Casey and Jarrod welcome Will Taylor, Financial Planner & Analyst, to discuss common ways to reduce overhead in a dental practice. If you are battling to capture more money in your practice, this episode is for you.
Announcer:
Hello, everyone. Welcome to The Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices. To help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.
Casey Hiers:
Hello and welcome. This is Casey Hiers back at it again at The Millionaire Dentist Podcast. Cohost Jarrod Bridgeman is in studio.
Jarrod Bridgeman:
Hey, I'm here.
Casey Hiers:
Yes, sir. And we've got a special guest, Will Taylor. He's a financial analyst here at the firm. Will, thanks for joining us.
Will Taylor:
Hey, thanks for having me back again.
Casey Hiers:
We wanted to talk about a topic that practice owners probably think about quite a bit, and that's overhead. I wanted to bring you in to discuss overhead, potentially reducing overhead. Listen, there's three ways to affect overhead: you can produce more, you can spend less, or ideally, a combination of both.
Will Taylor:
Our COO, Brogan Baxter, would be right behind you with that commentary. A famous quote that comes out of his mouth very often.
Jarrod Bridgeman:
Honestly, though, here's the deal. Save more, spend less, or combination of both. That's kind of like a good diet plan. Eat less and exercise more, which we all do such a great job on.
Casey Hiers:
There you go. Yep. So knowing that, Will, what are some areas in a practice that a practice owner should be aware of for general benchmarks?People may be spending a whole bunch on something because they think that's what they should be doing, for example, supplies. "Well, I spend 12% on supplies. I get the best deal ever." Somebody else says they spend 7%. What are some benchmarks you can give our listener?
Will Taylor:
No, that's a good question, and typically, with our clients, we try to steer away from many types of "budgeting", but there definitely are some industry standards that we try to keep in line with. For a general dental practice, there's three main metrics that we always keep an eye on. One would be employee wages. Employee costs, traditionally, should be around 20% of total revenues in a practice. There's a lot of factors that go into that though. That is percentage of revenues, so many dentists obviously know there's a big difference between production and revenues.
Will Taylor:
Insurance reimbursements can be a big problem in that particular category as well. If you're producing $2 million, but the insurance companies are taking half of that away from you and your revenues are only $1 million, in theory, your employee costs on paper are going to show that they're being way too high and someone might look at it and say, "Oh, I must be overstaffed." Well, you're employing a staff to produce $2 million, but you're only collecting $1 million. So that's why there is a little bit of give and take with these figures. But yes, traditionally, 20% of overall revenues is a benchmark that we shoot for with employee wages. That would be one of the big ones.
Casey Hiers:
Nice.
Jarrod Bridgeman:
So, in that case, let's say you produce more in that same scenario, but you're barely making any more, that's not a reason to say, "Hey, it's time to get the staff a raise."
Casey Hiers:
Yeah, exactly right. There's a lot that goes into employee wages. And like I said, these are benchmarks. They are not end-all be-all numbers to decide everything, but we've certainly had clients before that take a look at a number and say, "Oh my gosh, I'm 32% of revenues for my staff. I must be overpaying and I must be overstaffed." And that could potentially be the case. It could also potentially be the opposite. You could be understaffed, running ragged, and underpaying, but if the production and the revenue number is too far apart, then that's going to throw off that benchmark. So again, yes, these are benchmarks that you need to keep an eye on, but no, it's not an end-all be-all.
Will Taylor:
How about lab fees? I know labs are always a hot topic. Is there a general rule for those?
Casey Hiers:
Yeah, that's another one of them. Lab costs should be 10% or less of actual production in this case. So lab costs and supply costs would be another one. We measure those against production rather than against revenues, because they are a direct input cost as to how much you produce, not necessarily how much that you receive.
Jarrod Bridgeman:
Because if you don't have the supplies you can't produce.
Casey Hiers:
That's exactly right. So that kind of works the opposite direction of what I just discussed in employee wages, because if we were dividing supply costs out of revenues and that same description that I just described with the higher insurance adjustments, then you would have some issues there and it would say that you're spending way too much on supplies, when in reality, if you didn't spend that money on supplies, you couldn't do the production.
Casey Hiers:
So we try to stay 10% or less going back to lab fees. Lab costs should be 10% or less. This one is not typically one that's a huge issue to stick with. We don't see a ton of dentists that are drastically over this number, especially in today's day and age, because you have clients that do a lot of their lab work in-house now, whether they have their own lab in their office, which is not quite as common. But when you get into, your same-day crowns, your CEREC, that type of equipment, that's going to save you money in potential lab fees. But at the same time, you're paying $120,000 for that piece of equipment, so you're just really paying it on the front end rather than the back. But in theory, if you spend the money on that piece of equipment or something else that is similar, a milling machine of some variety, the goal is to save money on labs there, rather than send as much out.
Jarrod Bridgeman:
I was going to ask you, when does it make sense for somebody to bring the lab activities in-house? Is there a benchmark for that?
Casey Hiers:
Not necessarily a benchmark, this is something that I would recommend, whether it's a client of ours or not a client of ours, having their CPA take a look at how much they're spending in that particular category. And they can do some math and do some cross-referencing.
Will Taylor:
Say if it averages out to you would saved more money per month on a loan plan for the equipment than you went on lab fees, it kind of would make sense at that point.
Casey Hiers:
In theory, yeah. That's exactly right and that's very well said. So if you have $120,000 payments spread out over 5 years and it's X dollars a month and that's saving you X plus $2,000 a month on potential lab costs, then yeah, it makes sense, but there's a lot of factors that go into that as well. Those types of equipment, and I'm not going to mention any particular brands or anything like that, but those pieces of equipment require a lot of time, a lot of training, not just for the doctor, but for the staff, so we've certainly seen circumstances where the math says that this is going to save money. But if you don't have the time or the trained staff in order to use it, then you've got the bill payment and then you have to go to the lab because you're not able to use your equipment to the best of its ability. We've seen that go both ways.
Jarrod Bridgeman:
Well, we always hear those conversations when the equipment representative sits down with their ROI calculator, and you can make an ROI number look however nice you want to look, but if you don't have the training, if you don't know how to use it, and you don't utilize it, it's a very expensive coat rack.
Jarrod Bridgeman:
Let's jump ahead to equipment. Will, obviously practice owners are lured into all sorts of shiny new equipment, some of which help propel a practice, others maybe they should stay away from. When should you buy equipment as a practice owner? Are there some general markers for that?
Casey Hiers:
No, that's a good question. There's a couple of questions that a doc should ask themselves before they purchase equipment, and the first question is, why are you buying it? Are you buying it because it's going to make you more productive? Or are you buying it because it is going to make life easier in some type of way? Are you buying it because you think it's going to save you money on taxes? Those are three common ways that people say they're going to buy equipment. Or are you buying it because something broke and you've got to replace it? That last method is pretty common, and if you have an autoclave or a necessary daily piece of equipment go down, of course, that you're going to have to replace that equipment. Totally understandable.
Casey Hiers:
When you get into those higher dollar item pieces of equipment, it really needs to be well thought out as to the true purpose of why you're using it. And if the answer is, "I don't know," or, "My friend has it," that's probably not a good enough answer. You need to figure out, kind of like you mentioned, Casey, potential ROI on that. Figure out whether that's going to make you more profitable, faster, so you could see more patients, or give you the ability to do a procedure same-day versus having to bring somebody back and that takes chair time and you could get someone else in there in that same chair time to do something else, and boom you're more productive. There's some definite data that could support purchasing that piece of equipment.
Casey Hiers:
We hear all too common answers to people buying equipment, specifically from non-clients that we hear coming through the process, of, "Well, I was told if I bought this piece of equipment before the end of the year, it's going to save me X on taxes." Well, that's fine and good, but that's a one-stop shop, and then you're still stuck with that payment for the next 5 or 6 years. So that typically, not to get into accounting here-
Will Taylor:
Well even then, you have to actually implement that machinery too. You can't just buy it right there.
Casey Hiers:
That's correct. Yeah, exactly. Right. So yeah, that would be a good reason. And there are certainly luxury purchases on equipment. If it just makes your life easier and gives you less headaches, yeah, there's a dollar amount that could be put on that. You can put a price on anything. But typically, we like there to be a thought process when it comes into buying equipment, because again, those payments that you have every month and those interests that you have on it, that's overhead, overhead, overhead, whether it goes up each month or it doesn't.
Jarrod Bridgeman:
I'd say two of the weakest reasons I hear people buy equipment are the Section 179 tax situation, where again, unless somebody is giving a complete universal view of your entire financial situation, that's not the best reason, or, "Well, all these people I go to study club with have one, and so I need to keep up and what have you."
Will Taylor:
With the Jones', right?
Jarrod Bridgeman:
As patients, I don't know that we cross-reference technology when we go, while we want a nice office and all of that. So Will, it sounds like to me having the right information and data before making these decisions is important. We say something around here, the question is, what's worse than having incomplete or incorrect data? And the answer is making decisions using incomplete or incorrect data. So how do you know where you are with your spending and with your overhead? The practice owners I talked to, inevitably when I asked them what their overhead is, they either don't know or they're off significantly to what it truly is. So how can a practice owner though these numbers and data points to make decisions?
Casey Hiers:
No, a good question there. I can only speak for how our team here would handle it, because I can't tell you how everyone else handles it. I've certainly seen it handled differently, whether I agree with that or not from other people that have come through the process. But we like to provide our clients a fresh P&L, fresh balance sheet, and a snapshot of their overhead and what their spending was on a monthly basis. Some people do that quarterly, some people do that annually, which I don't see how you can conceivably try to stay within any sort of a plan if you're only looking at your numbers at the end of the year, especially after a year like we just had that was full of more surprises than anybody wanted.
Casey Hiers:
So having a finger on that, albeit dentists are dentists and that's what they're best at, they rely on the data that's given to them by the teams that they hire. That data is very important in being able to make them successful, and having an idea of where your overhead is at is the first step to being able to lower it. Because if you don't know where it's at, you don't know where to work. And if you don't know where to work, it's not going to go down. We've certainly seen people overhead like the wild west, they just buy, buy, buy, and if they think they need it, they buy it. And typically, those offices have pretty high overhead. It is what it is. So being able to keep a pulse on that and make sure that you have a team that gives you the ability to keep a pulse on that's very important.
Jarrod Bridgeman:
So do we calculate overhead collections minus owner income?
Casey Hiers:
Correct. So it would be your revenues, you take out owner's income, you take out depreciation, and you take out amortization. That is how we calculate overhead., And I'm sure if you picked up the phone and called somebody else, they could tell you that they calculate it a different way. But as far as dental goes, that has been proven, for us, to be the most effective and the most accurate route to calculate an overhead number. So yeah, if you look at a P&L, you're going to have a total income number at the top, you can take out your costs to the doc, what they were paid, you take out the depreciation and amortization, and then you're going to have a number at the bottom that's total income. And you put two and two together there and you can figure out an overhead percentage pretty easily.
Jarrod Bridgeman:
So then that takes us to, how much should a dentist pay themselves? And I'll set that up like this. All too often we hear, again, folks that aren't here, but as they're going through our process or we're talking to them, they pay themselves in the following way. They take what's left over at the end of the month, sure, they have to skip some paychecks, but they'll make it up in a massive distribution down the road. We've done other podcasts on that. That is a terrible way to pay yourself, right? There's a right-sized way to have a set W-2 and a consistent distribution. Every practice has that sweet spot in your team should help you fill that out. How should a dentist pay themselves with regards to overhead? We see some people don't pay themselves enough, some people pay themselves way too much. What's your take on that?
Casey Hiers:
As far as the actual overhead effect, the docs salary, whether it's in chunks or whatever, isn't going to drastically actually affect overhead, because it's being deducted anyway. But the problem is, is that with doctors not paying themselves a consistent wage, then it makes it pretty difficult to know how much you're spending. Because the bank accounts, if you're just taking what's left, if you have a month where, fortunately, you didn't have a lot of big expenses, no equipment broke this month, the server didn't go down this month, doc's going to take a big paycheck that month because there weren't a lot of big expenses. That's great.
Casey Hiers:
Well then the next month, when you have some big expenses, they're getting slapped in the face twice, because, oh, you're having to bring out the checkbook to pay for all these costs, and then you're not going to get paid because of it because you took it all last month. So having that consistent number go through is going to level things out as the year goes on to where you can actually keep a more accurate tab on what you were spending without having your own income being an additional unnecessary variable.
Jarrod Bridgeman:
It sounds like to me that to our listeners out there, your CPA, your financial planner, whoever your team are, they need to help you be on top of your overhead. You've given some great benchmarks, but what else would you want to tell our listeners out there regarding overhead?
Casey Hiers:
The biggest thing is, is you can't improve something that you know nothing about. In order to make sure that you have at least the opportunity to improve your overhead, you need to know your overhead and you need to have good data and you need to have up to date data. If you're not receiving, at bare minimum, quarterly updates on profit and loss balance sheet statements, you need to be asking yourself and you need to be asking your team, "Why not?" In order to really be able to crack down on it, you really should be receiving that monthly. Is it a higher cost in some situations? A little bit, but at what cost is the alternative? Make sure you have good data and make sure you make your decisions based off of good, accurate information.
Will Taylor:
So pull your head out of the sand.
Casey Hiers:
Yes.
Jarrod Bridgeman:
I think that's a perfect way to end. Will, thank you for joining us with great information on an incredibly important topic to practice owners, which is overhead and managing overhead. Thank you, sir.
Casey Hiers:
Hey, thanks for having me.
Will Taylor:
Thank you.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com, and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.
