Overhead Percentages By August de Oliveira augustdds@compaq.net

A friend of mine bought a practice a few months ago and had some concerns regarding the mounting expenses in his office. He turned to someone he felt had a finger on the pulse of practice management. Someone well aware of the ins and outs of everyday life in a dental office–his practice broker. “Just fire a staff member,” was the broker’s response. Now, I know it’s hard to argue with logic like that, but my friend called me up knowing I am a seasoned veteran of one-and-a-half years in my own practice. I asked him a number of questions regarding his office: what percentage of his overhead was labor, what his capacity was, what his average day was like, etc. After a few moments of silence I had assumed he hung up. Then he said, “I’ll get back to you on that, I’ll ask my accountant.” I now had a little project on my hands.

First, I should start with a little background as to why I am qualified to write on such an exciting topic as dental accounting. I grew up in Seattle, where all of the residents and their favorite Starbucks’ clerk were up to their umbrellas in cash from the stock market. “Well,” I thought, “I like cash and I like lattes too, so I will be a stock market player.” I then sent out a check to E-trade and soon I was the proud owner of a few shares of Starbucks, which subsequently plummeted by 60%. It seems that the general public wised up to the fact that spending $4 on a cup of joe and listening to “world music” wasn’t all that. Lacking the mental fortitude to call it quits, I hurried down to my local Barnes & Noble to buy some books on the market and, of course, another latte.

My father, filled with Portuguese wisdom always told me the best way to judge a book was by its cover. While looking the selections over I thought to myself, “Let’s see, picture of a crotchety old guy, another crotchety old guy…. Hey two guys in silly hats!” So, I bought all the Motley Fool books written by two brothers and one from their team at Fool.com. It seems these two nuts thought that stocks could be evaluated based on real numbers. The Gardner brothers taught their readers to read a profit and loss statement, to look at earnings and cash flow, and to see past the emotions that ruled the stock market. So there I was, trading along side the crotchety old guys, the silly hat guys and doing quite well for myself. That was until the Internet bubble burst, along with my dreams of a guest spot on CNBC. I then had to learn really hard words, like “earnings” and “profitability” and “securities fraud.” Oh well, I always had that dental degree. So, armed with a knowledge of numbers I went back to concentrating on much more rational things, like dental patients.

Lucky for us, running a dental office is really no different than running a bakery, with less ingredients. Money comes in as collections, and money goes out as expenses. What is left is ours to keep. The money coming in can be analyzed and predictions can be made based on those numbers. Money going out can also be analyzed and budgets can be created. Furthermore, a profit and loss statement helps us break those expenses down as a percentage.

Hang on to your seats as we delve headlong into the intriguing concept of a breakeven point! This is an important number as only after you reach this point can you get a paycheck. The only way to figure this out is by looking at the numbers from last year, either yours or the dentist you bought your practice from. There are a number of steps before you can arrive at this. First you take the total of last year’s collections and divide it by the total number of days worked. This total is your collections per day. Then, multiply the total per day by the percentage of overhead and you will arrive at your overhead per day, or your breakeven point. Usually, I go one step further and divide that by the number of hours seeing patients per day to give me my overhead per hour. Although this does not effect the way I treatment plan, it does force me to get off my ass and do the fillings I just diagnosed in hygiene, versus watching my American Pie 2 DVD in operatory one. In Figure 1 you’ll find numbers calculated for a hypothetical practice with a 60% overhead.

All right, we have established how low we can go with our practice numbers, now it’s time to raise the roof. I’m talkin’ about capacity. Capacity is when your practice is firing on all cylinders. I figure capacity by looking through the schedule and averaging my 20 busiest days. Really big cases will throw off the figures, so anything bigger than a three unit bridge is substituted by one unit per hour. Let’s say in this hypothetical practice that capacity was at about $6,000. Now the owner of the joint can make reasonable production goals based on the actual numbers of his practice, rather than pulling them out from you know where. So now we’ve got a grip on what’s coming in, now let’s talk about what’s going out.

To come up with some norms on overhead, I thought about the McGraw Hill study, or the American Dental Association’s survey on the average dental practice, but decided to look no further than to DentalTown.com. Lucky for me my fellow posters had the reproductive organs to post their practice numbers for Townies, lurkers (those who read the boards, but don’t post), patients, and IRS auditors to view at will. I went over 100 pages and wrote any number I could find and tried to stay focused as most discussions deteriorated into posts about marketing, amalgam, and whether or not to report those who do not use rubber dams to your state board. After about ten minutes I came up with the values you see in Figure 2. Keep in mind that the total percentages of overhead do not add up to the total overhead figure due to various posters having different categories of overhead. Plus, I hate math.

Payroll–Payroll should include salaries, workers compensation insurance, payroll taxes, spa treatments, bail, Lexus payments, etc. Anything you pay to keep your staff from leaving your office for greener pastures like the local Pizza Hut. Not surprisingly, our Townies are cracking whips with the best of them with a payroll percentage of 21.5%. The gurus tell us to keep this figure below 25%. This is probably the most important percentage on the Profit and Loss Statement. By keeping this number under 25% you can make educated choices on whether you can afford to give benefits, bonuses or raises. Furthermore, if this number is too high then you have extra fortitude to can the dental assistant who feels that helping you suction is not part of his or her job description.

Lab Costs–This is pretty self explanatory, and again, the misers at DentalTown.com are trouncing the gurus at 8%. The ideal is to keep this below 10%. Analyzing lab costs are a thing of debate as some will tell you a relatively high lab cost percentage means you are doing a lot of crown and bridge. To some extent this is true. I use an out-of-area lab that is about a third less than a lot of local labs. If I did the same amount of crowns and used a local lab then my lab figure would be above 10%.

Occupancy Costs–These include rent, mortgage, maintenance, etc. Anything to keep you off the streets. The Townies were slightly higher than the ideal 5% figure, living large at 5.7%.

Dental & Office Supplies–Some accountants lump dental and office supplies together; however, I have them separated for your reading pleasure. Dental supplies came in a little higher than the 6% ideal. Townies like their toys. Everything from Touch & Bond to Palfique Estelite, DentalTown.com posters spend close to 7.5% of their gross on supplies. Posts from Townies revealed that they bought stuff from catalogs, full service reps, and even E-bay!

Office supplies should include anything needed to run the front office from toner, to paper, to the magically disappearing white out. Townies came in at 5%, which is slightly higher than the 4% ideal. The white out must be missing for a reason.

Advertising–The numbers for offices that do advertising are skewed in that most of those that posted did no advertising. The ones that did advertise came in at 3%, which is higher than the 1-2% budget that most gurus recommend.

Like advertising, a number of DentalTown posters left out a category for equipment. Some included equipment repairs in this category. Townies bought up Waterlases, CERECs, and DIAGNOdents by the boatload. The equipment section should also include any leases and the plasma TV you bought for your living…I mean waiting room. Townies came in at 3%.

Administrative–Basically, this is everything else. This should include insurance, CE, professional fees, dues and subscriptions, that dinner when you and your spouse mentioned dentistry at least once, as well as everything that does not fit into the neat little boxes we just mentioned. Administrative came in at 9.6%.

There you have it! Everything you need to know about dental accounting, but were too bored to ask. Now you have a framework to hang your nervous breakdown on. Running a practice without this barometer is like an internist working without blood-pressure readings, a cardiologist without an EKG, or a hygienist without periodontal probings. Now you have a reference, other than your practice broker, to turn to for those difficult practice management decisions.

Somebody get me a latte!

August de Oliveira graduated from the University of Washington School of Dentistry in 1997. Following dental school, he completed a general practice residency at the VA Sepulveda in North Hills, California. August currently maintains a private practice in Encino, California. You can contact August on the message boards at www.dentaltown.com. Or you can contact him at augustdds@compaq.net or (818)-783-2981.