Running a successful dental practice requires you to control your practice overhead. By working with a team of experts, including a CPA and an attorney who provides services to dental professionals, you can learn what they didn’t teach you about business expenses at dental school. This article is a brief discussion of dental practice overhead and how to maintain it.
Understanding Your Profit and Loss (P&L) Statement
To understand dental practice overhead, you need to get a handle on your P&L statement, which can be broken down into the following basic expense categories: employee costs, variable dental costs, facility and equipment costs, other business expenses, discretionary costs, and owner’s compensation.
Employee Costs
Employee costs include your team’s salaries (front desk, dental assistant, and hygienist), items such as payroll taxes, retirement plan contributions, and other employee benefits, as well as the cost of outside services (e.g. employment agency costs to cover for an absent employee). It is worth noting that the costs of an associate are not included in employee costs, but are reflected in the owner’s compensation on your P&L. In any event, employee costs should be in the range of 24 to 26 percent of your practice’s revenues.
Variable Dental Costs
These costs may vary with the volume of dental services you provide, but normally include dental supplies, implant supplies, and lab fees. The costs for dental supplies should be no higher than 6 percent of your practice’s collections, although lab fees can vary further depending on the technology your practice is currently using.
Facility and Equipment Costs
Facility and equipment costs include such items as the depreciation of your dental equipment and the interest costs associated with financing your practice acquisition. Other costs that must be accounted for include:
- Rental costs of your space
- Equipment leasing
- Personal property taxes
- Real estate taxes
- Utility costs
A workable budget for facility and equipment costs is approximately 10 percent of the practice’s collections.
Other Business Expenses
Other expenses (e.g. advertising, bank charges, continuing education, dues and subscriptions, insurance costs, office supplies and postage, professional fees, telephone, uniforms, and laundry) should top out at about 11 percent of the practice’s collections.
Discretionary Costs
Discretionary costs (e.g. automobile costs, contributions, gifts, meals, entertainment, travel) should not exceed 2 percent of your collections.
Owner’s Compensation
The budget for owner’s compensation (your wages, your family’s wages, your associate’s compensation, and your portion of your retirement plan contribution) should be 35%–40% of your collections.
There are other considerations in controlling your practice’s overhead, not the least of which is setting and rebalancing your fees, which should be done on an annual basis at a minimum. It is also crucial to have a handle on the ratio of daily hygiene production to doctor production to ensure that your dental practice will maintain profitability while also generating sufficient income for you.
The Takeaway
Starting a new dental practice or acquiring an existing one can be an exciting and lucrative venture, provided that you control your overhead. By working with an experienced attorney and retaining an accountant, you can learn how to manage your expenses and achieve your objectives in the dental space.