Managing Your Overhead and Profitability, Part I, What is Your Overhead? by Jeffrey M. Blumberg
Managing Your Overhead and Profitability, Part II, Overhead Guidelines, by Jeffrey M. Blumberg
Managing Your Overhead and Profitability, Part III, Payroll Expense in a Dental Practice, by Jeffrey M. Blumberg
Managing Your Overhead and Profitability, Part IV, Associate Compensation & Other Overhead Trouble Spots, by Jeffrey M. Blumberg
Managing Your Overhead and Profitability, Part V, Lab Bills, Advertising, Overhead Peculiarities and What to do Next, by Jeffrey M. Blumberg
MGE’s weekly webletter, Issue 9.
Here is the next edition of MGE’s weekly webletter. The purpose of this webletter is to provide ideas, tips and suggestions to make your practice more successful.
Feel free to send us your comments and suggestions, or requests for future webletter topics you would like to see covered.
Managing Your Overhead and Profitability, Part I
By Jeffrey M. Blumberg
Chief Operating Officer, MGE
The subject of finance, or money in general, tends to create quite a reaction in people.
People “worry” about it, marriages run into trouble for lack of it and wars are started and fought over it.
You’ve probably experienced this “odd reaction” firsthand when presenting treatment to patients. “Mrs. Jones” might be the nicest person in the world during the presentation, asking all the right questions and seemingly interested in her dental health. You’re happy, she’s happy. Then financial discussion begins. At the mention of the cost, Mrs. Jones changes into someone completely different. Her face gets red. She’s belligerent. You have trouble believing that this is the same person you were having such a great conversation with thirty seconds ago. And all this at the mere mention of cost (money).
This article is the first in a five part series on the subject of how to increase profitability and manage your overhead. We’re going to talk about money. How you spend it and how to increase profitability. Being that this subject is so “charged” I wanted to lay out a few ground rules to ensure you get the most from it:
1. Due to the various “feelings” about the subject of money it tends to be one of the most volatile, misunderstood and poorly handled subjects.
2. As a result, there may be times in the process of going through these next few newsletters where you feel like increasing profitability or managing overhead is too “confusing” or too much “trouble” and avoid the subject altogether. This reaction is NOT uncommon. I assure you it’s a very simple subject. It’s a subject that, as a business owner, you MUST understand and I’ll do my best to help. So, persist. Your reward will be more control of your finances.
3. I’m not an accountant or investment professional. The purpose behind these articles is to show you how to create a SURPLUS; in other words, more profit. What you do with this “surplus” is up to you, your accountant and/or your financial planner.
Having said that, I’ll say this: Due to the confusion on the subject, along with the onerous and confusing tax codes and the general financial psychosis (for lack of a better word) associated with investing and estate planning, people’s eyes tend to glaze over when talking to accountants and financial planners. Sure they’re the experts. But that doesn’t mean that you should shirk all of your responsibility and just let them handle it.
Guess what, if a patient has no idea what you’re talking about with regards to treatment, it’s your job to explain it to them. Well, the same thing applies to your lawyer, accountant and financial planner. If you don’t understand why they are doing what they are doing, make them explain it. And if you don’t like the explanation, you have the power to choose someone else.
Bottom line: Don’t relinquish control because the subject seems difficult or impossible to understand. Find out. You’ll be the better for it.
4. Lastly and most important, finances work best when the subject is handled in a “clean” manner. What do I mean by this? Simple: obey the law. If your accountant or other financial professional suggests that you “hide income” or offers questionable tax strategies, I have one suggestion: Get a new accountant or financial professional who doesn’t do this. If what you’re being asked to do financially seems weird or sounds too good to be true – it probably is. The amount of time, effort and potential penalty associated with trying to “skirt the system” is not worth it. It’s also to sum it up in one word – wrong, and could potentially be illegal! If you disagree with various legislation the answer isn’t to violate it. Follow the law-abiding, standard route: join organizations that are committed to changing the laws or elect a representative that will change them, etc. Handle your finances in a manner where you could care less who looked at your books – life’s great when you have nothing to hide.
So, now that we have the “ground rules,” let’s move onto the “meat.”
What is Your Overhead Percentage?
You’ve at one point in time been asked, or have asked yourself this question. Most people answer with a percentage, i.e., “60 percent.” Some people plan their future on these percentages, “Well I can cut my overhead to 55% if I pay this off or fire this person,” etc.
The subject of overhead percentage can get pretty deceptive. Without getting into all of the variables, you can see that some expenses are more or less fixed (i.e., rent) and others are variable (i.e., lab). With this in mind, let’s take it back one step further, specifically to how an “overhead percentage” is derived.
This is simple enough; you divide your total expenses by your revenues.
Example: If you spend $40,000 per month to pay bills and the like while making $55,000, your “overhead percentage” is 72.7%.
$40,000 ÷ $55,000 = .727 (72.7%)
So far so good.
When discussing overhead percentage, the focus usually goes to expenses. This is only half the equation. It ignores what is, in my mind, the more important other half of the equation – revenues.
Let’s use the example above. We’ll say expenses are still $40,000, but in this scenario revenues are $80,000. Well, now our “overhead percentage” is 50%.
In an effort to increase profitability, the doctor with the $40,000 overhead and $55,000 in revenues, will more often than not place all of his or her focus on cutting expenses. They join supply co-ops, use a cheaper lab, refinance debt (the list goes on).
I’m all for cutting wasteful expenses. Why waste money? It misses the bigger point though, which is: If you’re looking to improve profitability, the FIRST action and focus should be to increase revenues.
Now, if you have some grossly ridiculous, hugely wasteful expense, feel free to cut it. But, and I say this with almost twenty years of experience, “penny pinching” for profit isn’t going to work as fast or as well as making your office produce the revenues it’s capable of.
What’s the starting point when it comes to increasing revenues? Simple – patients accepting and paying for their full treatment plans.
I’m not talking about just fancy full mouth reconstructions either. I’m talking about basic, bread and butter dental treatment. Like the patients you saw this past week who needed, but didn’t accept or put off, the crowns, implants or bridges (or endo, etc.) that they needed.
Now, you’ll have hardship cases where a patient cannot possibly pay and you handle these accordingly, you might do some of the work as a charity case and that’s great. I personally appreciate and enjoy doing work like that.
However, you’ll find – very often – that the patient who doesn’t accept treatment could pay for it. They just don’t. They pay for their vacation or other “stuff.” Why? They don’t understand the importance of it. They’re not “sold.”
It’s not uncommon to have a client go home and collect an additional 50% (or more) after their first seminar. I see this very frequently. And, I’m not saying this to “pump MGE up,” I’m just stating fact.
How do they do it? Well, usually it starts with them actually presenting full treatments and asking the patient to pay for it. Shocker – isn’t it? Look, there’s a lot more to this, it’s about the subject of sales. Which, if you’ve read our newsletters, you know that we teach a very professional, easy and actually fun way to handle this subject. We show our clients how to really connect with and communicate with their patients. I don’t want to go too far off on this, but it starts with sales.
I’ll give you two very simple case histories. And, I want it known that I didn’t “pore” over every client’s statistics to pick the “two best,” I’m too lazy for that…. I simply grabbed two successful clients to demonstrate my point. I’m not going to use names – but the numbers are real. While all of these doctors have gone on to even greater success statistically, I wanted to demonstrate how things changed in the beginning of the MGE program with primarily marketing, and communication and sales training.
Case #1: General dentist (practicing solo) with three operatories collecting about $59,000 per month (three month average). Attends MGE sales training and starts applying it. Within six months, with little staff change, is collecting about $81,500 per month (three month average). There was no change of facility, equipment or the like. No huge additional expenses. This doctor was spending less time in the office (as they were coming to MGE to train). Yet, despite all of this, they were collecting an additional $22,500 per month, most of which was profit. Keep in mind that there is no way they would have been able to “cut” $22,500 out of their expenses to become more profitable. It would have been impossible!
Case #2: Solo practice with three ops, general dentist, averaging $78,500 per month. Does two MGE seminars on communication and sales. Next three months following first seminar average about $115,000 per month (has increased far more since). A change of over $36,000. Again, no appreciable increase in expense (other than lab and supply of course), which means this additional revenue is profit.
If you look at these examples, you can deduce a few things:
1. The primary “change” which spurred increased productivity and revenue was training the doctor, not adding a piece of equipment or burdening the overhead with heavy expense.
2. These additional moneys were primarily profit.
3. Everybody wins in this set-up, patients get the treatment they truly need, the doctor gets the satisfaction of doing the type of dentistry they enjoy and the practice is more profitable.
4. Here’s the proverbial “kicker”: If these practices grew so fast, the potential to produce or collect that much was always there. It was just unrealized. So, using this logic, you could say had these folks started six months earlier – they would have been so much the more profitable!
My point? We’re dealing with overhead, profit and expense in this series. If you want to improve your profitability, look first to increase productivity. As you do this, you can then improve on and manage expense.
Look, you don’t have to do it this way. And by all means, as I said earlier, if you have any particular expense that is out of control, don’t “wait” to handle it.
But, if you want to be successful, focus on the income – not the expense to start. If you are not an MGE client, I’d suggest the MGE New Patient Workshop or the MGE Communication and Sales Seminars. If you’re already a client and you want to improve even further, check out the MGE Graduate Sales Team Seminar.
With all of that said, next week, we’re going to dive into expenses. We’ll detail various expense categories, along with percentage guidelines by category. We’ll also start to look into some common overhead trouble spots.
I thank you for your time, apologize for any “long-windedness,” and look forward to “seeing you” (electronically at least) next week.
PLEASE NOTE: This article provided by MGE: Management Experts, Inc. consists of suggestions and ideas that could be used to help improve the solvency and viability of a dental practice. There is no guarantee that the information provided is appropriate to your practice. Each practice, their owners, officers and staff are individually responsible for ensuring that any system implemented in the practice complies with the applicable federal, state and local accounting, tax and employment laws, rules and regulations governing the place in which your practice is located. These suggestions do NOT constitute legal or accounting advice. You should seek advice from your own accounting and legal advisors as to what is appropriate to implement in your practice, prior to implementation. MGE: Management Experts, Inc., its officers, directors, shareholders, employees, agents and the writer of this article, are not responsible for any claims, real or otherwise, associated with this material and information or any part thereof.
MGE’s weekly webletter, Issue 10.
Here is the next edition of MGE’s weekly webletter. The purpose of this webletter is to provide ideas, tips and suggestions to make your practice more successful.
Feel free to send us your comments and suggestions, or requests for future webletter topics you would like to see covered.
Managing Your Overhead and Profitability, Part II
By Jeffrey M. Blumberg
Chief Operating Officer, MGE
This article is part two of a five part series on how to increase practice profitability and manage overhead. To view part one, click here.
In last week’s article, we covered lowering overhead by realizing your collections potential and thereby increasing revenues.
In this week’s article, we’ll cover overhead and expense basics, including general overhead categories, along with suggested percentages for each. We’ll also detail common overhead trouble spots.
What’s Your Overhead?
Normally, the small business or practice owner thinks of their overhead in monthly terms – i.e., “My overhead is $30,000 per month.” We usually arrive at this figure by asking our accountant for a Profit and Loss statement or getting the same or similar report from our financial software.
Then using what was collected the past month, we calculate a rough estimate of profit, “We collected $50,000 and my overhead is $30,000 so my profit is around $20,000.”
Often, these rough calculations are way off the mark.
Calculating Your Overhead
Technically, your overhead will fluctuate (to some degree) month to month. Here are a few things to keep in mind:
1) You have fixed and variable expenses. More on this later, but for now, the variables are primarily dependent on how much you produce or collect. The more you produce or collect, the higher your variables go. So, if you’re estimating an overhead figure, you could get pretty close as long as that figure was based on a certain production and collection figure. For example, someone’s overhead is $40,000 as long as they are collecting and producing $70,000. If they produce $100,000, the overhead for that month would go up (due to more lab, supplies, additional staff or hours, etc.).
2) Basing projected expenses off of what you’ve already spent in the past can be a major error. Sure, using your Profit and Loss statement for the 1st Quarter could help you figure your monthly overhead out. But, what if you overspent in certain areas? Let’s say your assistant went wild with supplies and over-ordered? If you used this information, you’d project too high of an overhead figure into the future for dental supplies. So, while past expenses are helpful to determine future expense, they are not the final word. Don’t blindly transfer your P&L information to an overhead sheet and think it’s all nicely taped. Ensure the amounts you’ve been spending are the amounts you should be spending, which leads us to the next point.
3) Financial planning for a business should be done in this sequence:
1. Earn money.
2. Determine/plan how you are going to spend this money or which expenses you’re comfortable incurring.
3. Incur expense. You’re planning AHEAD.
How it’s usually done is:
1. Incur expense
2. Get money
3. Pay bills
4. Now figure out what you spent on what.
The earlier sequence is planning. The latter sequence is reacting. You wouldn’t go on a trip with no idea as to where you were going. Similarly, you’d want to plan what you were going to spend money on before you spent it. We’ll get into this more as the newsletters continue, but for now let’s use the dental supply example. Do you have a budget? If your assistant orders does he or she know how much they can spend per month? Or, do they just order whatever they want or think you need and you pay the bill? Maybe they have to exceed their budget one month – do you find this out before or after the money’s been spent? I think you see what I’m getting at.
4) Last point: Weekly and monthly expenses are usually added in to someone’s overhead figure. What about expenses that are less frequent? Malpractice and other insurances, major maintenance and repairs (i.e., replacing a compressor) and some tax bills are not paid on a monthly basis. But, they add up. Technically, even if they’re not paid on a monthly basis, it should be built into your overhead and expense figure and this money should be set aside for when the bill is due. For example, if your malpractice is $4,800 per year, $400 per month should be built into your overhead to cover this when the bill comes due. This deserves attention – I’ve seen plenty of doctors who thought their monthly overhead was 40K find out it was actually 45 or 50K when you factor these expenses into the mix.
Overhead Categories
The MGE Overhead and Expense sheet covers just about every category of expense. (For a copy of this Overhead and Expense sheet, click here.) It has two parts: The Worksheet where you figure out all of the expenses for each category and the Summary Sheet, where you bring it all forward and come up with a final overhead figure. The break down of categories with some explanation follows:
RENT & MORTGAGE EXPENSE
This would include any rent and association dues (if you’re in an office condo, etc.) that you might pay on a monthly basis. If your office owns the building itself, which I’ve found to be rare, you’d include the mortgage expense in here. If you own the building and rent it to the practice, you’d include your rent – not the mortgage – since you as the landlord pay the mortgage.
LEASE EXPENSES
Self-explanatory.
LOANS & LINES OF CREDIT
Again, self-explanatory. If you’re newer in practice and your loan payment will graduate higher in the years to come, keep in mind that you’ll need to adjust this category.
CREDIT CARDS
We include this category if you’re carrying any credit card balances. With clients, we work to get these retired quickly through increased profitability. Nonetheless, you have to service the debt whether you like it or not. If you use your credit cards for supplies or lab and pay them off every month, these would be lab and supply expenses respectively (which are covered later), not credit card expenses. This category is here just in case you’re carrying balances.
INSURANCE
Self-explanatory.
OUTSIDE SERVICES
Accountant, hazardous waste disposal, janitorial services, etc.
UTILITIES
Self-explanatory.
COMMUNICATION & PHONE
Self-explanatory. However, if your yellow page ad is included in your phone bill, break the amount off for the ad and include under advertising.
DUES
LICENSING
SUBSCRIPTIONS
Are all self-explanatory.
PAYROLL EXPENSE
This would include employee compensation, along with any employer related payroll tax or unemployment contributions.
ADVERTISING
Any advertising – mail, billboards, TV, radio, etc.
PR & PROMOTION
Birthday cards, sponsorship of local organizations, etc.
CONTINUING EDUCATION
Self-explanatory.
OFFICE EXPENSES
This is primarily office supplies.
BANK & CREDIT CARD CHARGES
DENTAL SUPPLIES
LAB EXPENSES
All self-explanatory.
BACK BILLS
We added this category in the event that a business is behind on bills. If this is the case, we’d want to ensure that this was factored into overhead to ensure that the office catches up to where they should be quickly.
OTHER EXPENSES
The catch all! If we’ve forgotten anything, here’s where you’d add it.
Overhead Percentages
Using the categories above, we’ve calculated some projected percentages. These percentages were calculated with a solo GP who’s been in practice for at least seven years. These are NOT written in stone and can fluctuate due to a number of factors (more doctors, newer in practice, etc.) that I’ll detail afterwards.
EXPENSE CATEGORY ESTIMATED PERCENTAGE
Rent and Mortgage Expense 4-5%
Lease Expenses **
Loans and Lines of Credit **
Credit Cards **
Insurance 2%
Outside Services 1.65%
Utilities .6%
Communication & Phone .6%
Dues & Licensing **
Subscriptions **
Payroll Expense 22.5% (1)
Advertising 3-5% (2)
Continuing Education 1-5%
Office Expense 1.25%
Dental Supplies 6-7%
Lab Expenses 8-10%
TOTAL 50.6 -60.6%
GROSS PROFIT 39.4 – 49.4%
** = not listed as a regular expense, or amount less than .3 percent.
(1) – Does not include doctor or associate pay.
(2) – Marketing budget can be higher depending on the doctor’s desire for new patients or expansion.
Now, as I said earlier, this is not written in stone. Percentages could be higher.
If a practice is newer, it’ll be carrying more leases, loans, etc. If there are multiple doctors, the profit will be lower (as you’re paying additional doctors) but you should be more than making this up in volume. There are a number of other variables, most of which I’ll cover through the balance of my newsletter series. For now though, we have a start.
Fixed versus Variable
Defining which expenses are fixed and which are variable depends in a large part on who you’re talking to. I’m giving you my view on this. Whether you use it or not is up to you (this is why I have that cool disclaimer).
Fixed expenses:
Using the categories above, you could say that the following expenses are for the most part fixed. They don’t change or they change very infrequently (i.e., every year). It’s a good idea to periodically review these categories (possibly quarterly or at least semi-annually) as phone plans & loan payments might change and some insurances adjust more frequently than annually, etc.
1. Rent and Mortgage Expense
2. Lease Expenses
3. Loans and Lines of Credit
4. Insurance
5. Outside Services (accountant, etc.)
6. Utilities
7. Communication & Phone
8. Dues & Licensing
9. Subscriptions
Variable Expenses
These expenses can change month to month. Some like lab and supplies are tied to office productivity. Others (like CE) are tied to how much and what type you’re utilizing. Regardless, we’ve listed these expenses as “variable” which could:
a. Drastically fluctuate on a monthly basis.
b. Change (as a percentage of expense) very quickly (i.e., you could sign up for a new marketing plan and this could impact your overhead within 30 days).
1. Payroll Expense
2. Advertising
3. Continuing Education
4. Office Expense
5. Dental Supplies
6. Lab Expenses
Even though these expenses are variable, they could still fit within the percentage framework as listed above.
Working with a Basic Overhead Figure and Variable Expenses
So, how do we put all of this together to work and manage with?
Well, here’s what you could do:
1. Work out what your average collections and production have been for the past three to six months. Now, I’m assuming there are not huge swings here on a month-month basis (i.e., 25% or more).
2. Now work out your current overhead. You can use the categories above. Ensure you include the monthly amount for expenses that are paid quarterly, semi-annually and annually (insurances, etc.).
3. #2 above would be your overhead more or less when you are producing and collecting what you determined in #1.
In other words, if you work out your average monthly collections at $60,000 and your average overhead/expense is $40,000, we would say that at $60,000 your overhead is $40,000 or 67%. Now of course as explained in our last newsletter, if you were to produce/collect more, this number might go up, but the percentage would go down.
Getting back to this example, you’d be pretty set saying that your overhead was “$40,000,” as long as your collections average $60,000.
Now, let’s say you’re humming at the overhead and collections levels listed above. You haven’t added any expenses particularly; you’re staffed the same and all budgeted areas are operating at about the same level. Then, out-of-the blue, you have an incredible month and produce and collect $100,000. How would you account for the increase in variable expenses?
A simple rule of thumb would be to set-aside 30% of your increase towards variable expenses. It might be more than you need, but if you had a choice between having too much money or too little, which would you choose?
Working the numbers using our example above, it would go like this:
We’ve collected $60,000 on average (some months a little higher and some a little lower), with an overhead of $40,000. We have a big month and collect $100,000, which is $40,000 above average. We take 30% of the $40,000, or $12,000 ($40,000 x 30%) and keep that aside to cover additional expenses incurred this month (lab, supplies, etc.). So, instead of our usual $40,000 to pay bills with, we have $52,000 ($40,000 plus the $12,000 for variables).
We may use less, but again, isn’t it better to have that problem than setting aside too little?
Now, we collected an additional $40,000. We have the $12,000 for variables, leaving $28,000 left over, which is for the most part profit. What do you do with that? Well, this is where you talk to your accountant.
Now, what if this increase is not just a “flash in the pan,” but a more regular thing? Well, good news – you’re expanding. As your office expands, you’d want to review your overhead more frequently to adjust categories as more productivity will usually bring at least some additional expense.
MGE clients expand pretty fast. As such, we place our Financial Planning Seminar early on in our Executive training.
We have a basic idea now on overhead. I thank you for reading and hope I haven’t driven you into the unconsciousness of boredom with all of this numbers talk!
Trouble Spots
Let’s preview a bit of next week and look at the overhead areas that cause the most trouble – our overhead “hot spots.” From my experience, these categories (in the order of priority) tend to be most problematic:
1. Payroll
2. Advertising and PR
3. Loans/Leases
4. Credit Cards
5. Supplies (Dental and Office)
6. Lab
While other categories could cause issues in individual situations (i.e., your rent is too high), I’ve found 1-6 above to be the most common overhead trouble points.
You’ll notice payroll is #1. It’s also (if you look at percentages chart above) the expense that eats up the highest percentage. Managed well it’s still a quarter of your expense.
Next week’s issue will be completely devoted to this subject and what causes it to go higher than it should. We’ll visit the subjects of efficiency, whether you’re paying too much for certain positions and how to get this category under control.
PLEASE NOTE: This article provided by MGE: Management Experts, Inc. consists of suggestions and ideas that could be used to help improve the solvency and viability of a dental practice. There is no guarantee that the information provided is appropriate to your practice. Each practice, their owners, officers and staff are individually responsible for ensuring that any system implemented in the practice complies with the applicable federal, state and local accounting, tax and employment laws, rules and regulations governing the place in which your practice is located. These suggestions do NOT constitute legal or accounting advice. You should seek advice from your own accounting and legal advisors as to what is appropriate to implement in your practice, prior to implementation. MGE: Management Experts, Inc., its officers, directors, shareholders, employees, agents and the writer of this article, are not responsible for any claims, real or otherwise, associated with this material and information or any part thereof.
MGE’s weekly webletter, Issue 11.
Here is the next edition of MGE’s weekly webletter. The purpose of this webletter is to provide ideas, tips and suggestions to make your practice more successful.
Feel free to send us your comments and suggestions, or requests for future webletter topics you would like to see covered.
Managing Your Overhead and Profitability, Part III
By Jeffrey M. Blumberg
Chief Operating Officer, MGE
This article is part three of a five part series on how to increase practice profitability and manage overhead.
In last week’s article, we did a basic review of overhead categories and percentages. For a copy of the MGE Dental Overhead & Expense Sheet, click here. We also identified the six overhead categories that tend to cause the most trouble.
In this week’s article, we’re going to cover the overhead category that in my experience causes more trouble than all others combined–payroll and staff compensation. We’ll look at the primary reasons it may be higher than it should be and how you could go about getting it under control.
Staff Payroll Percentage
As I mentioned in last week’s webletter, staff pay should not exceed 22.5% of your monthly expenses. Let’s get into specifics:
This 22.5% WOULD include:
1. All of your administrative staff (office manager, front desk and other, including part-time bookkeepers).
2. Your clinical staff—namely assistants and hygienists—full or part-time.
3. Any payroll taxes associated with paying your staff.
The 22.5% WOULD NOT include:
1. The doctor’s salary.
2. Associate’s salary—unless you are employing an associate in lieu of a hygienist to do hygiene at a flat rate per diem.
Are you paying too much?
Determining this is pretty simple.
1. List out all of your staff as noted in #1 above.
2. Figure out what they make each month. A note here when you work out employee payroll: remember that there are more than 4 weeks a month. I say this based on years of asking doctors and other business owners what they were paying a specific employee and getting the wrong answer—i.e., “What are you paying Jane the receptionist?” Reply: “$2,000 per month.” “How much per week?” “$500 per week.” If you’re paying Jane $500 per week, you’re actually paying her $2,166.67 per month. Figure out employee monthly compensation as follows:
a. Employee hourly pay multiplied by hours worked per week (assuming this is more or less fixed).
b. Multiply “a” by 52 (weeks in a year).
c. Divide by 12 (months in a year).
Example:
a. Jane makes $12.50 per hour for a 40 hour week = $500
b. $500 x 52 = $26,000
c. $26,000 divided by 12 = $2,166.67
So, you would do this for each and every one of your staff that would be included in the 22.5%.
3. Take the total from #2 above (all of the staff’s pay) and add 7.65%. This is the amount you have to match for FICA (Federal Insurance Contributions Act Tax which covers Social Security and Medicare).
Example: Your total employee compensation (managers, front desk, assistants, hygienists, etc.) comes to $12,000 per month. Add 7.65% of this figure to the $12,000.
Step 1: $12,000 x 7.65% = $918
Step 2: $12,000 + $918 = $12,918
$12,918 would be total employee compensation for our purposes here. Note that there may be other taxes depending on your situation or locale. Unemployment percentage is not included here as this varies by state and your history. Ask your accountant for more information.
4. Now we want to know—is our payroll too high? Well, we’re going to do two things here:
We’ll first a) figure out what our payroll percentage is.
b) If it’s too high, we’re going to figure out how much we should be collecting to justify such an expense.
“a” (our actual percentage) is figured very simply:
We take our payroll amount $12,918 as above and divide it by our average collections for the past three months. Let’s say we’ve been averaging $40,000 per month. So,
$12,918 divided by $40,000 = .322 or 32.2% – too high by almost 10%!
Now if it’s too high, let’s take a look at what we should be collecting if we’re paying that much. I’m going to do this the old fashioned way:
1. We take our payroll amount and divide it by 22.5.
2. We then multiply this figure by 100.
Using the numbers above, here’s an example:
1. $12,918 divided by 22.5 = $574.13
2. $574.13 x 100 = $57,413
In other words with a payroll of $12,918, we should be collecting at least $57,413, which is $17,413 more than what the office has been collecting. If you find yourself in this boat and were wondering where your profit has been going— you now have some idea.
So, what do we do about it? Depends. You could fire people—which I loathe to do unless justified. If someone is really underperforming this may be an option. I wouldn’t keep someone who refused to get the job done and didn’t improve despite efforts to get them to do so. As I mentioned in our first issue of this series, I’d rather get the office producing to its potential.
In my experience, high payroll usually traces back to a few basic reasons:
1. Treatment acceptance is low, or the office is disorganized and as such isn’t reaching its potential.
2. You’re paying the person—not the position.
3. Someone (or two) on your staff (and therefore the office) is underproducing.
4. Your staff are misallocated.
We’ll take each of these up separately.
1. Treatment acceptance is low or the office is disorganized and as such isn’t reaching its potential.
I spent a good amount of time on this one in the first issue in this newsletter series.
2. You’re paying the person—not the position.
Ideally, compensation should be linked to value. How would you measure someone’s value or potential value? This breaks down to two factors:
a. Their position in the office.
b. How well they do their job.
With one decision, a corporate CEO, who really knows his or her job, can make tens of millions of dollars for their business. Due to their position, they have sweeping impact on their organization. Now, this can of course be good or bad (i.e., remember “new” Coke?). The point is: the higher up you go, the more responsibility you have, the more your decisions and actions affect the activity. Generally (you would hope), people in these positions would also have more skill, knowledge and/or ability than the people that work for them (history does not always agree with this unfortunately).
Due to their potential impact, skill-set and ability, they are compensated more than say—the guy in the mail room, whose decisions—while not unimportant—do not have the same impact or potential exchange value for the company.
Using a dental scenario, let’s say you have a great office manager. He or she really keeps the office booked, hires great staff and makes your job a breeze. As a result of their work, practice revenues are up by $600,000 per year or $50,000 per month. This gives you some insight into their value to your office in dollars and cents. You notice that when they’re out for vacation, things don’t run as well and collections drop (which as a side-note they shouldn’t if they were a great executive—but that’s another subject). Based on the numbers, someone like this should be well compensated. You’re making a lot more (as proven by statistic) than you would if they weren’t there.
You could apply this to just about any staff member. Look at it this way: If you were to hire a Schedule Coordinator, what would you expect? I would expect that the office would produce a lot more. If production didn’t go up and no-shows didn’t go down, then what would be the point?
This, by the way, is why we teach MGE clients how to use statistics to grade performance. Statistics are unbiased—they don’t have opinions—they are what they are. They are based on nothing more than performance. Using statistics to decide on promotions makes life easy—the people who do their jobs move up and those that don’t do their jobs don’t, or they may move out.
Looking further we see that someone’s position in the office has a lot to do with how they can impact the place. A receptionist is a very important position. We go into this in a number of these newsletters. But, if you were compare the greatest receptionist in the world and the greatest office manager in the world—the office manager would have more impact and thus more value to the business—just based on their position alone. Again, this is not to minimize the receptionist’s importance—it’s just that from that position they don’t have the same responsibility as the office manager. As such, they are compensated differently.
Where this goes off the rails is when I see somebody complaining about profit and they’re paying their receptionist over $70,000 per year. Unless you’re charging $2,500 for a crown—I wouldn’t see how this could work. I don’t care how “great they are.” If they’re making that much money, they should have more responsibility and hence more potential impact. Maybe they should be manager or junior manager—or something! A receptionist has a certain value. How they are compensated usually has to do with your locale. A receptionist on the upper west side of Manhattan is going to make more than a receptionist in Wyoming due to cost of living adjustments. When clients have questions about what to pay, I usually, due to variances by locale, refer them to an applicable website like www.salary.com. These sites lay out, based on your zip code what the low, median and high rate of pay is for various positions and can help you gauge wage levels for your area.
While I don’t object to paying someone well or even a little high for what they do if they perform well, grossly overpaying by position because the person is “great” or they’ve been with you for umpteen years is a fast way to cause overhead issues. Rather pay them well and have a bonus system. Bonus systems offer you a potentially unlimited means of compensating someone. The better the staff does their job, the more the office makes. The more you make, the more the staff makes and everyone wins. If you’d like a sample office bonus system based on collections, you can send an email to info@mgeonline for a copy.
3. Someone (or two) on your staff (and therefore the office) is under-producing.
Here’s the kicker. You have six staff and four of them are running around working themselves half to death. One is indifferent and doesn’t get much done and the other is actively counter-productive to the organization. All of this results in a stressful working environment and struggling office barely paying its bills.
Why?
Let’s use an analogy. You’re part of a team in a tug-of-war contest. You have six people on your team, including yourself. You and three of your teammates are in there pulling. While some are stronger than others, the four of you are giving your all. The fifth teammate is standing next to the rope—staring at the team, having a coffee, secretly thinking about joining another team, explaining how “tired” they are and how they’ll be “right there.” Teammate five is a distraction. The four of you are annoyed with him or her, but you keep pulling. The sixth teammate is pulling the wrong way (while pretending to pull the right way) and sabotaging the four of you who are working your hearts out. With teammate six, some of you suspect something is wrong, but you can’t quite put your finger on it.
Whether your team wins or loses depends on the combined effort of the group to pull harder than the other team. You and three others are working towards that objective. One isn’t really helping and another is actually working against the objective. You could get rid of “teammates” five and six and the overall effort would actually improve. Why? Two reasons:
a. The obvious one, teammate six (who’s pulling against you and making it harder for the four of you to pull) would be gone—making it that much easier and
b. The annoyance associated with teammate five (which is counter-productive in and of itself) would be gone, making the rest of the team happier and less distracted.
Better yet, cutting teammate five and six loose gives you an opportunity to get a new teammate five and six who can add their effort to winning the tug-of-war. With the addition of these two new “pullers,” your team has more power.
Now, transpose the example above into an office setting. The only thing worse is you’re paying teammate five and six for their lack of work or downright counter-productive activity.
The activity of teammates five and six result in lower productivity, income and morale. Eventually, you’ll have an overhead problem because your income is too low and your payroll percentage goes up. Again, here’s where statistics are invaluable. Teammates five and six would be found out fast and would have to change their ways or move on.
So, keeping non-productive personnel on board will not only keep your office from reaching its potential (as discussed in the first newsletter in this series), you’ll have a hard time making it in general.
4. Your staff are misallocated.
By misallocated, we mean that people are placed in the wrong positions of the organization based on workload. It could also mean that some areas are to a small or large degree overstaffed (too many personnel based on workload).
Example: Dental office with one doctor, one assistant, two chairs, 500 active charts, an average of seven patients per day and three full time staff up front. In a small one-provider office like this, you don’t need that many administrative staff. There’s not enough for them to do. If they seem busy all of the time, especially if you’re not very productive, you probably have one of these counter-productive types causing trouble and creating work for the other two to do. Regardless, you’d be better served moving one in the back to work as an assistant. In this scenario, one front desk person would probably suffice.
Let’s look at the reverse: Eight-chair office, five thousand active patients, two doctors and four full time hygienists, five dental assistants (four for the doctors and one for hygiene), with one full-time person up front. In this case, the inadequate administrative staff can’t keep the doctors and hygienists booked.
Both of these examples illustrate a misallocation of staff. This is solved in some cases by reassignment (to another area based on workload) or in more drastic cases, potential lay-offs/dismissals.
Again, I’m not a big fan of getting rid of people—especially productive people. If you have a productive, performing person, you can usually find something worthwhile for them to do at your office. Non-productive, non-performing personnel are an entirely different matter.
Misallocation happens a good amount of the time due to poor organization—not malice. Lack of a good organizational structure opens the door to inefficiency, duplicative work and any number of things. For this reason, we spend a good amount of time with MGE clients teaching them how to set up an effective organization structure that allows for stable and profitable growth.
All right—that was a long one! I’ll leave you til next time. In our next issue, we’ll start off with a bit on associate compensation and then we’ll cover some of our other overhead “troublemakers”: advertising, loans and supplies.
See you next week!
PLEASE NOTE: This article provided by MGE: Management Experts, Inc. consists of suggestions and ideas that could be used to help improve the solvency and viability of a dental practice. There is no guarantee that the information provided is appropriate to your practice. Each practice, their owners, officers and staff are individually responsible for ensuring that any system implemented in the practice complies with the applicable federal, state and local accounting, tax and employment laws, rules and regulations governing the place in which your practice is located. These suggestions do NOT constitute legal or accounting advice. You should seek advice from your own accounting and legal advisors as to what is appropriate to implement in your practice, prior to implementation. MGE: Management Experts, Inc., its officers, directors, shareholders, employees, agents and the writer of this article, are not responsible for any claims, real or otherwise, associated with this material and information or any part thereof.
MGE’s weekly webletter, Issue 12.
Here is the next edition of MGE’s weekly webletter. The purpose of this webletter is to provide ideas, tips and suggestions to make your practice more successful.
Feel free to send us your comments and suggestions, or requests for future webletter topics you would like to see covered.
Managing Your Overhead and Profitability, Part IV
By Jeffrey M. Blumberg
Chief Operating Officer, MGE
This article is part four of a five part series on how to increase practice profitability and manage overhead. To view the first three parts, please go to:
Managing Your Overhead and Profitability, Part I, What is Your Overhead?
Managing Your Overhead and Profitability, Part II, Overhead Guidelines
Managing Your Overhead and Profitability, Part III, Payroll Expense in a Dental Practice
In last week’s article, we covered the overhead category that usually causes more trouble than all others combined – payroll. We looked at the reasons your payroll percentage could go out of whack and some potential solutions.
This week, we’ll continue to look at a couple of other overhead “trouble spots,” and we’ll also cover associate compensation, along with how it relates to your payroll percentage.
Compensating Your Associate
If you’ve read the prior three installments of this newsletter, you’ll know that:
- The first thing you should do to reduce your overhead percentage and increase profitability (barring the presence of any unusually ridiculous, wasteful expenses) is to increase productivity and collections.
- Your payroll percentage should not exceed 22.5%.
- This 22.5% does NOT include you as the owner/doctor, or any associates you might have.
- It does include all of your other staff (administrative and clinical, part-time and full-time).
- Ideally, a solo practitioner who’s been in practice for at least seven years, has paid off their practice loan and isn’t carrying a huge amount of debt for build-out and equipment should be running between 50.6% and no more than 60.6% overhead. And if it’s lower than 50.6%, that’s OK too!
This brings us to the subject of associates.
If you have questions about how to find, interview, pay and integrate an associate, and the like, I’d recommend you read Dr. Winteregg’s Webletter
articles on the subject, All About Associates,.
When it comes to profitability and expense, there are a few things about associates to keep in mind that will monitor the impact they might have on your profitability.
1. If you add an associate, your production should increase.
Now, some offices add associates to free the owner/doctor up to manage or present treatment. If you have that type of an arrangement, then this would not apply. This idea refers more to the conventional model, where you add an associate to free up your booked out schedule. Moving the fillings, less productive procedures, single unit crowns and possibly endo to an associate’s schedule should create more time on your schedule to be more productive. Instead of booking that four-unit bridge out for two weeks, you get to do it in a couple of days. Two things should happen when adding an associate in this manner: a) Your associate should become productive and b) by freeing your schedule up, you should become more productive. A solo-practitioner doing $80,000 per month ($60,000 him or herself and $20,000 in hygiene) should see a jump in their production (to say $70-$80,000 or more) with an additional $30-$40,000 from the associate. This takes an $80,000 per month practice and turns it into a $120,000 – $140,000 per month practice (i.e., $70-80,000 owner doctor, $30-$40,000 associate and $20,000 hygiene).
This setup doesn’t work if you add an associate and give them work, while you sit idle. If you’re scheduled to work this morning, but there is nothing on your schedule but a denture reline, while your associate is booked up – then something is wrong. The primary purposes of bringing in an associate are to a) To improve patient care by getting them in quicker and b) to free you up to become more productive. Sure there’s also emergency coverage and the like, which is great. But, if your production stays the same same (or worse, goes down) to “keep the associate busy,” it defeats the main reason you would add one in the first place.
2. The associate must produce enough to make employing them worthwhile.
Associate pay plans can vary. The primary plans I’ve seen are:
a. Percentage of production or collections.
b. Straight per diem amount.
c. Per diem plus some type of production bonus.
d. Per diem plus production bonus after a certain production level is hit.
The primary variance in a-d above is the amount of the per diem and the percentage paid.
Regardless, if you’re paying an associate a per diem of $500 for a 17 day month to produce $15,000, it’s not going to work very well, just on numbers alone.
Depending on your locale, fee structures can vary wildly, so I’m not going to throw out that an associate must produce $X amount to make it worthwhile. I leave that up to to you to decide. Minimally, I would say that regardless of their pay plan, paying them anything over 30% of their collections (I guess you could push that to 35% if you really wanted to) doesn’t make much sense. Using the figures above ($500/day to produce $15,000 on a 17 day month), you’ll see that you’d be paying them 56.7% ($500/day X 17 Days = $8,500. $8,500 divided by $15,000 = 56.6%). To make it worthwhile, that $500 a day or $8,500 a month associate would at least have to collect $28,333 ($8,500 is 30% of $28,333).
3. If your associate has no case presentation duties, their compensation percentage should reflect this accordingly.
How an associate is paid should be based on what they are expected to do. If you’re presenting all of the treatment and they get to come in and produce all kinds of high-end dentistry, 30% of their production or collections is way too high.
On the other hand, if the associate is expected to present treatment and is given the more simple treatment to free up your schedule, then 30% might be justified.
Ensure you factor all of this in when formulating associate pay. Why? Acquiring new patients costs money. So do dental supplies and the assistant you have to hire to work with them. Ultimately, you’re on the hook for all of these expenses.
4. Your associate should be paid on collections.
I get some odd looks at times when I mention this at a seminar. To me it’s pretty simple. You can’t pay your associate (or staff and bills) with production. You can only pay them with real money – collections. Basing it off of anything else, such as production can open you up to any number of issues, such as the time factoring in write-offs for PPOs and finance plans, so you’re not paying for what you didn’t collect.
Again, for more information on the whole associate picture, I recommend Dr. Winteregg’s articles titled All About Associates.
Other Overhead Trouble Spots
As we covered two issues ago, the top six overhead categories that I’ve observed cause the most trouble are: Payroll, Advertising and PR, Loans/Leases, Supplies (Dental and Office), Lab & Credit Cards.
We covered payroll last issue. To finish this issue off, we touch on Loans/Leases and Supplies (office and dental).
Loans & Leases
From time to time, especially with expensive equipment, you need to take out a loan or do some kind of a lease. Fine. It goes with the territory.
Here’s where you can get into trouble doing this:
- If you’re a newer office and your production and collections are not up to snuff.
- If you build out, expand, add rooms, move, etc., expecting this to magically make you more productive – and that bump in production never comes.
- This is the most common issue – you purchase a cool new piece of equipment that is not really justified by your current level of productivity.
1 and 2 above are pretty easy to think with.
If you find yourself in #1, you need to become more productive. This might include increasing the number of new patients and learning how to present treatment more effectively. For information on how to get more new patients click here. To find out how to improve case acceptance, click here.
Number 2 above, expanding/adding more facility (rooms, space, etc.) hoping to become more productive, really depends on your situation. If you’re busting at the seams with patients, this can work well if done right. For example: You have a two chair office, with a full time hygienist in one of them and both you and the hygienist are booked out six weeks. You decide to add a chair. Well, in this instance, that extra chair could add at least an additional $100,000 or more per year – or more. It’s a good move.
Conversely, let’s take a doctor who has a nice four chair office that’s paid for. He or she decides that moving to a prettier five chair space will “raise revenues,” and provide a happier work environment. He or she is not overbooked, doesn’t need to add any additional providers, etc. The office, while productive, is not really growing and has collected the same amount the last two years. Well in this case, unless you get the place expanding, the primary things you’ll add with a move are debt and stress.
The new office is most likely more expensive and now you’ll have to add the debt service for it to your overhead. And, you’d better hope that revenues don’t go down. I write this as I’ve seen my share of doctors who move for no other reason than to move. There was nothing wrong with their location or physical plant and they expect that the half million dollars they take out in loans to build out and equip the new place will attract people because it’s pretty. This very rarely works out the way you might hope. Sure, you might eventually pay everything off – after seven years of unnecessary stress and ulcers.
The moral: Don’t do this unless a) you’re expanding and the need for space in the relatively close future (not ten years from now) is clear or b) you find an opportunity that you feel you shouldn’t pass up – i.e., owning your own space, etc., and even then you should really crunch the numbers and be certain that it will work.
Number 3 above, purchasing new equipment that isn’t particularly justified by current productivity, is, as I wrote above, the most common of these issues. How does this happen? Let’s say you go to a trade show. You see some really cool piece of equipment that you desperately “need” and go ahead and lease or take out a loan for it. Need is the key word here. What’s the different between “need” and “want”? As a businessperson, “needing” something, would mean, in my opinion, that:
a) Not having it compromises clinical quality in some way, or adding it would really improve the level of patient care or
b) Having it would raise revenues and make you additional profit. And by raising revenues, I don’t mean just enough to cover the payment. If you purchase a piece of equipment and spend $1,200 to lease it every month, I would expect that having it would – at least – make you an additional $5,000 per month.
Look, I want you to have a beautiful high-tech office. I would hope that it’s everything you’d ever dreamed of. I don’t, however, want you stressed out financially because you’ve loaded up on equipment that’s hardly being used, or wasn’t really required to improve or maintain clinical excellence. Before buying something, really examine whether it’s a “need” or a “want.” If it’s a “want” item, see if you’re really in the position to swing it financially, at your current rate of revenue, not hoped for future revenue increases. Chances are, that piece of equipment you “want” now, will eventually become a “need” as your office grows.
Supplies (Office and Dental)
The problem with supply expenses is one of control.
I wouldn’t suspect that you would leave your office checkbook lying around and allow just any employee to write a check for whatever expense he or she thought necessary. Even then, while not completely secure, one of the fail-safes with a check is it requires your signature.
With the way supply accounts are set up (either directly with your supplier or attached to your credit card), the potential liability is someone can just order what they want or feel is needed without authorization.
This area becomes problematic when no hard budget has been set. In other words, your Lead Dental Assistant (or whoever does your dental supply orders) would ideally know that the supply budget for this month is X amount and no more.
When he or she does the supply orders for the month, they are responsible for keeping within your budgeted amount and are not authorized to exceed it.
You could even, if you wish, carry over whatever money they didn’t use a prior month to the following month. This really gives the person in charge of ordering the ability to have some fun with it. They can save money here and there to buy some particular item or items that the office has been looking to get.
The plus here is that you allow the individual to be responsible and give them a degree of power and control. You would also have to set this up with a few conditions in mind:
- You can’t run out or run dangerously low on supplies that are needed to operate – i.e., you don’t want to have to call a colleague down the street to borrow impression material because not enough was ordered.
- If something expensive breaks (hopefully not due to poor maintenance or misuse) and you need to exceed budget, the person in charge of this should be able to come to you and sort it out to get the needed funds to handle it.
- If production jumps spectacularly one month or more, you may have to quickly adjust your budget, especially if you’re doing a lot of implants or crown and bridge. Implant supplies and impression material can be expensive.
- The supply budget you set must be REAL. Meaning, if you need $4,000 a month for supplies, don’t give your assistant a $2,000 budget and tell them to “figure it out.” That’s a recipe for disaster.
You could apply these same rules to your office supply accounts and whoever handles the ordering.
Well, that’s it for this week. Next week, we’ll wrap up the series with more on how to address our final troublesome overhead categories, along with a summary of steps to take based on your situation.
PLEASE NOTE: This article provided by MGE: Management Experts, Inc. consists of suggestions and ideas that could be used to help improve the solvency and viability of a dental practice. There is no guarantee that the information provided is appropriate to your practice. Each practice, their owners, officers and staff are individually responsible for ensuring that any system implemented in the practice complies with the applicable federal, state and local accounting, tax and employment laws, rules and regulations governing the place in which your practice is located. These suggestions do NOT constitute legal or accounting advice. You should seek advice from your own accounting and legal advisors as to what is appropriate to implement in your practice, prior to implementation. MGE: Management Experts, Inc., its officers, directors, shareholders, employees, agents and the writer of this article, are not responsible for any claims, real or otherwise, associated with this material and information or any part thereof.
MGE’s weekly webletter, Issue 13.
Here is the next edition of MGE’s weekly webletter. The purpose of this webletter is to provide ideas, tips and suggestions to make your practice more successful.
Feel free to send us your comments and suggestions, or requests for future webletter topics you would like to see covered.
Managing Your Overhead and Profitability, Part V
By Jeffrey M. Blumberg
Chief Operating Officer, MGE
This article is the fifth and final installment on how to increase practice profitability and manage overhead. To view the first four parts, please go to:
Managing Your Overhead and Profitability, Part I, What is Your Overhead?
Managing Your Overhead and Profitability, Part II, Overhead Guidelines
Managing Your Overhead and Profitability, Part III, Payroll Expense in a Dental Practice
The last two issues focused primarily on the overhead categories that tend to cause the most trouble. Up to now, we’ve covered payroll, associate compensation and how it relates to your payroll percentage, leases and dental supplies.
We’ll wrap up the series with a look at the overhead categories of lab and advertising, and look at some suggested steps to take overall, depending on your current situation.
Lab Bills
As we covered in the third installment of this series, lab bills should run at approximately 8-10% of your collections. Years back I remember the industry standard was 10%. In my experience, it can be less, hence the 8%. More than 10% can be downright unhealthy.
To calculate your lab percentage, you might want to use three to six month averages (i.e., for your total lab bills and total collections). Using less can really skew your percentage one way or the other.
For offices that pay more than 10% of their collections for lab, the usual culprits are:
1. You’re a prosthodontist.
2. Fees are too low.
3. Too many reduced fee, PPO or HMO plans.
4. Collection percentage is poor.
5. The other areas of your practice are underperforming.
I’ll comment on each in sequence.
1. Fees are too low.
Regardless of what you charge for a crown, bridge, denture or partial, your lab fee will be fairly fixed. Of course some crowns cost more than others, but I believe the point is made. One work around here is finding a cheaper lab. I’m not in love with that idea, but clinically, you’re the boss. For me it’s simple: If you’re happy with your lab or labs that you use – why change? Ultimately, the most important aspect of your practice is patient care and clinical excellence. If you change labs because you can get the same or better quality at a cheaper price somewhere else – I can understand – it’s a business decision.
If you’re changing labs because you need something cheaper and as a result lower your clinical standards…well…not a good idea. Why? It flies in the face of everything a dental office – or any health care practitioner – should stand for: what’s best for the patient.
Instead, if you have a great lab that you’re working with and their fees are high, realize that their fees are high most likely because they are a great lab! They do good work. In this case, you may need to raise your fees.
Run the numbers. Check out some of those services or products out there that show various fee schedule percentiles by zip code and see where your fee falls. If yours is too low, you might want it raised.
2. Too many reduced fee, PPO or HMO plans.
Let’s say your fee for a standard crown (semi-precious or high noble) is $1,000 (could be higher or lower – just using a simple figure as an example). Chances are this fee allows for moderate profit and an acceptable ratio to your lab bill for said crown. But, you’re in a few PPOs and your average PPO fee for a crown is $600. That’s a 40% or $400 write-off! The lab bill for the “PPO” crown and fee-for-service crown are the same. For that matter, I have yet to see a lab that asks if the crown you’re prescribing is for a PPO or HMO patient so they can give you an applicable discount. Why? Just like you – their costs don’t change just because your fee did. The only one eating the write-off here is you. The expenses associated with prepping and delivering the crown (i.e., staffing, and other office expenses) are the same. You’re just charging less.
Here’s where the fun begins. Let’s look at just the lab expenses associated with a crown. Let’s say for our example above your lab charges $200. OK, for the $1,000 fee, this is 20%. On the other hand, it’s 33.3% of the $600 crown. So, who loses here? Again – you. The lab bill, staff and other expenses with producing this crown are paid for first – you’re just getting less on the back end.
Just by the math above, you could see that if you’re doing loads of discounted crown and bridge, your lab bill – as a percentage – would be higher.
So, backing this up, why are you writing this $400 off in the first place? Simple, so you’ll be listed in that PPO’s directory and as a result get more patients. For all intents and purposes PPOs and HMOs are marketing plans. And your write-off is the “marketing fee.”
While some PPOs do have acceptable fee schedules, many don’t. And, in the main, HMO can be downright horrible.
Chances are, using the example above, the doctor who’s writing 40% off of his or her crown fee is writing a similar amount – or more – off of other procedures. They are in a sense spending 40% (or more) of their fees from these PPO patients on “marketing.”
Any way you slice it, 40% is a heck of a lot to spend on marketing. For that matter 30% or 20% is pretty high! Chances are that if this doctor knew how to market correctly, he or she could spend far less for more new patients, making participation in PPOs like the above unnecessary. As a side-note, if you’re interested in how to get more fee-for-service new patients, I’d suggest that you look into the MGE New Patient Workshop.
3. Collection percentage is poor.
This is similar to the managed care scenario painted above. Whether a patient or an insurance company pays you (or not), the expenses (payroll, general office, supply, lab, etc.) associated with any given procedure stay the same.
In the dental business model, expenses increase based on the amount of office production – especially lab and supply expenses.
Let’s say an office produces an average of $100,000. Their average lab bill is $9,000. For whatever reason (sloppy financial arrangements, poor insurance follow-up, whatever) collections for this office run at 85%, or an average of $85,000 each month. Percentage-wise, lab runs at 10.5% for this office ($9,000 divided by $85,000).
Let’s say the office collected at a more acceptable level. And while it should be higher, let’s say this office ran at 95% collections or $95,000 per month. Well, now lab percentage falls to 9.5% — back in range.
4. The other areas of your practice are underperforming.
This one takes some explaining. When corrected, however, your profit and overall practice performance can really soar.
I’ll illustrate with an example:
Dr. Smith is a very skilled and productive dentist. Most of the procedures he performs involve a lab fee. He’s booked out weeks in advance. To get on his schedule for basic procedures (composites, etc.) could take up to three or four months – there’s just no time in the schedule. And very little time is allocated for this type of work. The numbers work out like this:
Monthly Production:
Dr. Smith: $80,000
Hygiene: $10,000
(6 Days, 1 FT and 1 PT Hygienist)
Office Total: $90,000
Lab Bill $10,000 per month – 11.11%
So, what’s the problem? In this case, Dr. Smith is so booked out that he most likely could use an associate. As most of what he does includes a lab fee (crowns, bridges inlays, etc.), his lab bill is high. Most of the “lower-end” dentistry has to wait months and months to get done. Additionally, Hygiene is really under-producing.
From afar, he seems like he’s doing pretty well and in fact he is fairly productive. But again, his lab bill is high – as a percentage.
Let’s say Dr. Smith just straightened out his hygiene production and brought it more in range – which at the low end with 6 days of hygiene would be for our example $25,000. Here are the numbers:
Dr. Smith: $80,000
Hygiene: $25,000
(6 Days, 1 FT and 1 PT Hygienist)
Office Total: $105,000
Lab Bill $10,000 per month – 9.52%.
Dr. Smith lowers his lab percentage by addressing an area of the practice that has nothing to do with his lab bill – hygiene.
You could expand on this scenario. Patients are booked way out, so Dr. Smith adds an associate to expand and improve service. The associate works up to $30,000 per month pretty quickly doing procedures with no lab fee (composites and the like). Now our lab percentage drops even further. And, don’t forget as we covered in our last issue, freeing Dr. Smith’s schedule up with an associate should drive Dr. Smith’s personal production even higher (maybe into the $100,000 per month range).
5. You’re a prosthodontist.
If you specialize in prosthodontics, i.e., your practice is composed primarily of patients referred by GPs, your lab bill would most likely exceed 10%. This would be expected. Most everything you do has a lab bill associated with it, and you wouldn’t have a hygiene department or an associate performing procedures with no lab bill to offset this.
I know I’m speaking to a small percent of the dental profession, but figured I’d add this, as it is after all a valid point.
Marketing, Advertising and Public Relations
I’m all for marketing your business. It makes sense and puts you in control of your new patient flow and income. This assumes of course that YOUR MARKETING IS ACTUALLY WORKING.
How do you know if your marketing is working? Simple: you’re getting an adequate response. Marketing won’t “get you more new patients.” It will get people to call your office. How you handle it from there also has a lot to do with whether your marketing is working or not. I’ve already covered this very subject in depth (marketing and new patient acquisition) in our first three webletters. See the New Patient Acquisition Series.
While there are a number of reasons your marketing budget could go out of control, I’ve found, in my experience, three major reasons behind it:
- Contracting for marketing services that exceed what you should be spending based on your collections level.
- The marketing isn’t working.
- The “quality” of your marketing is exaggerated, resulting in less marketing potential.
Let’s have a look at each of these:
1. Contracting for marketing services that exceed what you should be spending based on your collections level.
This is pretty basic – and common. We’ll take a dentist, we’ll call her “Dr. Jones,” who’s collecting an average of $20,000 per month. She wants to increase productivity and new patients and decides to do some marketing. She signs a one-year contract with a marketing company for a marketing campaign to be done via mail and the internet. The cost is $5,000 per month (25%) which is way too high. She expects revenues to take off. They improve to $30,000 per month – not quite what she expected. Added to this, she finds out that this contract did not include postage costs for mailings (as this is paid to the US Postal Service), which is an additional $3,000 per month. Our total monthly marketing tab is running at $8,000 per month. With her $10,000 per month increase to $30,000, she’s still running in the 25% range (26.7% to be exact), which is way out of range.
The problem started with her initial monthly commitment, which should have been in the $2,000-2,500 range at the maximum – depending on her practice circumstances (i.e., new practice, established, etc.).
The moral? Marketing services can be great. Just ensure you understand all of the expenses associated with the marketing that you’ll be doing.
Now, I really didn’t break this down very much, but let’s say Dr. Jones had 1,500 charts and was getting 20 new patients per month. Sure she should be marketing, but with that many charts to collect $20,000 per month she has other problems – namely case acceptance, to start with.
2. The marketing isn’t working.
OK, this is pretty simple. You’re spending money on mail, a website, display ads, TV, radio, etc. but no one’s responding. As I mentioned earlier when referring to our first three Webletters on the subject of new patients, your problem might be internal. But nonetheless, spending money on marketing with no or little recompense isn’t going to work. Something has to change. And of course, this added marketing expense with no additional income will make marketing appear as a nasty “wart” on your overhead sheet, both as an amount and a percentage.
Now, I’ll say this as I’ve seen this messed up more times than not: The answer to “marketing isn’t working,” is NOT “stop marketing.”
Instead, the answer should be “do marketing that works!”
3. The “quality” of your marketing is exaggerated, resulting in less marketing potential.
This concept was a little difficult to put into one sentence. Let me explain. You decide to market for new patients in your local area. You design a beautiful brochure, envelopes, etc. The cost for each mailing (including postage) is $4.50. So, to reach 1,000 potential new patients it would cost $4,500. Now, I’m exaggerating a bit as I explain this, but my concept is simple: Yes, your promotion should be smart looking and high-quality, but don’t go overboard to the point where you can’t afford to do it in an effective quantity.
My thought process on this is usually pretty simple and I work promotion expense on an “inverse-ratio” based on to whom I’m marketing.
For example:
I’d spend the least per piece on mass mailing to potential new customers. This way I can get more out. Notice I didn’t say do something cheap or that looks bad. I just said this is where I’d spend the least per piece.
From there, I’d spend more on direct promotion to existing customers. As there are less of these than there are “non-customers,” or people who “aren’t customers yet.” For instance, you could spend a few bucks creating some beautiful promotional material for high end treatments at your office – i.e., implants, veneers, etc. I know some of these already exist; I don’t know whether they work or not (never really looked into them enough to be able to give you a real evaluation).
Using the above, just run the numbers. You could spend $4 a piece on a DVD and other promotional items promoting different types of cosmetic dentistry and send them to specific patients of record or hand them out in the office. How many would you – in reality – be giving out? Several hundred maybe? OK, let’s say you gave out 500 over the course of a few months. In that case we’re looking at $2,000 at $4 a piece. Not bad. And if it’s done well it should help to “sell” these services. Turn that around and you’d see that sending it to 10,000 potential patients in your area could get very cost prohibitive. In that case, you’d be better off spending .50 a piece max (including postage), for a nice newsletter, flyer, etc. You could hit more people.
I think I’ve hit the basic concept here.
Lastly, you might be well served to have your marketing budget carved out as a percentage. Then it grows as your office does and it begins to feed itself. More marketing should lead to more income, which would lead to more marketing money, which in turn should lead to more income and so on.
What to do now?
If you’ve made it this far (through all five of my newsletters) without excessive coffee or 100 ccs of adrenalin – I congratulate you. I know they’ve been long. I thank you all for reading, and your positive feedback and I hope they have been helpful.
OK, so if you’re ready to put some order into things financially, here’s a list of suggestions:
- Complete your overhead sheet. Download We detailed exactly what to do with it in Part II of this series.
- Work out your overhead percentage by using the average of your last three months of collections (divide overhead figure by collections).
- If it’s high, two things should happen:
a. You need to increase collections. I’d suggest the MGE Communication and Sales Seminars along with the MGE New Patient Workshop.
b. Compare your completed overhead sheet by category to the guidelines given in Part II of this series. Spot the areas which are out of control (i.e., too high).
- Suggestions about how to address high percentages in the categories of lab, supply, payroll, marketing & loans are covered in newsletters III – V.
- If you run into a particular issue that you’re having trouble with (i.e., not sure how to handle what you’ve run into or a high overhead category not covered in last few newsletters, etc.), feel free to email me at jeffb@mgeonline.com.
And with that I leave you to “get into action” on the subject. I wish you the best and again, feel free to e-mail me with any questions.
PLEASE NOTE: This article provided by MGE: Management Experts, Inc. consists of suggestions and ideas that could be used to help improve the solvency and viability of a dental practice. There is no guarantee that the information provided is appropriate to your practice. Each practice, their owners, officers and staff are individually responsible for ensuring that any system implemented in the practice complies with the applicable federal, state and local accounting, tax and employment laws, rules and regulations governing the place in which your practice is located. These suggestions do NOT constitute legal or accounting advice. You should seek advice from your own accounting and legal advisors as to what is appropriate to implement in your practice, prior to implementation. MGE: Management Experts, Inc., its officers, directors, shareholders, employees, agents and the writer of this article, are not responsible for any claims, real or otherwise, associated with this material and information or any part thereof.
