Ideal overhead margins for a profitable practice
You undoubtedly track at least a few metrics or KPIs (key performance indicators) as a way of measuring the growth and profitability of your dental practice. You’ve probably set goals to do at least somewhat better. But why not set goals to do a lot better? Is it because they would seem hopelessly out of reach? Maybe not even possible? Or, you think there would be a big trade-off in terms of time, effort and/or money required? We are here to tell you that you can attain the ideal overhead margins for a profitable practice. Allow this article to be a myth buster.
No need to reinvent the wheel
It’s May 6th, 1954 at Oxford University. A hush falls over the stadium. The runners are in position. The gun fires. Exactly 3 minutes and 59.4 seconds later the crowd erupts when Roger Bannister breaks the fabled 4-minute mile barrier. In the 67 years since then, at least 1,500 athletes have achieved this milestone, with the current record being almost 17 seconds faster.
The moral of the story is that performance barriers are highly psychological. Once someone breaks through what is commonly perceived as an impenetrable barrier, others realize it can indeed be done and are mentally more disposed to break new ground themselves.
This is as true in business as it is in sports. Performance metrics that may have seemed unreachable become benchmarks to shoot for because they have been proven possible. But not by doing what everyone else is doing; barrier-busters find more unconventional and innovative approaches to achieve uncommon results. That said, there’s no need to reinvent the wheel. Look to those who have already achieved what you want to, then follow their lead.
Getting a handle on overhead
Production and collections are high on the list of important KPIs, but overhead is a critical part of the equation when it comes to profitability. An essential starting point for getting a better handle on overhead is realizing that for dental practices, every cost not associated with dentist income is considered overhead. Expenses are not “something different,” they are overhead, pure and simple, and include employee compensation, rent or mortgage, supplies, equipment, utilities, and other costs, as shown in the chart below.
The national median overhead for both general and specialty dental practices is 75%. And yet, according to the Levin Group Data Center (as published in Dental Economics), the recommended overhead rates vary greatly by specialty, and they’re all way below 75%:
Industry Recommended Overhead Goals
If these goals make you want to throw up your hands and give up, let me reiterate – barrier-busting practice owners consistently achieve these levels of overhead… and even lower. How do they do it? By intensively controlling expenses, reducing costs, and managing margins on all the individual components that comprise total overhead. These are the industry recommended targets, with staff wages of course being the single largest line item:
So now let’s talk turkey (or better yet, elephant) about how such successful practice owners go about lowering their overhead. I like to apply the concept of “How do you eat an elephant? One bite at a time,” when explaining the extremely important term – Opportunity Cost. This KPI is as important as production and collections, if not more so. And when you “chunk it down” into a bite-sized single hour, opportunity cost becomes a powerful tool for understanding and managing overhead and profit on a small scale… which leads to large scale bottom line improvements.
Hourly opportunity cost is the same thing as hourly overhead rate. Thinking of it as opportunity cost is psychologically advantageous because it tells you how big your opportunity is to be more profitable every hour that the office is open. If you’ve never calculated this rate before, take a minute to plug your figures into this simple formula to determine your own hourly overhead rate:
Calculate Your Hourly Overhead Rate
In order to make a profit, your hourly production must be greater than your hourly overhead. It really is that simple. Knowing where you stand leads you to make better critical decisions, and facilitates critical conversations. Discuss it with the staff… post it on a whiteboard… update it as you make progress as a team… so everyone is aware of what it costs just to keep the doors open and the lights on, whether or not someone’s in the chair. Involving team members in setting and attaining goals lets them put some skin in the game; they’ll be more bought into what you’re trying to accomplish for their benefit, as well as that of the business. For instance, they’ll better understand that raises can’t be forthcoming if the business isn’t making more money.
Moreover, when it comes to adding production staff (i.e., associate doctors and hygienists), knowing this figure will guide you to make better business-building decisions because you’ll realize the cost of not having an associate or hygienist to cover vacations, for example.
Knowing what your practice’s time is worth is empowering. You will come to appreciate that when you save money, you are buying time. And with that added time, you can do things that make more money for the practice, or do other things you never had time to do before. With this mindset you’ll focus on the profitability of every decision – even small decisions that make a few dollars’ difference. Over the course of a week, month, year, lots of incremental improvements can lead to a surprisingly large bottom line increase.
Example: Assessing the Real Cost to the Business
Let’s say your hourly overhead rate is $350. And let’s say the last Friday of every month you pay for a pizza party and give the staff an extra hour for lunch. Consequently, there is zero production during that hour. You may think the cost of the outing to the business is just the price of the pizza, but think again!
Price of pizza + $350 (hourly overhead rate) = cost to the business (with no offsetting production)
Knowing this, you may decide to have the pizza delivered so the team can enjoy a fun working lunch!
Recommended overhead goals
Here at eAssist we’re not just inspired by practice leaders who break barriers, out-perform the competition, and constantly innovate to drive performance and business growth, we pull them together to teach others to do the same! We are truly dentists teaching dentists. We’ve learned from years of trial and error in the course of building dozens of successful, profitable practices. We want to save you the time, effort and frustrations by sharing what we’ve learned that’s proven to get results.
On a 3-part webinar series called “Smart Ways to Net More by Minding Your Margins” an esteemed panel of dentists discussed why 49% is “the new 4-minute mile” for general dentists. The industry-recommended 59% is just too easy – so many are already achieving it. In fact, some of our Top Docs consistently surpass the 49% mark with overhead in the 30%-40% range… and enjoy the profit margin that comes with that!
The recommended target overhead goals are proven to be achievable, and get you to the 49% total overhead level, which leads to significantly higher profitability while simultaneously delivering a great patient and employee experience:
Take action to increase your profits
Check out the webinars for lots more details on the “how to’s.” In the meantime, here are two strategies you can take action on beginning today that will make a difference in your profitability beginning tomorrow:
- The $100 Rule
The “$100 Rule” is the same concept as reducing opportunity cost to a more manageable one-hour bite. Finding small savings here and there add up to big savings overall. Sit down with your P&L and your office manager and go through every line item with the goal of finding, say, ten $100 monthly savings opportunities. Chances are you will find them much more easily than you expect, and voila, you just saved $1,000 in a month — and $12,000 in a year! The outcome is so satisfying and beneficial to the business, you’ll get addicted to doing this routinely.
- The “Big 5” of Increasing Profits
In a nutshell, here are the “Big 5” strategies shared in greater detail on the webinars:
- Don’t be afraid to negotiate everything
- Eliminate operational bottlenecks
- Implement best practices for streamlining and efficiency
- Spend money to make money
- Collect 100% of what you’re rightfully owed
The higher your overhead, the more opportunity you have to drive it down, and drive profits up. You need only challenge your mindset about what’s possible, set aggressive goals, learn from those who have already figured out how to achieve such great results, and continue to be inspired by the Roger Bannisters of the world.