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4.14.06 Issue #214

"Cash Cow or Money Pit?"
A McKenzie Management Case Study

Nancy Caudill
McKenzie Management
Senior Consultant

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“Money Pit” was a great movie.  Don’t let the movie become a true story about your dental practice!

Actually, Dr. Freeman is not the first dentist that has called McKenzie Management for this reason.  “I need to make more money!”  OK, seems like a legitimate concern.  When an office isn’t producing enough, this means that it also isn’t collecting enough…funny how that works!

Let’s face the truth, doctors.  Most of you do not hold MBA’s in dental business and you will buy because you don’t know how to say “no”, and this includes a dental practice. Understanding how to calculate a healthy overhead by reviewing over your Profit and Loss  or Income statement that your accountant gives you is very important to avoid the feeling of being overwhelmed later on when you find yourself in debt.

Dr. Freeman Facts:

  • He just purchased an existing practice from a retiring dentist
  • He chose to purchase this practice because he liked the location
  • The practice was seeing 4 New Patients a month at the time of the purchase

My first question to Dr. Freeman was: “Who held a gun to your head and forced you to purchase this practice?” Smiling shyly, his response was: “I liked the location.”

Now, THAT is a really good reason to make one of the biggest purchases of your life!  Granted, location is an important factor when purchasing a practice BUT it is not the only factor. My next logical question was: “Do you have a game plan on how to market your practice to bring in more new patients?”  I didn’t have the heart to tell him that he was going to starve to death with 4 new patients a month, unless dentistry is a hobby and he is independently wealthy! Again, almost blushing now, he answered: “That is a really good question!”


  • Attempt to rebuild the hygiene program by reactivating as many past due recall patients as possible.
  • Implement as many internal marketing programs as possible to encourage existing patients to refer their friends and family.
  • Seek professional advice and assistance from a dental marketing expert.

There is so much valuable information that can be obtained from the computer.  Run the following reports to help you evaluate the history of the practice:

  • Production and collection reports for the past 5 years, if available.
    • Look for trends – increasing, decreasing, flat? 
    • What is the history of the collection rate of the practice?
    • What mix of services have been provided in the past?  More basic and less major?
  • Adjustment reports for the past 5 years.
    • Look for trends –PPO adjustments – more bad debt write-offs – was the selling doctor giving away his services?
  • Accounts Aging Report.
    • What percentage of the total A/R is over 90 days?
    • How many dollars are credit balances?
    • How much is still outstanding in insurance claims over 60 days?
    • What is the ratio of net production to A/R?
  • P&L statements for the past 5 years.  Analyze the 7 areas and look for trends.
    • Office Supplies
    • Dental Supplies
    • Lab Expenses
    • Facility Costs
    • Staff Gross Salaries
    • Staff Benefits and Employer Taxes
    • Miscellaneous

To help you determine the possible future profitability of the practice, look at:

  • Production Summary reports that show the # of the various ADA codes that were performed over the years. 
    • Look for trends in the # of new patients seen (D0150 code).
  • Past Due Recall Report for the past 12 months.
    • This will indicate how well the practice has retained its hygiene patients.
  • Recall Report for the next 12 months for patients with and without appointments.
    • This will indicate how many hygiene days you will need to service the existing patients.
    • This is also the number of your “active” patients.  Because, guess what?  All those patient records that are on those shelves are NOT all active patients.

Review a sample of the “active” patient records to determine how much dentistry has been diagnosed and already completed.

  • Print the Outstanding Treatment Plan Report.
    • This will give you an idea of whether treatment plans are performed and how much is outstanding.  (This report is not always accurate, depending on the performance of the staff).

Do your homework before you purchase an existing practice to avoid investing in a “money pit” due to lack of cash flow!

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