4.13.12 Issue #527 info@mckenziemgmt.com 1-877-777-6151 Forward This Newsletter
 

Is THIS What's Driving Your Overhead Up?
By Sally McKenzie, CEO

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It creeps up on you slowly, silently - much like termites, quietly chewing away at the infrastructure. You don’t quite comprehend the extent of the problem until it’s a crisis. It all begins innocently enough.  A few extra bucks for a “helper” at the front desk for those busy times, “occasional” holes in the schedule that just don’t get filled, raises based on another year of service rather than improved productivity. And before long, you are wondering if you’ll have enough to make the payments on the new diagnostic equipment you had planned to purchase. You’re asking yourself if there will be enough money to cover all of the continuing education that you and your team are required to complete in coming months. And you are trying to convince yourself that it’s okay to defer saving for retirement yet again.

This is when you start to realize that the tables have turned. You can’t plan for the future. You are no longer in charge. Overhead is now dictating how you run your business. No longer are you making decisions based on what’s best for the practice. Rather, choices are made based on how much it costs - whatever “it” is. How much longer can you do without it, and is it absolutely necessary. This, doctor, is no way to run a practice. Worst of all, there are few things as stressful as monetary stress. The good news is you can get out from under overhead - but it won’t come without commitment to clean up inefficiencies and a clear understanding of those systems that have the greatest impact on cash flow.

Let’s consider the benchmarks. The industry standard for overhead is 55% of collections. If you are currently at 60-65%, you are comfortably within reach. If yours is higher, you need to take action. Some doctors report their overhead as high as 85%, which means they are making just 15 cents on the dollar! And you definitely don’t want to be a member of the “15 Cent Club” for any length of time.

The first step in controlling overhead is to establish the following budget targets: 

Supplies - 5%
Rent - 5%     
Laboratory - 10%
Payroll - 19-22%
Payroll taxes and benefits - 3%
Miscellaneous - 10%

Do you want me to review yours? Just click HERE to send me your figures.

Certainly, all of the areas can be a drain on profits, but payroll is typically the biggest expense. Problems arise when payroll, including taxes and benefits, exceeds 23-25% of gross income. If yours is higher, profits are taking a pounding. Most often, high payroll costs are caused by one or more of the following situations:

You Have Too Many Employees
Too often during busy times, staff will think they need a “helper.” There’s no effort to objectively evaluate whether the practice needs or can financially support a helper. The attitude is that more bodies would ease the burden. Helpers do little to improve efficiency and a lot to bust the budget. More staff does not guarantee an improvement in efficiency or production - unless you are hiring a patient coordinator who is going to make sure the schedule is full and production goals can be met.

Raises Based on Longevity Rather than Productivity/Performance
Even during the recession of the last few years, we have seen practices giving raises based on another year in the office. That is a horribly ineffective compensation model in the best of times, and potentially disastrous in difficult economic times. If production is going down and overhead is going up, payroll cannot be increased. In other words, if the practice is losing money, employees DO NOT get to make more. Establish a compensation policy stating that raises will be given based upon employee performance - provided the practice is making a profit.

Hygiene is Not Meeting the Industry Standard for Production
The industry standard for the hygiene department is 33% of total practice production. If the doctor steps back to take a closer look at what is happening, s/he will find that the hygienist has far more down time than s/he should. Patient retention is seriously lacking, and periodontal treatment is minimal at best. The recall system, if there even is one, needs immediate attention to ensure that (a) the hygiene schedule is full, (b) the hygienist is scheduled to produce 3x his/her salary, and (c) cancellations are filled.

Next week, plugging the holes and tracking the systems.

For more information on this topic and for additional Dental Practice Management info, visit my blog: The Lighter Side.

Interested in speaking to me about your practice concerns? Email me at sallymck@mckenziemgmt.com.

Interested in having Sally McKenzie Seminars speak to your dental society or study club? Click here.

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