Last updated on November 10th, 2021 at 03:18 pm
In this week’s post, I wanted to touch on a question I get a lot: “How do I know if my overhead is too high?”
It’s an important question. Overhead has everything to do with your office’s financial health and profitability. In order to answer this intelligently, let’s first take a look at what we’d consider to be “Overhead”:
Overhead would be the amount (of money) needed for your dental practice to survive and expand. It would include things like:
- Marketing budget
A full list of overhead items can get quite detailed. If you have any questions on what items should be represented on your overhead and the percentage of income you should be spending on each we have two forms you can use: Click here to download a Dental Overhead Sheet and here to download a Dental Overhead Expense Percentage by Category.
Determining if your overhead is too high:
Now, to the question. Is your overhead too high?
Working this out involves a few steps:
- Determine which categories should be included in your overhead (again, you can download the forms above to help with this).
- Grab your Profit & Loss Statement for last quarter, and calculate how much you spent on these categories.
- Average these out by month and then,
- Take your collections for the last quarter and
- Average these out by month.
- Now, subtract the overhead number from your average monthly collections. You now have your profit.
If you don’t have much (or any) money left after subtracting your overhead, you know your overhead is too high.
So, what should your net profit be as a percent? Well it depends on your business model. A large practice with a ton of staff and associate doctors, specialists, etc, with a net of 15-20% is great. For a solo practitioner that’s…terrible! Another thing to factor in is how long you’ve been in your office. A newer practitioner is carrying more debt – which is normally gone within 7-10 years and so on.
Concept here: if you expand and add associates, you’re getting a smaller piece of a larger pie. And the reverse applies to the solo doc – larger piece of a smaller pie.
Doctor with three associates is working three days a week and office is collecting $4 Million a year. Net is 20-25%. That’s $800,000 to $1 Million profit. Not half bad.
Solo doc collects $1.2 Million a year with a 55% overhead – 45% net. Net profit is $540,000. Again – pretty good, but bottomline not as good as our multi-doctor practice.
Your overhead is too high. What now?
So, you do 1-6 above, and find that there isn’t much profit left. Time to look at a few things:
- Are all of the items you’ve included in your overhead absolutely necessary to the survival and growth of your business? If they’re not, you may need to cut a few of these out until you’re in a condition where you can afford them for your dental practice.
- If you’ve already cut out unnecessary expenses and you’re still left with a number that’s too high, you need to do an analysis of your practice because it is underproducing.
Why your practice is underproducing is a different subject, but keep this in mind: you are paying for your facility, marketing, staff, etc. – that should be making X amount of dollars every month, but they are not. That means something is wrong.
In my experience, I find that most dental offices are underproducing to one degree or another, and this is the most common reason for high overhead. New clients of ours often increase by 30-50% in just a couple months – with no meaningful increase in overhead – simply by addressing the underproducing areas of their practice.
Find out if your practice is underproducing—and how to fix it.
If you think you may be underproducing, click here to request a free practice assessment to help determine where you are underproducing and losing money.
Let me wrap this up by saying that overhead is a large subject and there’s a lot to know about it. In fact, our COO (and my husband) Jeff Blumberg did an entire video series about it on our YouTube Channel (you can view it here), and series of posts on our site which can be found here which I suggest looking at.
Again, give us a call at (800) 640-1140 if you’d like help improving your profitability. Until then, I hope this post helps!
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