Rent, insurance, and inventory. They may not be first on your list of concerns throughout your busy day of seeing patients, but overhead is a key factor in any business and dentistry is no exception. Dentists need to understand the different categories of overhead, how to assess and track them, and when and how to make adjustments. Only then will they be better able to create a successful financial model for their practices.
Know Your Overhead Categories
The easiest way to understand the various overhead categories is to look at your profit and loss statement. Listed there, you’ll see categories such as labor, gas and electric, rent, and supplies. Each of these categories represents a different form of overhead, with some more important than others. Start with the largest overhead categories and the ones where you have some control.
First it’s important to understand that there are two types of expenses. There are fixed expenses that cannot be changed regardless of whether or not the practice is open or closed. Rent, insurance, and utilities are examples of fixed expenses that you have little to no control over. Then there are variable expenses. These expenses often change based on the volume of patient care. An example of a variable expense would be laboratory costs. The more crowns performed by a practice, the higher its laboratory costs will be. Again, this is an expense that you have little control over. In fact, an increase in lab costs represents an increase in production—something that you’re always striving for.
Three expenses that you do have control over are the variable expenses of labor, inventory, and professional services. Let’s take a look at these expenses through the perspective of a practice that I recently worked with.
Since labor is the single largest expense in a practice and can be controlled, it should be tackled first. This particular practice had 31% staff overhead. In general practices, we recommend a 25% expense relative to practice revenue for all labor, including benefits, bonuses, and uniform allowances. This 6% increase over our recommended allocation resulted in a loss of $6,000 of income for every $100,000 dollars of annual revenue. The practice’s revenue was slightly above $800,000 so it was literally losing $42,000 of annual income.
So why was staff overhead so high? The answer was simple. The doctor gave automatic raises every year to all staff members. As their longevity increased, they were being paid well above local market rates even though both the doctor’s income and practice revenue were declining.
A candid meeting took place to explain this situation to the staff members. They expressed caring and concern for the overall practice, and we were able to work out a program that replaced automatic raises with automatic cost-of-living increases and a bonus system. The staff was also enthusiastic about adopting new strategies that would help the practice grow.
We also took a look at purchasing and discovered that the practice was still buying supplies at a level and pace that increased overall inventory. We recommended that the doctor get advice from the practice’s sales representatives on the best options for purchasing, pricing, and volume discounts.
Finally, we addressed an issue that the practice was having with its long-entrenched accounting firm. The doctor felt for some time that the firm was not providing much in the way of enhanced or additional service even though its fees were increasing annually. We recommended that the practice immediately begin requesting proposals from several other firms. Accepting our advice, the dentist found a firm that was 25% lower in cost, with an increased level of service.
Overhead is a critical factor in any business. While investing in your practice is smart, wasting money is not. All too often, dentists are in the dark regarding what their overhead should be in a category-by-category basis. It’s important to continually analyze overhead monthly in categories, get feedback from experts and accountants, and continually identify opportunities to decrease expenses.
Dr. Levin is the executive founder of Dental Business Study Clubs—dentistry’s only all-business study clubs, the next generation of dental business education. For more information, call (833) DBS-CLUBS or visit dbsclubs.com.