You have likely often heard it said by fictional CEOs sitting in fictional boardrooms within glitzy, big budget movies: “In order to make money, you have to spend money!” And, although they live in the world of make believe, they are right. You must spend money in order to effectively operate your practice and, in turn, make money. However, if you are not careful, high overhead can and will destroy your practice. Unfortunately, since 2008, there has been a disturbing trend of clinicians who have experienced this with their practices. Many of these practices cannot produce enough to cover their expenses. Others simply have lower doctor income as expenses continue to creep up. This financial challenge is further complicated by insurers who reduce reimbursements, the increasing expansion of PPOs that can reduce reimbursements anywhere from an additional 15% to 25%, and increased competition. The good news is that there is a solution, and that solution is lean dentistry.
LEAN DENTISTRY
The concept of lean manufacturing has been in the business world for many years. First created and implemented years ago by Toyota, the concept of lean manufacturing became popular in many companies looking to control costs. In order to maximize profitability, companies worked to eliminate all unnecessary expenses and waste and carefully monitored their investments back into their businesses. In much the same way, lean dentistry is the smart way to run a business while continuing to offer the same quality. Many practices today are struggling, and one way to avoid a financial trap is to have a complete understanding of practice overhead and expenses and a clear plan to keep them at a specific target relative to production and revenue.
When creating a lean dental practice, you can’t simply look at a profit and loss statement and see if anything jumps out at you. Lean dentistry is about evaluating every single expense in the practice and answering the following questions:
- Is this expense essential for the practice?
- If the expense is essential for the practice, is it being purchased at the best price point?
- Is there an opportunity to reduce the cost of this product or service to the practice?
- Is there another product or service of equal quality and lower cost?
- Is the practice buying only what it needs for a specific time frame, and can the practice be resupplied in sufficient time when the next order is placed?
- Does this expense contribute to a return on investment for the practice?
We routinely find that practices working through this process for the first time can save 4% to 6% of overhead. This may not sound like much, but it translates into $4,000 to $6,000 of increased income for every $100,000 of production. The practice that produces $800,000 and reduces expenses by 6% will increase income by $48,000 yearly.
Keeping Big Expenses in Check
Once you have addressed the small expenditures, it is time to tackle the big ones. Staff labor is the single largest overhead cost center in the dental practice, and it should be. Investing in the dental team is one of the most important aspects of practice success. However, we are also seeing practices that invest far beyond the recommended overhead percentage for dental office staffing. In our experience, each type of practice should have a specific target, and, when that target is exceeded, it reflects either insufficient production for team compensation or a rising staff labor cost.
The most common reason for a higher staff labor cost is a long-term staff that has been given increased compensation on a regular basis, often annually. There is certainly value in having a long-term dedicated staff that works hard and does a good job, but, at some point, there will be a compensation ceiling. Going beyond that ceiling will begin to have a negative impact on the practice. For example, if the recommended staff compensation, including all benefits, is 25% to 27% of total overhead and a practice is sitting at 55%, then the staff labor expenses will have a serious impact on the practice. In most cases, doctors do not recognize that the staff percentage is extremely high until production flattens or declines.
There are many ways to invest in an excellent team that allow the staff to be well compensated, motivated, and create further longevity. These include cost-of-living increases, bonus systems based on merit, and investing in effective job training. However, the number one priority should be to design a financial compensation system that’s fair to the team, the doctor, and the practice.
In addition to staff labor, a practice can find itself under the heavy burden of costs associated with building a new office when it has outgrown its current one, the neighborhood has changed, or the facility is no longer physically or aesthetically acceptable to patients.
Often, the issue is not the building of a new practice, but the overbuilding of a new practice and a desire to buy new, expensive furnishings and equipment. This is natural because it’s an opportunity to create the dream practice that the dentist has always wanted. However, the cost of the new building, equipment, and furnishings can often create significant financial challenges for many years to come. When adhering to the concept of lean dentistry, you must focus on having what you need rather than what you want. Ask yourself the following questions when considering a new facility:
- Is it essential to build a new practice now?
- What is the space that is needed today in a new practice?
- What can we afford if there is no growth?
- What can we afford if we decline 5%, 10%, or 15%?
- Are you absolutely confident that taking more space than needed is essential?
- Can you move in with any or all of the current equipment that you are already using to operate the current practice? If not, why?
- Have you given the interior designer a set budget that will not be exceeded?
After considering these questions, you may discover that you might not need as much space as you thought you did. Furthermore, you may find that you are able to make use of most of your current equipment. It’s also important to note that designers can be very creative when given a specific budget.
CLOSING COMMENTS
Unfortunately, many practices do not fully understand their overhead costs and business expenses. This can cause them to make decisions that can have detrimental financial effects. Every clinician-owner of a dental practice should analyze all expenses on a periodic basis and answer the questions posed above. By fully understanding expenses, better business decisions can be made with regard to acquiring new equipment, staffing, moving offices, etc. Following the concept of lean dentistry will be of great benefit to a doctor-owner’s career.
Dr. Levin is a third-generation general dentist and the founder and CEO of Levin Group, Inc, a dental-management consulting firm that has worked with over 26,000 dentists. He is an internationally known dental-practice-management speaker and has written 65 books and more than 4,300 articles. He is also the executive founder of Dental Business Study Clubs (dbsclubs.com), dentistry’s only all-business study clubs and the next generation of dental business education. He can be reached at levingroup.com.
Disclosure: Dr. Levin reports no disclosures.
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