9.13.13 Issue #601 info@mckenziemgmt.com 1-877-777-6151 Forward This Newsletter

Overhead: Your Deal With the Devil
By Sally McKenzie, CEO

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"The art is not in making money, but in keeping it." - Proverb

For dental practices, those words could not be truer - and the #1 threat to keeping your money is overhead. It can be the disease that plagues the high-potential practice, the venom that sucks the life out of great ideas, grand plans, and even mere necessities. In some cases, overhead has made cash flow so tight that simply meeting payroll and the monthly mortgage is enough to have the doctor shaking his/her head in disbelief and struggling to understand why the practice is barely clinging to the side of the financial pool to stay afloat. After all, the doctor is certainly working hard enough.

For too many practice owners, it seems that no matter how hard you work, more and more of the practice revenues are siphoned off to cover just the day-to-day costs of doing business. And getting a grip on overhead is no small challenge. It is evasive, and its growth is often gradual. Few doctors recognize that seemingly insignificant decisions and daily occurrences have a profound and powerful impact on the bottom line, and many never consider what is happening right in front of them.

Sure, there are those “occasional” holes in the schedule, but you’re certain that’s not the problem. Okay, so you agreed to hire a part-time “floater” in the office to “fill in” here and there when things get a little hectic. But that position can’t possibly be what’s creating the financial stress, after all it’s only a few hours a week. And yes, you do give “modest” pay raises for the team annually, but they are so miniscule, that couldn’t possibly be the reason why you can’t fund your retirement or why you occasionally have to forego your own paycheck, or why you still can’t swing that much needed upgrade to the computer system. I can assure you that you are absolutely right, it’s not any one of those items listed above. No. It’s all of them, and so much more. 
Doctor, I’d like you to take a moment to introduce yourself to Overhead, he is now in charge of your practice. It’s not quite like a deal with the Devil, but it’s close. He will dictate 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 does “it" cost? How much longer can you do without “it”? And is “it” absolutely necessary. I don’t need to tell you that this is no way to run a practice.

Now if you are ready to reclaim control of your practice and your profitability, read on. It will take courage, commitment, and clear communication to get overhead under control. But the payoff is huge, not just in terms of your finances and your practice’s profitability, but in your overall quality of life and work.

First, I want you to write down this number: 55. No it’s not the age at which you can retire - at least not yet. Rather, this is the percentage of collections that should cover your overhead expenses. In the dental industry, this is the gold standard that every practice should aim for. If your overhead is currently 60-65% of collections, pat yourself on the back. You can remain calm and carry on for the most part, but be keep a watchful eye on those systems that are major overhead drivers as well as the seemingly insignificant expenses.  

Unfortunately, most of you are well above the standard. While there are several factors that influence overhead, and dentists may be well aware of the bigger drains on resources, the little things add up quickly as well, in particular, those “little” raises that you feel obliged to give annually to your staff. Repeat after me: If production is going down, payroll cannot go up. To put it another way, if the practice is losing money, employees are not entitled to make more merely because they have logged another year on your staff.

Now, I will be the first to acknowledge this can be a difficult situation, particularly when it comes to long-term employees. I understand that many of you feel an obligation to pay them more, or you feel you want to reward those who have been loyal to the practice. It’s not that I recommend withholding raises – rather, change the context under which they are awarded. Move away from longevity increases to productivity increases.
Next week, when and how to award raises.

For more information on this topic, visit my blog: The Lighter Side

Interested in speaking to me about your practice concerns? Email sallymck@mckenziemgmt.com
Interested in having Sally McKenzie Seminars speak to your dental society or study club? Click here.
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