Why you need to maintain control on overhead expenses

January 9, 2019

Set limits and plan accordingly to responsibly increase production while maintaining overhead spending.

When looking to build up their practices, many dentists focus entirely on increasing production. While production is important to overall practice success, focusing solely on production often causes practices to forget about their expanding overhead - the silent killer of practices.

Why overhead matters

Every dollar you spend on overhead is a dollar of income you don’t get and can be mathematically correlated to how many extra minutes, hours, days, weeks, months, and years you will be in practice before reaching financial independence. One dentist told me that he didn’t really care about that because he intended to practice for the rest of his life. Well, based on his savings, it looks like he’ll definitely have that opportunity.

How overhead gets out of control

Overhead tends to grow over time. It can start with something as simple as a new piece of equipment. Then there’s a new technology you must have, or a great new office space downtown. The acquisition of all of these things will be rationalized because you feel that you can’t possibly provide excellent patient care without them - that’s what all the salespeople will tell you as well. Too bad they won’t be around to help you pay for it.

Read more: 9 ways to increase profits by controlling labor expenses

I’m not suggesting that you never buy anything. Investing back into your practice is an important step in building your business, but you should never fall into the trap of thinking that you have to buy everything to have a successful practice. I have seen offices that have more technology in their dental treatment room than you’d see in an open-heart surgery operating room. And even with all that equipment, these practices are doing no better than offices with a fourth of what they have.

Dealing with overhead

Your philosophy on overhead should be all about setting limits and sticking to them. Sit down with your consultant or accountant and set limits for every category, which collectively should be limited to a certain percentage of the practice revenue. For example, we recommend that general practices have no more than 59 percent overhead. When you’ve used that up, you’re done. You don’t get that new piece of equipment, and you don’t fly off to that four-day-amazing-because-the-pictures-looked-so-good-online CE course that also doubles as the tax-free vacation. You may be thinking: Why not? What’s just one more purchase for the year going to hurt? Well, it will hurt your bottom line - a lot. Every one percent that the practice exceeds the acceptable overhead percentage represents a loss of $1,000 of income for every $100,000 of revenue. Believe me, it’s not unusual for an $800,000 practice to be losing $32,000 of income every year for the doctor or owner.

Related reading: How to lower overhead and increase productivity with optimized scheduling blocks

Summary

Keeping control of overhead is as important as increasing production. By focusing on overhead and keeping it within or below an acceptable range, practices will almost immediately have an understanding of their current state and know what to do to improve performance.