Know When to Grow Your Practice

Know When to Grow Your Dental Practice | Image Credit: © VISOOT / STOCK.ADOBE.COM

So, your dental practice is thriving. You have a full patient schedule, amazing treatment acceptance rates, and you’re hitting all of your revenue goals. It feels like it’s time to expand, and maybe add a second location. Should you take the leap?

We all know the expression, “go big or go home.” And while it’s important to lean in to big ideas and goals—and even take a few risks to continue your practice’s growth—expanding your practice to a new location isn’t something you should dive into without some thoughtful research and deliberation.

The first step in the process is reviewing your current practice metrics. For many people, metrics simply means production and revenue or reviewing your profit and loss (P&L) statements. However, before expanding, you’ll need to dig much deeper, if you want to implement a successful expansion that helps—not hurts—your business.

Planning for Expansion

The first thing to evaluate before expanding to a new location is if you can afford to do so. According to the American Dental Association, opening a new practice requires an initial investment of around half a million dollars.¹ Before opening a second location, practitioners should evaluate the status of their current one. Is there still room to grow within the current space and setup? Is the current practice performing well enough to support the new location as it starts up? Do you have the resources to staff the new location?

It's also important to truthfully assess the workload you want to undertake. Will you be working at both locations? How many associates will you need to bring on? How much time and energy do you really want to sacrifice to manage 2 locations?

Practice owners will also have to consider whether they want to start from scratch or buy an existing practice. Building a patient base in a new practice can take 7 to 15 years,² so owners may want to consider buying an existing practice. Regardless of the approach, you will most likely have to accumulate debt to do so, or leverage against your existing practice, which could put a strain on your cash flow. Lenders will generally want to see a comfortable savings cushion before agreeing to finance a second practice, so your current location will need to be performing admirably for a lender to sign on.

Obviously, there’s a lot to consider, but the most important step is to carefully evaluate if you can actually support a second location. And that’s where your current key performance indicators (KPIs) come into play. Since KPIs are the metrics that allow you to assess your business’ growth and profitability, they are integral in determining the success of the practice.

The Metrics to Consider

While production and profit are may be 2 of the most critical metrics in determining if you should expand to a second location, they are just 2 of the KPIs that a practice should evaluate before expanding. The ADA recommends pulling the last 3 months of data on the KPIs you are evaluating to get a snapshot of practice health.³

Practice production

As mentioned, production is one of the most important KPIs to consider when evaluating your current practice. Without production, you don’t have revenue. Production can be affected by several variables, including team efficiency, hygiene productivity, scheduling, and case acceptance. According to the ADA, in a healthy practice, the dentist(s) should be generating 75% of production, with the hygiene department providing the other 25%.3 Industry standards set daily production goals for dentists at $4,500-5,000, and $750-1,000 for hygienists, equating to annual production goals (for 1 full-time dentist with 2 full-time hygienists) at $1,152,000-1,344,000.⁴

Knowing your production figures provides you a big picture of your practice’s health. By shoring up any shortcomings in these departments, practices can improve production, ultimately improving revenue and subsequently, income. In addition to evaluating practice production, owners should also examine production per patient. Are you maximizing the amount of production you can get out of your patients? If average production per patient is declining, so is your revenue. If you aren’t getting the most out of your current patients, this may present opportunities to expand your offerings, such as teeth whitening, sleep apnea treatment, or diagnostic programs, rather than locations.

It’s not enough just to offer extra services, however; your patients actually have to accept these treatments. Case acceptance also plays into production. If patients are not accepting—or following through—with treatment, your production will suffer. On average, case acceptance ranges around 50-60% for established patients, and 25-35% for new patients. Practices should aim for around 85% case acceptance to increase production.⁵

Ultimately, if your production is not steadily increasing, then your practice growth may stagnate—which is not a good position to be in when you’re adding on the major financial burdens that accompany opening a second location. By tracking production on a quarterly, monthly, and even weekly basis, practices can effectively evaluate if their production is growing meaningfully. If it isn’t, you’ll have some work to do before expanding to a new location.

Active Patient Count

Active patients are ones who have been seen in your practice within a set amount of time, (usually the past 18 months). Although active patient count is an incredibly important metric, less than 5% of practice dentists know what their active patient count metrics actually are.² Why is it so important? While you may have thousands of patients on your roster, you’re only making money off of the ones that actually come in for treatment. The active patient base is responsible for the ongoing cash flow to the business.

According to Jarvis Analytics, a good benchmark for a full-time dental practice is 1,600-1,800 active patients.⁶ If you’re significantly below these numbers, you may not be filling your schedule, making it irresponsible to expand to a new location. If you are over this, you’re probably cramming too many patients into your schedule—which may be a good indicator you can support expansion.

New Patients and Patient Attrition

The average dental practice can expect to see around a 17% decrease in their patient base each year, due to patients relocating, dying, patient changes in insurance coverage, or numerous rother reasons. If your office has the desired 1,600-1,800 active patients, this means you’re losing 270-300 patients per year.

To continue to grow, practices need to replace patients at a rate of at least 20-25 new patients per month,² and the number of new patients should increase 10 to 15% annually, year over year.³ If your practice is falling short on these numbers, it’s probably not a strong business plan to open a second location where you may be starting a patient base from the ground up. Although the new practice may be in a different location with different demographics, if your current practice is unable to sustain a patient base, you probably need to adjust your marketing strategies. Perfecting those before opening a second location means you’ll be prepared to market effectively when you do expand.

Practice collections

Production is great, but it only really matters if your practice is actually collecting on it. Collections percentages can be calculated by dividing your practices total collection by the total adjusted production. For continued growth, successful dental practices should collect 98% of their total adjusted production (the gross production less adjustments like insurance write-offs or discounts).⁷

Unfortunately, the average practice collects a lower amount of around 91%. While that still seems like an “A” grade, this can result in major financial losses: If the practice is losing revenue for 9% of production, a practice producing $60,000 a month will be losing practically $65,000 of revenue annually.⁸

If your collections aren’t to the level where they should be, evaluate your processes to see where you can improve. Mistakes on insurance claims forms, not reviewing your insurance aging reports, and not collecting payments upfront can all result in a sloppy collections process, which could result in lower collections percentages. Verifying patient insurance before an appointment or procedure, requiring same-day payment, and up-to-date billing and payment posting can all help raise collection rates.

Overhead

Overhead can be a killer for a business in any industry, and it’s no different for dentistry. The cost of running a business, median overhead for dental practice in the U.S. are around 62% and the average was approximately 75%.⁹ Ideally, overhead expenses should be under 60% for general practices. Any money spent on overhead is money that isn’t going into your practice’s profits.

They say you must spend money to make money, and that rings true with expanding your dental practice: If you add a second location (and the potential to make more money), you are also adding more overhead. You’ll have to pay more staff (one of the biggest portions of practice overhead), buy more supplies, and pay utilities at a second location. Finding ways to minimize your current overhead can position you well for when you double down. The best strategies are to identify areas where you are overspending; increase practice efficiency; and evaluate fees and subscriptions for value.

Practice profit

Profit is a clear frontrunner in KPIs, as it combines the success of both your collections and production, as well as your overhead. Put simply, profit is collections minus overhead. On average, dental practice profits hover at around 30-40%, with an average overhead percentage of around 60-70%.⁸

One way that profits can be evaluated is by EBITDA (i.e., earnings before interests, taxes, depreciation, and amortization). EBITDA removes expenses such as depreciation and interest payments that can skew underlying business performance. Instead, it allows business owners to evaluate their practice’s operating performance and revenue. EBITDA can be calculated by taking revenue, and subtracting the operating expenses and COGS (or “cost of sales;” essentially, the overhead cost of doing business).¹⁰

The higher your practice’s profits, the more money you will have to put towards your second practice. Ensuring a strong and consistent cash flow can help smooth over the transition to a new location.

The Cost of Expansion

If your collection rates are high, the profits are rolling in, and your current practice is thriving, you’ll still need to consider how much of that profit you want to put into a new practice, rather than into your pocket. Can your current practice support the costs of starting a new practice, and still make you a profit?

As mentioned previously, on average it can cost up to $550,000 to open a new practice. Even if you’re buying an existing practice, you can expect to put some money into renovations, upgrades, and technology updates. And technology isn’t cheap: Most new practices incur $50,000-70,000 in new equipment costs.¹¹

Startup costs aside, a new practice is going to have monthly expenses that may not be covered by income from that location. New practices can expect to face monthly operating costs of $67,500-70,000 for the first few months.¹¹ This is comprised of costs including salary, rent (if you’re renting space), supplies and other variable costs, and other expenses.

A primary expense will be payroll. Depending on the size of the practice, you should expect to set aside around $45,000 per month for salaries. Assuming 2 dentists (with an average gross salary of $180,000) a full-time hygienist ($77,000), 2 dental assistants ($40,000) and a receptionist ($32,000), you’re looking at nearly $550,000 per year you’ll need to be prepared for—around the same amount as you’ll invest in the practice to begin with.¹¹

While your new practice will presumably be bringing in revenue to offset these costs, owners should have contingency plans in place if there’s a slow start (particularly when starting a practice from the ground up). And don’t forget, from day one you’ll need to attract patients to the new location, keep the practice stocked, and the lights on. Expect to set aside up to 10% of your total revenue for other expenses, such as marketing, advertising, supplies, utilities, and other investments.¹¹

The Bottom Line

Ultimately, as convenient as it would be, there is no one set metric or number that triggers the go-ahead to expand to a second location. Dentists will need to have a comprehensive understanding of their earnings, expenses, and resources before they make the decision to expand. By staying up to date on your KPIs (and understanding what the trends mean), dentists can make informed decisions about the best course of action.

References

1. The real cost of owning a dental practice. American Dental Association. Accessed July 12, 2023. https://marketplace.ada.org/blog/dental-business/the-real-cost-of-owning-a-dental-practice/.

2. The most important number–the active patient count. Henry Schein Professional Practice Transitions. Accessed July 12, 2023. https://www.henryschein.com/us-en/images/dental/ActivePatientCount.pdf.

3. Measuring Success–Guidelines for Practice Success. American Dental Association. Accessed July 12, 2023. https://www.ada.org/en/resources/practice/practice-management/measuring-success20160428t155202.

4. Increase dental practice profit by measuring KPIs and managing production. The Dental CFO, LLC. May 1, 2023. Accessed July 12, 2023. https://www.thedentalcfo.com/blog/increase-dental-practice-profit-by-measuring-kpis-and-managing-production.

5. Measuring Case Acceptance. Henry Schein Dental. Accessed July 12, 2023. https://www.henryschein.com/us-en/dental/SalesCon/article_MeasuringCaseAcceptance.aspx.

6. Practice benchmarks: The value of your active dental patient numbers (part 1). Jarvis Analytics. July 14, 2022. Accessed July 11, 2023. https://www.jarvisanalytics.com/blog/dental-practice-benchmarks/.

7. Factors that help align your dental practice collection to production ratios. Jarvis Analytics. July 14, 2022. Accessed July 10, 2023. https://www.jarvisanalytics.com/blog/collection-production-ratios/.

8. How profitable are dental practices? Break-even & profits. SharpSheets. February 24, 2023. Accessed July 12, 2023. https://sharpsheets.io/blog/how-profitable-are-dental-practices/.

9. How to value overhead. Dental Buyer Advocates. July 6, 2023. Accessed July 12, 2023. https://www.dentalbuyeradvocates.com/valuation/overhead/.

10. Remi. EBITDA: What it is, how to calculate. SharpSheets. April 21, 2023. Accessed July 12, 2023. https://sharpsheets.io/blog/ebitda/.

11. It costs $170,000 to $550,000 to start a dental practice. SharpSheets. January 22, 2023. Accessed July 12, 2023. https://sharpsheets.io/blog/how-much-cost-dental-practice/.