Dentists: Is Your Practice’s Overhead Too High?
February 15, 2022
At a glance:
- The Main Takeaway: Many general dental practices operate with excessive overhead eating into profits due to surplus operating costs and inefficient business practices.
- How Does Your Practice Measure Up: Recommended overhead for general dentistry is around 60% of revenue, but most practices today run around 75% – that’s a 15% loss in potential profits.
- Next Steps: It is possible to run an efficient general dental practice that also prioritizes patient care, but it’s easier with help. Partner with a dental CPA and achieve more profitable growth.
Looking for more effective or creative ways to reduce overhead and boost profits? Aprio’s National Dental Practice can help.
The full story
It’s no exaggeration to say that overhead can make or break a general dentist practice. By definition, your overhead determines your profitability, and your profitability determines your practice’s ability to survive. It also determines your salary as the practice owner, and that’s no small matter.
With so much of a practice’s performance tied to overhead, it makes sense to keep overhead low. But what is “low” overhead in the context of general dentistry? Or, perhaps the better question: what is reasonable overhead for a general dentist practice?
There’s no one-size-fits-all answer to these questions, but there is some general rule-of-thumb guidance that can help you run a more profitable practice.
Defining overhead in a dental practice
Let’s take a step back to clear up precisely what counts towards overhead in a general dental practice. The answer is simple: everything except the dentist’s income. That means employee compensation, rent, lab costs, supplies, equipment, etc., all contribute to overhead.
For example, if your practice generates $1 million in revenue and your expenses total $750,000, you’re carrying an overhead of 75% and earning an income of $250,000. For reference, the generally accepted target overhead for a general dental practice is around 60% of revenue. If you reduced overhead by 15% to the target goal, you could generate $150,000 in additional income.
So if the ideal overhead for a general dental practice is around 60%, the next question is how that percentage should break down into actual practice expenses. Understanding industry-recommended costs for major business expense categories can provide useful benchmarks to understand how your practice measures up. Your largest expense will always be labor, including all salaries, benefits, bonuses, payroll taxes, etc., and is recommended to stay around 25% of your revenue. Other categories like rent, lab costs, and supplies should each fall around 6%, and all other expenses, such as marketing and accounting, should each stay under 3%.
Strategies for reducing overhead
The proportional relationship between overhead and profits means every dollar matters; reducing overhead by 1% means increasing profits by 1%. However, overhead also has an important relationship with your revenue. If your revenue declines, the percentage of your overhead increases; conversely, if your revenue increases, your overhead decreases.
If your goal is to boost your practice’s profitability, there are two main strategies you can turn to for decreasing overhead: increasing your practice’s efficiency or reducing your dollars spent.
Strategy 1: Increasing Efficiencies – The best first step towards decreasing overhead is increasing revenue, which requires growing production and operating more efficiently. Some simple steps toward this goal might include growing your referral sources, minimizing no-shows and cancellations, and potentially adjusting your fees. None of these methods impact your dollars spent, but they can offset those costs by bringing more revenue.
Strategy 2: Reducing Costs – Cutting expenses is an obvious way to reduce overhead, but it sometimes requires difficult decisions. Drastic cost cuts may require reducing your staff, but this is always the last resort. Other cost-cutting steps may include negotiating your lease terms, reviewing your insurance policies, and evaluating your utility costs.
It’s important to remember that each practice is unique, so your revenue and expenses may align differently. Your goal should be to maximize profitability while prioritizing excellent patient care – any cost-cutting measures that negatively affect efficiency just aren’t worth it.
The bottom line
Many dentists struggle to run their practices as efficiently as possible because it often means spending more time on business decisions than treating patients. Get back to what matters most – your patients – and let a dental CPA help with the rest.
Aprio’s National Dental Practice can shoulder some of the burdens of managing a successful business through our comprehensive advisory services across accounting, tax, and wealth management. On average, our clients achieve a net operating margin of 41.3%, and we have the expertise to help you achieve your profitability goals.
About the Author
As partner-in-charge of Aprio’s National Dental Industry Practice, Brad McKeiver arms dentists with real-time financial data about their practices. He has helped numerous dental practitioners make informed business decisions that focus on driving increased practice profitability, growth and value.