net profits by 50% if used faithfully.  We also hope you will use our Daily Trak monitoring software, as this will enforce the accountability factor that inherently leads to greater profit.  Go to www.practicehawkpro.com for more information.

Practice Hawk determines your fixed cost expense every month, which is your minimum expense of doing business each month. Every dollar that you generate each month in excess of your fixed cost is only subject to your variable cost (which is the sum of your dental supplies and lab expense as a percentage of gross revenue).  What this means is that after you reach your “break even” point, you will be able to keep over 80% of gross revenue that exceeds your fixed cost!

Let’s look at a sample practice and how this works.  Our practice generates $50,000 a month and the overhead expense is $35,000 a month (70% overhead) for a net profit before taxes of $15,000.  If our sample practice can produce and collect an additional $10,000 (from increased case acceptance or seeing more new patients), that $10,000 is not subject to the 70% overhead expense-- it is subject to variable cost, which will be no more than 20%.  This practice makes $15,000 profit on the first $50,000 collected, but makes $8,000 on the next $10,000 collected.  This is a 53% increase in net profit resulting from a 20% increase in gross revenue!

Ideally you can keep practice overhead less than 60% of gross revenue and variable cost should run about 15%.  If your practice generally collects $50,000 a month your net profit will be $20,000 before taxes.  Collecting an additional $12,000 with your variable cost of 15% will generate an additional $10,000 of profit, bring your new net profit to $30,000.  That is a 24% increase in revenue but a 50% increase in net profit. 

Practice Hawk is specifically designed to determine your easiest path to higher profitability, using the Dental Profit Wizard.  As you can see by the example above, you do not need to increase your revenue by 50% to see a 50% jump in net profit (in our case above with 70% overhead, a 50% increase in gross revenue will result in an increase of net profit of 133%!)

When I ask a dentist what he makes each month, invariably he gives me his gross revenue. The hope is that you will begin to think in terms of net profit as opposed to gross revenue.  It is not how much you make; it is how much you get to keep that matters.