Know Your Practice Numbers
Dentist Case Study #157
The doctor’s concerns: “Every month I struggle to pay my personal bills. I’m just not making enough. Some months I can’t even write myself a payroll check.”
Unfortunately, many dentists find themselves in this situation. Why? It’s typically because they don’t think about their lifestyle as part of the big picture and they make decisions based on emotions rather than facts. This is what happened to this dentist and is why he contacted McKenzie Management for guidance.
Here are the practice facts:
After talking with his team, I found they enjoy working with the doctor but they have noticed he’s become anxious about not bringing in enough money. The team doesn’t see what the problem is; they’re meeting their daily production goals 75% of the time, which as far as they’re concerned is pretty good. Their monthly goal is $96,000 in net collections, however, leaving them $16,000 short every month.
Even though the practice is struggling financially, the dentist bought a beautiful new home in an upscale neighborhood. He convinced himself he would work harder and start making enough money to offset the mortgage payment. The problem is, he came to this conclusion without putting together a definitive business plan to improve practice systems. That means even after he bought the house, his overhead stayed the same and collections stayed at 83% of goal. With those numbers he simply can’t afford to pay himself more, mortgage payment or not.
Around the same time, the doctor decided the reception area needed an update, so he invested in new furniture, a fish tank and other decorative items. He also hired another clinical assistant.
Before making these decisions, the Doctor should have asked himself a few questions:
- What is my gross salary overhead for the existing team members?
When he did sit down to address these questions, it became clear he couldn’t afford to hire another clinical assistant. Here’s how it broke down. Standard payroll costs should be between 19-22% of total collections (not including payroll taxes and benefits, which are an additional 3-5%). His salary overhead costs were at 28%, or $22,400 of $80,000/month in collections. Now if the practice had been meeting its monthly goal, which was $96,000 in collections, payroll costs would have been at 23% and much closer to the industry benchmark.
Before hiring this new team member, the doctor should have performed a salary review to determine if he could afford the new hire and, if so, how much he could afford to pay him or her. He also should have thought about the new hire’s job description and how this person would help increase collections to justify the increased expense. The fact is, he felt pressured to hire because his team members insisted they needed more help. But remember, inefficiencies might be the result of broken systems, and adding a new team member won’t fix the problem. He should have taken a closer look at his systems before bringing a new team member on board.
The doctor also should have looked at total overhead. The industry standard is 62% of net collections. Turns out his was 76%. This left him with 24% or $19,200 a month.
The solution: The bottom line is, the practice was not producing/collecting enough money to support practice expenses. That means he couldn’t afford his new mortgage either. The doctor needed to find a way to fix this situation and alleviate some of his financial burden. With help from McKenzie Management, he developed a business plan that reduced overhead costs and increased revenues.
Together, we determined how much money he needed to bring in each month to satisfy his personal obligations and determined at 35% of monthly collections what that monthly amount needed to be.
We reviewed practice systems and came up with solutions to any obstacles we encountered along the way. Through this process, the doctor realized how important it was for him to diagnose necessary treatment and then trust his team members to encourage patients to accept that treatment and get more of them on the schedule. He now knows what his practice numbers are and what it takes to reach both his personal and practice goals. He’s making decisions based on facts rather than emotion.
The lesson: No matter how hard you work, there are limits to what your practice can produce and how much money you can bring in. Knowing your numbers and putting a plan in place to meet your personal and professional goals will help you make more informed buying decisions both inside and outside the practice.
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