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As a rule of thumb, a general dental practice should spend 59% of its revenue on overhead, says Dr. Roger Levin.
If your income and personal assets suffered as a result of the Great Recession, you may be contemplating the need to retire years later than you had planned. Even though many practices have started increasing annual production again, it will be difficult for dentists to recoup their losses and get back on track for their former retirement target date.
Should you resign yourself to practicing dentistry longer than you had hoped? Absolutely not. Practices are growing again. For example, Levin Group consulting clients, who’ve implemented new high-performance business systems, are increasing production and collecting a higher percentage of their fees â¦ and, significantly, they’re also learning to control spending, both at the practice and in their personal lives.
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Too much overhead leaves too little for retirement
In the financial management of your practice, the key is to establish the right balance between income and expenditures. In addition to developing strategies for increasing production, you should also implement policies and systems that will regulate overhead. Common sense tells you that bringing in more revenue won’t help you reach long-term financial goals if it’s consumed by wasteful spending.
This is not to say that the more you cut expenses, the better. Some costs are obviously essential for efficient practice operation, and wise investments will actually increase rather than decrease income. You must learn to distinguish between good spending and bad.
Consider the dentist who laid off his hygienist to reduce labor costs when his practice was severely impacted by the recession. It may have made sense at the time â¦ but as the dental economy stabilized and growth became possible again, this budget control tactic began working against the practice. Spending time performing hygiene services was limiting his capacity to produce more dentistry.
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Set an overhead target, budget accordingly, and exercise fiscal discipline
As a rule of thumb, a general practice should spend 59 percent of its revenue on overhead. If you don’t know your overhead number off the top of your head, use your practice management software to calculate it. Then, if your operating costs are higher than this target, determine what that excessive spending really means, in dollars. It’s common for practice owners to discover that they’re spending 5 percent over the limit. In an $800,000 practice, that represents $40,000. Lose that much every year for 10 years and you’re coming up $400,000 short - and the loss would be even greater if you could have been investing that additional income carefully.
You have to establish tight spending controls for your staff and yourself. Create a realistic annual operating budget that pegs overhead at 59 percent. Review every expenditure against the plan. Track total spending monthly to ensure that you’re not drifting from your goal. And steel yourself against impulse buying â¦ whether it’s some nifty new technology for your business or an extravagant vacation. Spending money is often more fun than saving, so keep reminding yourself that there’s not much fun in working years longer than you had hoped, pinching pennies in your so-called “golden years,” or leaving very little to your loved ones.
Unless you’re about to retire, there’s still time to enrich that period of your life - and maybe even reach it sooner. Implement new, more efficient management and marketing systems and growth strategies, and preserve the resulting income by maintaining tight overhead control.
More from Dr. Levin: Is it time to make over your dental practice?
Arrange for Dr. Levin to present a seminar to your study club or association. A leading expert in practice management and marketing, he’s also one of the most dynamic speakers in dentistry. For details, contact our Seminar Events Manager Rebecca Luwisher at firstname.lastname@example.org or 443-471-3202.