Overhead is the cost of doing business, but high overhead can have a devastating effect on a dental practice. Dentists spend most of their time providing patient care. So, unless proper systems are in place, it can be difficult for them to know when overhead costs - salaries, supplies, rent, insurance, and other expenses - are exceptionally high. Excessive overhead not only jeopardizes the success of a dental practice, but threatens the financial security of the dentist as well.
Overhead as a percentage of practice revenue is an important measurement when gauging the economic health of a dental practice. According to the ADA Survey of Dental Practices published in 2004, overhead - on average - represents 60.5 percent of GP practice revenues.
As a practice grows, its overhead percentage should remain flat or decline, even though actual overhead may increase. Keeping the overhead percentage within range of the national average (or even lower) can be difficult. The following five tips can help you control overhead, and increase profitability in the practice:
1) Follow the money. When you do not track your expenses, cash seems to disappear. The best way to make an accurate budget is to figure out and record how you spend your money. Evaluate where your money comes from and where it goes. You will need to keep track of your collections, purchases and expenses - ranging from staff salaries to dental supplies - using some type of accounting system. Record how much you spend in each category every month. Making and following a budget does not mean that you cannot purchase these items that you need for your practice. It does mean that you must have a plan when purchasing.
2) Know your inventory. Do you know your current level of supplies? When was the last time someone in the practice took inventory of all storage spaces and supply closets? During inventory, many practices find they have extra supplies that will carry them for months, as well as older, expired items that should be disposed of properly. By taking inventory on a semiannual basis, a practice can maintain a steady stream of supplies, avoid overages and shortages, and exhibit stronger control over expenses.
3) Benchmark against past use.What supplies did the practice use in previous years? What was the practice production, and how did it affect the use of inventory? Will this year’s performance surpass last year’s? Benchmarking against past performance can help a practice ensure accurate ordering of supplies necessary for success.
4) Examine insurance participation. Practices should review insurance participation each year. Dentists should be aware of important data, such as what percentage of total practice collections is generated by insurance, which insurance plans pay the highest or lowest reimbursement rates, which provide comprehensive patient coverage, etc. These factors can provide a statistical snapshot of the benefits and liabilities of each plan.
5) Pay for performance. There are two kinds of overhead - fixed and variable. Fixed overhead must be paid no matter how the practice is performing. It includes salaries, rent, and utilities. Variable overhead, on the other hand, increases only when practice production increases. A bonus system is based on practice and staff performance. Thus it is considered variable overhead. When implemented properly, a bonus system can be a “win-win” for both the practice and staff members. To earn bigger bonuses, staff members are motivated to work harder and more efficiently to help the practice increase production and profitability.
Overhead is a necessary part of running a practice, but eliminating unnecessary expenses can ensure the financial health of the practice. Many dentists and their teams fail to look at overhead as an opportunity to reduce costs and improve financial performance. The five tips offered in this column can help your practice control overhead, manage expenses, and increase profitability.
Roger P. Levin, DDS, is founder and CEO of Levin Group, Inc., a leading dental practice-management consulting firm that provides a comprehensive suite of lifetime services to its clients and partners. Since 1985, Levin Group has embraced one single mission - to improve the lives of dentists. For more than 20 years, Levin Group has helped thousands of general and specialty practices reduce stress, increase productivity, and implement data-driven systems. Levin Group may be reached at (888) 973-0000, or at www.levingroup.com.
