Comprehensive dentistry in 2008 requires a simplistic yet powerful model of profitability that very few dentists discuss, or even know about.  The short of it is that your overhead has to be within reaching distance of 50% (instead of the national average of 67-72%). The race of running a profitable practice is getting tougher.  Outrunning a rising overhead just isn’t a good answer anymore.  This month we look at how some dentists are re-thinking their practice models to enjoy the prime years of their lives with 3 ways to dramatically increase profits.

 

 

 

Remember when you used to produce $20,000 a month?  Times were tight.  You thought to yourself that things would be easier if you just produced a little more.  You would sit in your private office and say to yourself, “If I could just produce $50,000 a month, I would feel very comfortable.  That would give me more money than I need.” 

 

Now your practice produces $70,000 or more a month.  You never dreamed you would produce this much.  The problem is still the same.  It’s not enough.

 

When does it end?

 

Never. 

 

 

 

Once you give birth to your practice it becomes a living and breathing entity.  It is an entity that starts to build an appetite for resources.  This constant need for resources is crucial for its survival.  Inevitably, over time the appetite grows.  Its appetite consists of time, capital, energy, people, and most of all……YOU.

 

Depending on who you listen to, the national average for overhead costs in a dental practice ranges from 67-72%.  This is high by any measure.  This leaves about 30% for gross (not net) profit in a practice.  On that remaining profit, a dentist must pay his or her own salary as well as their taxes, build a cash cushion for the business, and save for retirement.  With that razor-thin margin, many dentists find themselves stretched beyond the limit before the end of the month.

 

If your overhead costs exceed 65%, my guess is that you aren’t a very relaxed individual. In my years of observing practices, I have never met a dentist that had an overhead of 65% or more that was relaxed. 

 

I love what Dr. Frank Spear says in his Practice of Excellence course about profitability.  He says, “The key to getting everyone adequately compensated in your practice is that the practice has to be highly profitable.  If you are not highly profitable, no one feels like they are being adequately compensated.  How you do you feel if your staff compensation percentage is 33%?  Do you think you feel any stress?  You better believe it.” 

 

I agree with him completely.  Everyone in your practice will feel under compensated when the overhead is higher than 65%.

 

If your overhead is higher than 65%, then it is probably a good idea to get your blood pressure checked weekly.  The nature of this neglect is often systemic to other areas of your life (like cholesterol, work hours in a week, body weight, lack of vacation, etc.).

 

In a truly comprehensive, restorative or cosmetic dental practice it is crucial for the practice to sustain high and comfortable levels of profitability.  This kind of a commitment to quality can be done with very little room for error.  Let’s face it, general dentistry is physical labor.  Dentistry at a more complex level is physical, emotional, intellectual and spiritual labor.  The resources that are required for this kind of practice are much more intense than that of an average dental practice.  That is why your profit margins have to be closer to 50%.  The intellectual (or indirect) time alone in studying a case requires an above average level of profit.  Without it, something will be greatly compromised… more often than not the dentist’s well-being.  The deficiencies (or inflammatory conditions) that arise from a lack of profitability in a dental practice are compensated by stealing from the cells of dentists’ bodies.

 

We estimate that more than 75% of all dentists’ illnesses are stress related.  We wonder why.

 

The appetite of your practice has to be first understood and then tamed to avoid these potentially threatening circumstances.

 

 

So how do we move to a healthier percentage?

 

 

Every practice has a number.  You have to know YOUR number.

 

I am continually baffled when I ask dentists what their overhead percentage is and they say “I don’t know.”  To me, this is the all important number.  This becomes the critical diagnostic indicator for calibrating how hard we push on the practice.  Without it we push hard for a result.  The result we push for is “MORE.”

 

That might have been a good answer a few years ago, but not today.

 

Every practice has a NUMBER.  That number is different for each.  That number is the average number of dollars your practice needs to keep its lights on.  This number does not include the dentist’s salary.  That is not considered overhead for this discussion.

 

It is also important to note that your overhead number is a CHOICE.  Having an overhead that is 72% is an unconscious choice.  It is not an irreversible circumstance.  The same goes for an overhead of 50%.  This is also a choice.  This kind of a choice is usually a conscious one and extremely rewarding.   These practices always seem to have “enough.”

 

Take the time to find the average dollar amount you have in overhead costs for the last 6 months (not including the doctor’s salary).  This is your number.  This is what it costs to “keep your lights on” every month.  For example:

Once you hit your goal of collecting 2x your overhead, give your team a bonus of 20% of everything you collect above that.   Do this on a 3 month trailing average to protect yourself from severe ups and downs in the practice.  Once you set this up, your team will be able to clearly see how their performance directly impacts their income.  On top of it, you will be thrilled with the profits the practice yields.

 

Many of the dentists we have coached learn what their number is. This dramatically affects their life in a positive way.  They look at it as A HURDLE to jump every month.  They realize that a $54,000 hurdle every month isn't as fun as a $34,000 hurdle.  They also realize that they can sometimes net more with a $34,000 hurdle than when they did with a $54,000 hurdle.  It becomes a profound transformation in their careers.

 

This is where choice really comes into play.  Having debt is a necessary component of becoming a dentist today.  The big question you have to answer when signing the loan paper is whether or not this is “necessary debt” or “ego debt.” 

 

We all have to answer the same question when it comes to purchasing our next home.  Is the debt “appropriate and necessary” debt or is it “ego or entitlement” debt?  Let me digress and say that entitlement is a disease that is plaguing the youth of America and the younger generations of dentists at an alarming rate.

 

If you take on NECESSARY DEBT, there will be a period of growth in which you will service this debt and grow your business.  After your business reaches the first plateau of maturity, you will start to retire some of this debt.  It is at this point you can start to implement the 50% overhead tactics listed above. There are many dentists that have overheads at or below 50%.  Again, this is a choice.  We have several as coaching clients.

 

If you choose to take on UNNECESSARY or “EGO” DEBT, the period of growth will be much longer before you reach that first plateau of maturity.  Even when you reach this point, it is likely that the same behavioral patterns that allowed you to take on EGO DEBT will show their face again, most often prior to the first plateau.  In this case, debt becomes a constant component of your business plan. The debt then increases in size and risk as you mature in practice.  These are the dentists that say, “It is totally impossible to have an overhead of 50%.”  Many of them service debt forever.

 

Let’s be honest, debt is a behavioral issue not a financial issue.

 

 

 

Once you understand the overhead dynamic, you can increase profitability in 3 ways:

 

1.       Reduce your overhead

2.       Increase your production

3.       Do both

 

 

Now let’s be clear.  Reducing your overhead isn’t about cutting costs everywhere.  Instead it is about calibrating the proper amount of resources for the optimal return.  It’s about doing MORE with LESS with team members and patients.

 

Sandy Roth says, “I am a fan of having the least amount of people in your practice to do the job well.”  This also requires world class systems design.  People can only be at their best when they don’t have to think about how the task is to be completed when they work.  Without systems, we hire compromised team members, put them in an inefficient ecosystem and get them a helper.  Great design instead requires fewer hands. 

 

Think about this in your practice.

 

 

Increases in your production can come from many different elements in your practice.  Most importantly it will require you to THINK differently.  Your brain is the most important tool in making this happen.

 

 

Over the course of your career you will start to notice that your energy depletes.  In your 40s you will realize that you don’t have as much energy as you had when you were in your 30s.  And when you are in your 50s you will find that you have exponentially less energy than what you had in your 40s.  What most dentists fail to plan for is GETTING TIRED.

 

So, plan on GETTING TIRED when you get older.  You can fight this if you want, but it is still going to happen.  The key to enjoying a fruitful life in dentistry is to do what you have been called to do… with the gifts you have been given… and to have something left over to give outside of the walls of your practice.  In order to do this, you have to manage your energy wisely.

 

When you hit age 50 in dentistry you should be in full stride.  These are the prime years of your career.  You should be challenging yourself with cases that make you think and test your knowledge.  It is too painful to practice for more than two decades, get to age 50, and still be dealing with a practice that is struggling.  When you are age 50, you are playing the back nine.  You should be taking in the view and enjoying every hole; not finding yourself digging out of one.

 

Dentistry is one of the greatest professions in the world.  What other business in the world could you start that has the opportunity to have a 50% overhead, choose your hours, take 5-8 weeks of vacation and help people in such a profound and significant way?

 

The answer:  Very few.

 

My hope is that you understand this overhead dynamic and use the power of its simplicity to serve you well. 

 

It is truly a choice.  I hope you make it a conscious one.

 

My very best to you and your family,

 

Kirk