02.13.09 Issue #362 Forward This Newsletter To A Colleague


Nancy Caudill
Senior Consultant
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Bonus Or Bust?

Dr. Jill Gordon—Case Study #426

As more and more dentists are scrutinizing their practices in the areas of expenditures versus income, there is one area that seems to be at the top of the list during this economic downturn: bonuses. Let's take a look at a scenario that you may find relevant.

Dr. Gordon requested consulting assistance for her practice:

Dr. Gordon’s Practice Statistics:

  • 1 doctor, 2 assistants, 1 full-time hygienist and 2 business employees
  • 5-year-old start-up practice
  • 18–22 new patients a month
  • $60,000 a month in net production in 2008
  • Collecting 99% of net production

Dr. Gordon was managing the practice by the seat of her pants, allowing her team to make many management decisions for her based on their past experiences in other practices. She also brought with her from her previous associateship some protocols that she felt were applicable in her practice. Unfortunately, she didn’t know what she didn't know!

As the months went by, Dr. Gordon witnessed a decrease in the number of new patients as well as a reduction in hygiene production because of openings in the hygiene schedule. As a result of fewer patients being seen in hygiene, this also reduced the number of opportunities she had to diagnose and recommend treatment. This was affecting her production and manifested itself in more openings on her schedule.

She is now concerned about the future of her practice and how long she can carry on. The practice is only five years old and she is still carrying a substantial debt load from school loans, equipment and facility overhead.

Discoveries:

  • Dr. Gordon was over-staffed. Not only was her gross wage overhead for her team hovering around 25%, her benefits overhead was almost 7%.
  • Initially, it appeared that her collection to production percentage of 99% was excellent. Upon further investigation, it was discovered that 6% of her total net production was being written off due to uncollectible balances of patients… no financial systems. 2% is acceptable in the industry. The bad debt write-offs were keeping the A/R low and reflecting a false indicator.
  • Her overall overhead for the practice from a management view point was almost 80%.

The Most Shocking News:
Dr. Gordon brought into her new practice a bonus plan that was being used in her previous practice where she worked as an associate. It seemed reasonable to her so she implemented it in her own practice. The bonus plan was based on the ratio of Accounts Receivable to Collections.

What was shocking about this bonus plan was not the way the bonus plan was structured, even though it wasn't a good plan. What WAS shocking was the fact that she was still offering it to her employees! As poorly as the practice was performing over the past two months, the overhead at 80%, the employee gross wages and benefits too high, she was still paying a bonus.

When questioned about this, after showing her the statistical facts, her response was, "I don't know how to take it away from them…they expect it."

Keeping The Doors Open
When any practice has down turns, and it happens in healthy economic times as well as when what is being experienced now is happening, there are times when any practice is not as profitable as it needs to be. A true "bonus" plan is just what it implies—a bonus when the practice performs above and beyond what is considered normal for the practice.

If a practice has instituted a bonus plan, and it does seem that this is common even though McKenzie Management recommends that alternative methods of rewarding your team be utilized, it should be made VERY clear to the employees that when the practice is not performing, there is NO bonus paid out. It is more important for the practice to remain as profitable as possible to meet monthly obligations to keep the door open to provide employees with a place to work—not to pay out bonuses that the practice can't afford.

Just Say "No"!
Dr. Gordon was paying out team bonuses from her own pocket, not from profits from the practice. No wonder she was struggling financially. She was instructed to stop all bonuses. She was given other options to show her team how much she appreciated them when the practice shows signs of profitability again. One way was a simple but sincere "thank you" at the end of the day. It is amazing how many dentists don't utter these two little words to their teams even though their teams yearn to hear it.

Conclusion:

  • If your practice overhead is unhealthy—stop the bonuses.
  • If your staff gross wages are high—stop the bonuses.
  • If your staff benefits are high—stop the bonuses.
  • Most important, know what your practice overhead percentages are so you can make educated business decisions about your practice.

Serious times make for serious business decisions. It is not the time to be a "buddy" to your team but a time to be a leader. If you are unsure about the health of your practice, contact McKenzie Management today.

If you would like more information on how McKenzie's Practice Enrichment Programs can help you IMPLEMENT proven strategies, email info@mckenziemgmt.com.

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