Overhead has been part of practice control since the first modern dental practice was launched. Every business has overhead, and overhead is essential to create successful dental practices. The real questions are which expenses make sense, how to eliminate unnecessary waste, and how to keep overhead from rising.
In 2022, overhead increased dramatically in most practices, partly due to significant increases in staffing costs, and due to PPE and supply costs.
What drives up overhead?
In researching thousands of dental practices, Levin Group has found that in most cases overhead is approximately 4% – 6% higher than it needs to be. Inefficiency and waste are part of that overage but a lack of planning, monitoring, and analyzing expenses also contribute to the problem.
This 4% – 6% overage equates to a significant amount of money. It is a simple calculation. If an $800,000 practice has an overhead that is 4% too high, than that practice is losing $32,000 per year of profit (income). (Note that this is income, not revenue.)
If the same practice has overhead that is 8% too high, it is losing $64,000 of income each year.
So what drives overhead up? Each year, labor costs, supply and material costs, practice insurance costs, and more will rise.
Some years, they will rise faster than others. In a long-term upward economy where practices experience organic growth levels, the overhead percentage may not increase due to the increases in practice production. However, in times of either low, no or negative growth, the overhead percentage will begin to rise.
Controlling costs and driving overhead down
Larger companies have departments that focus exclusively on cost controls.
Each department must submit budgets annually which need to be approved and are designed for the company to reach the desired profit margin. While sophisticated budgeting may be overkill for dental practices, here are three suggestions to reduce costs in the short and long-term that should be adopted as permanent practice behaviors.
- Bid out your top expenses. Dental practices develop excellent relationships with vendors. However, it is still good business to periodically check the cost of the products you purchase with other resources. Not only dental treatment products, but insurance products, maintenance and service contracts, etc. As an example, you can expect cyber insurance to increase on a consistent basis going forward, due to the increasing number of online security breaches that occur these days. You should solicit multiple bids for such services to obtain the most attractive. By bidding out top expenses, you gain a sense of what the market rates are. You don’t necessarily have to leave your current vendor, but you can go back and let them know that you are looking to reduce costs in this area by a specific percent and ask them for creative ideas. You will be pleased how many will be able to work with you along these lines.
- Join a buying group. There are many buying groups springing up in dentistry from all kinds of different organizations. When you join a buying group, you are essentially entering the realm of volume-based purchasing. While your practice may not have the volume power to negotiate better costs, banding together with other dentists through an organization will give you that opportunity. Just pay attention to how much the organization is taking in commission against the purchases that are made. Some will be higher than others.
- You don’t have to be first. Technology has advanced dentistry in wonderful ways, but you don’t have to be first. Those who are first often end up purchasing technologies at double or triple the cost of what those technologies will be just a few years later. The cost of technology is typically driven down over time. We see too many practices that invest heavily in technology, only to find that it creates a higher level of debt, lower level of cash, and does not necessarily improve practice performance or quality of care. Be strategic about which technologies you are purchasing and don’t be motivated to “keep up with the Joneses.”
Overhead is necessary but should be used strategically. Most practices operate with an overhead that is 4% – 6% too high. There are many steps available to all dental practices that can have an immediate impact on overhead, including bidding out your top expenses, joining a buying group, and waiting for prices to come down on the newest technologies.
A practice with overhead controls in place will be much more profitable in the long term.
ABOUT THE AUTHOR
Roger P. Levin, DDS is the CEO and Founder of Levin Group, a leading practice management consulting firm that has worked with over 30,000 clients to increase production. A recognized expert on dental practice management and marketing, he has written more than 60 books and over 4,000 articles and regularly presents seminars in the U.S. and around the world.