The First Step to Reducing Overhead & Increasing Profit

Do you know exactly what it costs to run your practice on a day-to-day basis—to cover all your expenses, pay down debt, fuel future growth, and turn a profit?

And throughout the month, do you know if production is on track to cover these costs?

If you’re like a lot of dental practice owners, you have a general idea of your overhead but aren’t tracking it in real-time. You may not know how much you’re spending—or can afford to spend—until you get a Profit and Loss Statement from your accountant at the end of the quarter or year.

This leads to the all-too-familiar situation where you approach the end of the month and realize, “Uh oh, we didn’t make enough to cover payroll!” So, you need to scramble to make up the difference in the last few days.

Why Knowing These Numbers is Your Job, Not Your Accountant’s

Accountants can tell you how much you spent and they can advise you on your taxes. That is useful. However, they typically don’t have an in-depth understanding of things like:

• What is needed to take great care of your patients and run your practice efficiently
• Developing a strategy for practice growth
• Improving profitability long-term
• Ensuring there is enough production on the schedule
• Getting cases accepted and payments collected
• Looking at your numbers in real-time throughout the month and making adjustments as needed

If you’re waiting until the end of the month (or quarter or year) to find out how you did financially—you’re too late to do anything about it!

You need to be looking at these numbers yourself on a regular basis. You don’t need to look at all the data an accountant would—but I would recommend that you at least look at your collections and budget once a week.

It’s important to stay on top of it because things can change quickly.

Having a big production month? Great! But that also means your lab and supply costs will be higher, so that’s something to factor in. Is your assistant doing a bulk order of supplies? That could be good if you get a discount, but may also be bad if you end up with excess supplies or it wasn’t budgeted for beforehand. Not enough production on the schedule next week to meet your target production? The team needs to know this so they can work to fill the schedule and identify potential case presentation opportunities.

Monthly Expense Breakdown

So, the first thing to do is break down all your monthly costs into clear numbers. I suggest calculating this every three months or so because expenses can change over time.

Calculate your average costs for payroll, supplies, labs, taxes, insurance, rent/mortgage, etc. Put all these numbers together in a format that tells you exactly how much it costs to keep your practice open each month. This gives you a clear idea of your monthly expenses.

By the way, you can download our Overhead Worksheet here. You just enter your numbers and then the spreadsheet will do the calculations for you. Easy!

Calculating Dental Practice Expenses

When it comes to managing your dental practice’s finances effectively, understanding and calculating your average monthly expenses is key. Here are some practical steps to help you get a clear picture:

1. Spreading Out One-Time Expenses:

• Identify significant one-time expenditures, like purchasing new equipment such as handpieces.
• These aren’t recurring costs, so you can take the total amount and divide it by 12 to spread it out over the year, so you can get a more realistic view of your monthly costs.

2. Separate Lab Costs:

• Separate costs associated with specific treatments, like clear aligners, from your overall lab expenses.
• Recognize that these treatments can often account for a substantial part of your monthly outlays, which might differ from other, more regular, lab costs. If you just include it in your normal lab expenses, it will look like you’re way over budget on labs.

3. Account for ALL Recurring Expenses:

• Don’t overlook recurring expenses that can sometimes go unnoticed, such as taxes and small subscription payments.
• Remember that tax obligations occur annually, and your accountant can assist you in estimating your expected tax liability.

4. Spread Out Tax Payments:

• Avoid the stress of facing a large tax bill at the end of the year by dividing the anticipated tax amount evenly over the months.
• This proactive approach ensures that you’re well-prepared and won’t encounter unexpected financial challenges.

Budgeting in the Doctor’s Salary

When calculating your dental practice’s overhead, don’t forget to factor in your compensation as the practicing dentist. This includes not just your salary but also any distributions you may take.

I’ve seen many dentists take a very low salary for tax purposes and the rest in profit distributions. The problem is that if you only reflect that low salary (which isn’t enough to support yourself and your family) on your overhead, you don’t get a realistic view of how much you need to produce/collect.

Whether your pay is taken in the form of salary or distributions is a discussion for your accountant. Either way, you should factor enough into your overhead figure to include owner compensation that is realistic for you to live on and support your lifestyle. Then any additional profit on top of that is gravy—not something you depend on to survive.

It’s important you don’t underpay yourself, as this can lead to financial strain. In most practices, the owner is also the primary producer and the most important “employee” in the office, so don’t short-shrift them!

Setting Monthly & Daily Production Goals

Once you’ve got your overhead figure, you can set your monthly goal—and then break it down into daily goals.

For example, let’s say your monthly overhead is $70,000 (including proper compensation for the owner and any associate doctors), and this month you’re open for 20 days. It’s simple math from here.

Set your goal higher than the overhead. When you hit your goal (or surpass it), the extra money can go toward reserves, retiring debt, profit distribution, staff bonuses, new equipment, etc.

You want it to be a bit higher than your recent average because you want to grow. So, let’s say you’ve been averaging $85,000, then you might set this month’s goal at $90,000.

Take that $90,000 figure and divide it by the number of days you’re working this month. If you’re open 18 days, then you need to make $5,000 per day.

Inform your staff, “This is the daily target we must meet to ensure the practice operates smoothly.” Now you can all coordinate together as a team to ensure there is at least $5,000 of production on the schedule every day (and enough patients and case presentation opportunities to keep generating that much production).

If you’re worried about sharing numbers like this with your team, check out this article: Sharing “The Numbers” with Your Staff.

It’s amazing how much of a difference it makes when the entire team has a clear goal that they are working towards. Instead of just putting patients on the schedule as they come in, the scheduler knows “I need to make sure there’s at least $5,000 each day,” and can design the schedule accordingly.

In your morning huddle each day, you’ll all know if you’re short on your target and can identify opportunities to get back on track.

(For more on how to use your morning huddle strategically to make your targets, download these morning huddle guidelines.)

Summary – FREE Downloadable Worksheet

I hope these insights provide you with a solid starting point for understanding and managing your practice overhead effectively. For a more detailed breakdown and practical recommendations, I encourage you to:

DOWNLOAD OUR FREE OVERHEAD CALCULATOR & GUIDELINES HERE

The Overhead Calculator Worksheet will help you calculate your true overhead, and in the Overhead Guidelines, you’ll find recommended overhead percentages for various expense categories in a general dental office.

While specific details may differ from one practice to another, this resource allows you to benchmark your expenses, which provides valuable insights into your financial performance.

If you have any questions or need personalized guidance, please schedule a free consultation here. Thank you for taking the time to read and invest in your practice’s financial health!