Put more money back into your pocket by going paperless

November 12, 2012

We wrap up our Paperless Series with a breakdown of the revenue-increasing and cost-reducing efficiencies of a paperless dental practice.

We wrap up our Paperless Series with a breakdown of the revenue-increasing and cost-reducing efficiencies of a paperless dental practice.

What a great series of articles about the benefits of operating a paperless dental practice. We covered a range of ideas from improving on in-office efficiencies, enhancing the patient experience, efficient implementation, and quality-of-life benefits. Let’s wrap up by taking a look at some of the numbers involved-those dollars in a hard-working dentist’s pocket.

The “before” view
Let’s assume a typical dental practice scenario:

* 32 percent = 12% hygiene + 8% assistants + 8% office + 4% taxes & benefits

After consulting with experts and crunching the numbers with her Dental CPA, our good doctor decides to invest $150,000 to go paperless. She purchases digital radiography, outfits her operatories with computer terminals, incorporates patient education and communications programs, and establishes mobile computing and remote access to the office computer system. To keep things simple, we’ll deduct the technology costs over five years and assume a cash purchase.

Revenue$9,000100%
Staff Costs*– $288,000– 32%
Other Fixed Overhead– $162,000– 28%
Variable Overhead (Supplies & Laboratory)– $135,000– 15%
Net Income$315,00035%
Less Taxes (Assuming 40%) – 126,000 
After-tax cash flow$189,000    

Next, let’s look at plausible expected results, assuming relatively conservative revenue increases of 5% and 10%. We’ll also assume the fixed overhead grows by $6,000/year (increasing property taxes, service contracts, insurance premiums, etc.).

Referring to our initial scenario, a five percent increase in revenue equals $45,000. After backing out about 72% of the increase (in the form of employee compensation, variable supplies and lab costs and increased fixed costs), that leaves $32,250 in net income before depreciation. Subtract the non-cash depreciation deduction to arrive at taxable net income, and then subtract 40% in taxes. The resulting, after-tax cash flow is $220,350 (versus $189,000 in our “before” view). That’s a take-home pay increase of $31,350 (see Table 1). A 10% revenue increase equals $90,000. After applying all of the same calculations, our doctor’s take-home pay is increased by $54,300 (see Table 2).

TABLE 1

Current Practice

Revenue$900,000100%
Less:  
Employee Compensation288,00032.00%
Supplies/Lab (Variable)135,00015.00%
Other Overhead (Fixed)162,00018.00%
Income Before Depreciation315,00035.00%
Less Depreciation -0.00%
Net Income (Taxable)315,00035.00%
Less Taxes of 40%126,000 

Paperless Practice with 5% Increase in Revenue

Revenue$945,000100%
Less:  
Employee Compensation288,00030.48%
Supplies/Lab (Variable)141,75015.00%
Other Overhead (Fixed)168,00017.78%
Income Before Depreciation(30,000)-3.17%
Net Income (Taxable)317,25033.57%
Less Taxes of 40%126,900 

TABLE 2

Current Practice

Revenue$900,000100%
Less:  
Employee Compensation288,00032.00%
Supplies/Lab (Variable)135,00015.00%
Other Overhead (Fixed)162,00018.00%
Income Before Depreciation315,00035.00%
Less Depreciation-0.00%
Net Income (Taxable)315,00035.00%
Less Taxes of 40%126,000 
Cash Flow After Tax$189,000 

Paperless Practice with 10% Increase in Revenue

Revenue$990,000100%
Less:  
Employee Compensation288,00029.09%
Supplies/Lab (Variable)148,50015.00%
Other Overhead (Fixed)168,00016.9%
Income Before Depreciation385,50038.94%
Less Depreciation(30,000)-3.03%
Net Income (Taxable)355,50035.91%
Less Taxes of 40%142,200 
Cash Flow After Tax$243,300 

Dollars and sense
In short, with a modest technology investment, a conservatively estimated 5%–10% revenue increase can become a 17%–29% uptick in take-home pay for our good doctor. Talk about a nice “bonus.” Can you spell 401(k)?

And this is with a relatively one-dimensional illustration, assuming the doctor generates the entire revenue increase with no help from hygiene. If we leave the payroll at 32% of revenue, or assume hygiene salaries go up proportionately with revenue, the doctor’s take-home pay still goes up 12% with the $45,000 revenue increase, or 20% with the $90,000 increase.

One could argue the assistant and office salaries remain constant and that those percentages go down with the increased revenue, thereby offsetting the increase in hygiene salaries. Regardless, we have seen that a paperless practice is greener; can create revenue-increasing and cost-reducing efficiencies in several areas; fosters a better patient experience and new patient referrals; and contributes to an enjoyable, vital dental practice for doctor and staff alike.

Building for tomorrow
Last but not least, let’s consider the day you’re ready to sell your practice. A modern, efficient dental practice with happy staff is attractive to prospective buyers. This tilts the supply/demand lead to other negotiation advantages.

Learn about the financial benefits of a paperless practice

A more profitable practice also renders a higher sale price. While part of the value of a dental practice is derived from revenue, the profit available for a buyer has a much greater impact. I try to avoid rules of thumb because, by definition, they don’t universally apply. But for simplicity’s sake, if a practice sells for 65% of revenue, a $45,000 increase in revenue can add $29,250 to the sale price. Accordingly, a $90,000 increase in revenue can add $58,500 more at escrow closing.

Another, less well-known ratio is sale price as a percentage of profit. For this, I typically see a range of 1.5–2.0 times profit. If you factor in this ratio, the paperless practice in Table 1 could sell for $40,000–$50,000 more than the pre-paperless version; the practice in Table 2 could sell for $80,000–$100,000 more. While these increased sales prices don’t recapture the full investment of $150,000 for going paperless, you don’t have to factor in too many years of expected increased profits and tax savings to exceed it.

For my money, the benefits of a paperless office outweigh the cost in current and future dollars. Perhaps even more important, they weigh heavily in favor of a valuable intangible that money alone can’t buy: improved quality of life for the doctor, staff and patients.