Your practice represents one of your most valuable assets and affects your current and future financial picture. Overhead control provides the capital to enjoy the journey and plan for a successful exit. And incremental improvements produce exponential results, especially when time is on your side.
Every practice is different, but it’s helpful to align with proven benchmarks in the profession. A well-run dental practice may have 65% overhead, but anything over this target has room for improvement. Practice type, region, and other factors influence overhead, but most practices can find minor adjustments to increase profitability.
Consider a practice that’s collecting $1.5 million annually. If overhead accounts for 65% of collections, there’s $525,000 left for owners and associates. But every 1% decrease in overhead adds $15,000 straight to the bottom line. That’s $150,000 in profits with a 10% reduction in costs, a goal that many practices can hit with the right strategies.
Maybe you have two years to add $300,000 more to your retirement nest egg or ten years to invest another $1.5 million with these moves. Either way, controlled overhead propels your plans without extra hours or more procedures.
And keep your eye on the prize: for every dollar in overhead you cut, you’re likely to realize $5 or more when you sell. So just $50,000 annually in savings can increase your practice value by $250,000 in some cases.
Consider these three ways that overhead can get away from you. Better yet, take action to boost profits:
1. Overlooked Overhead Metrics
Many dentists focus on high-level metrics that only reflect half the story. Solid production, collections, new patients, and cash on hand can lull an owner into a “good enough” mentality. However, a thriving practice can have growing revenue canceled out by rising overhead. Dentists must dig deeper for a thorough understanding of net income and the real costs behind the enterprise.
There are targets for the critical overhead categories, and they can vary across practices and specialties. But efficient owners look for opportunities to capture incremental improvements. For example, administrative costs encompass various subscriptions, business supplies, postage, etc. It’s possible to carve 1-2% by consolidating software or auditing for services you no longer need. Opportunities vary, but analyzing each category can uncover unforeseen savings.
SOLUTION: Engage with a dental CPA who generates categorized reports with insights into specific expenditures, reviews quality data, and discusses areas of improvement that don’t compromise the quality of care. Use this data to review with a practice transition specialist and explore exit planning ideas.
2. No-Show Tolerance
There are few profitability killers like short-notice cancellations and no-shows. Business overhead continues whether a patient is in the chair or not. Non-productive time amplifies the cost of staff, utilities, and rent; overhead moves higher during these periods, and it takes extra production to balance the uptick.
Many practices tolerate a 15% open rate in their schedule, primarily due to missed appointments. Lowering open time to less than 5% significantly impacts the bottom line, but any open time affects your exit plan. If 5% of your appointments are unfilled, you’ll work an extra year every 20 years to make up for it. Regardless of your timeframe, it costs you more than dollars and cents if you’re trying to reach an exit target.
SOLUTION: Educate patients and emphasize “reserved time just for them.” This messaging can be built into electronic reminders that reach patients through their preferred channels. Use analytical tools like Dental Intelligence software to track metrics in real-time and uncover hidden daily opportunities. Some Patient Relationship Management software also includes Fast-Fill tools that automatically contact patients when short-notice openings occur.
3. Neglected Fee Increases
Overhead expenses continue to rise, and the current inflation rate threatens to undermine practice profitability. Staffing challenges affect many practices, and currently-hiring dentists report that it’s very or extremely challenging. In the best of times, employees expect rising wages. And today, retaining employees may depend on it.
If a practice doesn’t optimize and raise fees, rising costs drive overhead higher unless the dentist adds more production. Many practices that neglect to increase fees regularly quickly fall behind. A 3-5% master fee increase at the first of the year can be reasonable, but a missed year or two can make a double-digit bump necessary to get back on track. If expenses are moving up without concurrent increases in revenue, profitability can quickly erode and compound ownership stress.
SOLUTION: Review fees in the last quarter of the year so that your team executes an increase in January. Consider consulting with PPO Advisors for a Master Fee Analysis or free PPO Analysis to optimize your fees.
Dental Practice Overhead Drives Profitability Now And Later
Subtle profitability drains don’t seem much day-to-day, but they add up over time. Incremental improvements add profits to the bottom line without extra clinical hours. And every extra dollar that’s invested now compounds for a healthier retirement later.
Many dentists don’t realize how much profitability influences the value of their practice. A practice producing $2 million annually isn’t always worth more than a practice producing $1 million. Overhead management drives profitability, and profitability significantly impacts valuation.
At DDS Match, we can help you gauge your current overhead and valuation. We can also guide areas that will impact your practice value as you develop an exit strategy. Contact us for a complimentary analysis to review your practice’s financials and discuss adjustments that can improve profitability and increase practice value when you’re ready to sell.
