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Dentist Money: The Profitability Killer – Episode 8


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Are your collections going up while your bottom line stays the same? It’s frustrating to look at your impressive growth only to realize you’re no better off than you were a few years ago. But if you understand how to manage costs, you’ll have something to show for all that hard work. This episode of the Dentist Money Show™, recorded on location at the Yankee Dental Conference in Boston, covers the different kinds of practice costs and how to keep them under control.

 

Transcription:
Ryan: Hey Reese, welcome to Boston!

Reese: Thanks, if you hear some crowd noises today it’s because we are on location at the Yankee Dental Convention. We have turned our booth into a recording studio, so that Ryan doesn’t waste his time standing around watching people.

Ryan: I am handing out mints though, I’m handing out mints. Well, I would be.

Reese: These booths are always awkward because I’m waiting for someone to see me and then not want to talk.

Ryan: It’s the eye contact because someone has to look and look away and then you have to chase them down. Ya, thats great. Well we don’t want to waste any time, so in the spirit of being in Boston, before we get started we are going to give everyone some good Boston trivia. Some uh, useful, not so useful history lessons about this historic city. The historic city of Boston.

Reese: Well, we are all about educating here, so it feels right to start with some facts about the infamous Paul Revere, an American icon. Famous for warning the locals that the British were coming.

Ryan: oh ya, and as a side note we have our people checking with the Beastie Boys to see if we can get Paul Revere’s Ride to be playing right now as we speak. So, according to the history channel did you know, Reese, that he actually never shouted the famous line, which was…

Reese: “The British are coming”

Ryan: Ya, he never said that apparently.

Reese: Ok.

Ryan: His operation, the whole thing was supposed to be kind of secret, like they didn’t want to tip off the red coats, but there were British troops actually hiding out in the Massachusetts countryside.

Reese: Well, any other interesting facts you might throw in there?

Ryan: Yes, I’m glad you asked. He had sixteen kids, sixteen children! Eight kids with one wife, and then he had eight kids with another wife. His first wife died, I didn’t know that. And something else, on the night of his famous ride he had to cross the river called The Charles River, so as he is getting ready to cross on his boat and he realized that paddling the oars in the water was making too much of a splashing sound, it was too loud, like he couldn’t row his boat. So one of the oarsmen, Is that what they are called, Oarsman?

Reese: Ya, on the Starboard side??

Ryan: Or a boatman? Like a footman, only on boats? On the portside? On the poopdeck? Anyways, the oarsman gave him a coat from the his girlfriend, and he wrapped it around the oars, and it muffled it. It was like a silencer from an oar.

Reese: Well, I was talking to my brother in law, shout out to, Dr. Rich Hada in mission Viejo, California. I was excited to tell him about this cool fact about Paul Revere that I knew, and he told me that pretty much every dentist already knew this. So I felt kind of dumb, like I’m not “in the in”. So if you know this fact you are in the “in crowd” and if you don’t you are one of the outsiders like me. But the cool fact was, that Paul Revere, was a silversmith by trade, but he also worked as a dentist on the side. Which is funny because being a dentist was kind of a side gig, but the primary gig was pouring iron around. So today that’s kind of switched.

Ryan: It’s different.

Reese: But if you think about it, it is all very common for dentists today, according to our last podcast episode (which is all about outsourcing, by the way) for dentists to focus on their primary careers, the day trading of stock, and uh,

Ryan: Real estate investments?

Reese: Yah, real estate investors, and then they work as a Dentist on the side?

Ryan: Ya, side gig.

Reese: Just like Paul Revere.

Ryan: The ten year education track and the student loans..

Reese: Yup, you know exactly what I’m talking about.

Ryan: Ok, so what you are saying is though, is that Old Paul used his skills as a craftsman to wire dentures and apparently they were made of walrus ivory and animal teeth.

Reese: Wired dentures used walrus ivory, animal teeth and he put them into patients mouths.

Ryan: Last thing about him though, in 1776, he actually unintentionally became the first guy to practice forensic dentistry in the united states. He had this friend named Joseph Warren who, nine months after he died in the battle of Bunker Hill, he was able to identify by his teeth!

Reese: Yes, false tooth, his false tooth. There ya have it, your history lesson for the day. Paul Revere was a dentist, and a hero. Just like our listeners and this is a perfect lead into our topic today, which is?

Ryan: Managing the costs of your practice.

Reese: Wabam!! See how that like tied in?

Ryan: Yah..

Reese: Ok, maybe it’s not like a perfect lead in, but we are going to make it work people.

Ryan: We always do, we always make it work, so let’s start by talking about the two different types of costs a dentist actually has in the practice. The first one that you have is your variable costs, and the second one is, you have your fixed costs. So let’s take just a minute and explain the differences, Reese.

Reese: Well, I’m sure our listeners are on the edge of their seats right now, “What’s a variable cost?? Whats a fixed!?” Look, this is important.

Ryan: Here it comes..

Reese: Variable costs-Vary.

Ryan: Wait, wait, repeat that.

Reese: It’s very complicated, but variable costs vary. What I mean by that is that your variable costs are tied directly to the number of patients you have. So a good example of variable costs is the bib you put on your patient’s chest. If you had 0 patients, you need 0 bibs. So your bib cost would be 0. But if you grow to more than one patient, you are going to need 1 bib, if you go to 100 patients you have got to cover the cost of 100 bibs and so on.

Ryan: So if you are Paul Revere then your variable costs would include things like, wires, uh walrus ivory, or animal teeth.

Reese: Yes.

Ryan: Who was his supply rep for walrus ivory? We won’t get into that.

Reese: I wanted to come up with a pithy name for that, “Shine Walrus Shine” “Patter Walrus”…

Ryan: Ya, there is a good play here. We will come back to that.

Reese: So, Here is another complicated definition ok, we have got to talk about fixed costs now. Ready? Fixed costs are fixed.

Ryan: Ya, wait, slow down. Say that again.

Reese: They are fixed. That means they don’t change because you brought in a new patient. So if you have one patient and then you get a second patient you don’t have to go out and purchase a new building. You don’t have to purchase a second cone beam.

Ryan: Ya, you don’t need an extra X-ray machine or cone beam, just for the second patient. You would get one and…

Reese: Rent is a fixed cost at the general level too, and your equipment is a fixed cost, your rent is a fixed cost, your building is a fixed cost. Wait, I need to retract my definition here just a little bit.

Ryan: No, it was good though. It was a good definition, so you are saying that fixed costs aren’t fixed??

Reese: Well, kind of, there will become a point when you will need a new building and maybe it won’t happen when you go from one to two patients, but it could happen when you hit 1,000 patients. So even though your lease is going to stay the same for a long period, it is not totally accurate to say it will be fixed forever. But, you are still going to lump that into your fixed costs.

Ryan: Ok, so the same logic does apply to your support staff, your utilities, your equipment, they are not going to change often, but they will change as you start hitting certain points in your growth. I think that covers a good explanation of the two different kinds of costs. Variable and fixed, right?

Reese: Ya, so, while your variable costs are super important you do not have a lot of control over them as a dentist, not a ton. You can meet with a supply rep and negotiate a better price on your sundries, but your fixed costs are where you really have a chance to keep more money in your pocket, so let’s spend the rest of the show today talking about that. I want to to talk about keeping fixed costs under control, in the business world, fixed costs are kind of what people mean when they talk about overhead. Overhead is relating more to the fixed costs than the variable.

Ryan: Ok, so in our experience then, these fixed costs, the overhead, those are the ones that tend to get more inflated for dentists and can actually hurt the bottom line the most. Let’s actually start by talking about this phenomenon called “overhead creep”.

Reese: Did you make that up?

Ryan: I did.

Reese: Because, I think that’s not…

Ryan: I don’t think that’s real, it’s not a real term..

Reese: I’m seeing that though, it’s a real thing, we talk a lot about that in the office. So, “overhead creep” is truly a silent killer.

Ryan: But deadly…

Reese: It’s kind of like high blood pressure.

Ryan: Alright, so it’s the story of how dentists become less aware of their overhead expenses as time goes on.

Reese: Yah, so get this, most of you probably remember your first hire. I know I do.

Ryan: You do? Your looking at him!

Reese: He demanded way too much money, and he has been a pain in my…yup, ok.
So I bet you know exactly how much you paid that person, because I know I do. Entrepreneurs usually remember the first time they made the commitment to carry someone on payroll. It’s a huge stress and they don’t forget about it, even with the passing of time. But eventually, you start getting focused on growing your collections or growing your revenue, in my case, along the way you bring on more staff and without even realizing it you are up to hundreds of thousands on payroll within a really short period of time.

Ryan: Ya, and then the same sort of thing starts happening with other expenses too right? You remember in the beginning when you had the small expenses, but now it is just kind of pouring out of the businesses account. You know you are worrying about making the business grow and collections expand each year and so why do you think then it is easy..I mean because this happens to everybody. Why is it easy for a dentist to fall victim to overhead creep? To kind of let things get out of control?

Reese: First, I think that when your collections are high it is just easy to overlook the fact that your costs are too high because you are bringing in enough money to hide the problem right? More collections make dentists feel more successful and in many cases they, ya know, I guess you shouldn’t consider more collections a bad thing, but it doesn’t really tell the whole story. So I have seen a lot of practices that have an increase in collections and a decrease in profit which leaves less money for the doctor to take home as he or she works harder and kind of tries to push the needle higher and higher there is less and less money for them at the end of the day. And it is easy to see that overhead just slide up. Payroll is a huge one, ya know, so at the end of the day your profit margin is really what matters and so as a dentist you might measure your success by how your practice looks on the surface instead of how profitable it is. So you look at hundreds of clients that you have accumulated, your prime location, the experience of your staff, that sweet flat screen that you have around the office, the iPads on the table, the fish tank with that like, sweet LCD screen behind playing you know “Finding Nemo”.

Ryan: And that’s cheaper though actually..

Reese: Right, but you look around and think “I’ve got a really successful operation”!

Ryan: Ya, but you have already said it, at the end of the day what actually matters is the profit margin. What are you actually bringing home?

Reese: Only if you want to make more money.

Ryan: Then yes, only if you care about that..

Reese: If you don’t care about that, which is fine…

Ryan: Then NOO…

Reese: Then there is no point to listening to this.

Ryan: Ahhh…just stop! Stop. Go do whatever you are doing. Ok, so let’s give a few recommendations for managing this overhead. Number one, we would say you need the ability to actually track your costs, and see what percentage of collections you are spending on each piece of overhead.

Reese: Ya, right, and don’t disregard the little things like office supplies, software updates, magazine subscriptions, you know, the costs that might not seem like a big deal on your own but when you add them all up together they can have a big impact on what’s left over.

Ryan: Ok, so the number one thing then we call a profit and loss statement. If you have a bookkeeper or an accountant, brother in law, neighbor, wife, spouse, someone that is doing your books, ask them to give you a full year of overhead in one sheet.

Reese: Most recent calendar year that you finished up.

Ryan: And that’s what people are going to call a P & L, profit and loss statement, or an income statement is the same thing, so that way you can actually get a clear picture of where you are spending all of your money over the course of a year. And if you can get two to three years, you can actually get some trend lines to develop.

Reese: Ya, one year is fine to kind of get you started.

Ryan: Ya, it’s your base line.

Reese: But once you have your P & L in front of you, you can start dividing. Just take each expense that you see and divide it by your collections and that will give you a percentage on what your spending in that area. For instance, if you collect a million dollars and you spend $50,000 on marketing, your marketing line is going to show 5%. If you need a list of putting together your overhead expenses, a chart of accounts, we have a sample chart we can send you, just email me. It’s reese@dentistadvisors.com, and I will send that to you. You know, most of your CPA’s or bookkeepers are going to have an overhead guide, it’s just that in a lot of cases it’s not detailed enough. Most of them are pretty generic.

Ryan: Ya, did you want to hit on that at all? I was just going to kind of bring that up a little bit, when you are saying a chart of accounts, we are saying every line on that profit and loss statement. Sometimes we see them and they are extremely generalized. For example, payroll will be the only employee overhead category, but you have different types, do you want to explain?

Reese: Ya, it doesn’t help to have just a chart of accounts which is a fancy accounting word for “which category you’re putting your moneys into”. If you dump everything for your payroll into a category called payroll then there is no detail that you can track.

Ryan: Like how much of that was doctor? How much was front desk staff, and back, or hygiene?

Reese: Associates, it’s just hard to make any decisions that way. I would just say that you need to make sure that is detailed.

Ryan: Cool, and again they can email you for a sample of a “chart of accounts” if they want right?

Reese: Ya, just send a message to reese@dentistadvisors.com or ryan@dentistadvisors.com and we can get that to you.

Ryan: Ok, so next, once you have this data which is something that we believe in a lot, you want to measure and benchmark this data. You want to know and be able to monitor your overhead over time. You want to see how it is moving. Once you have established your starting point by giving every item a percentage of collections, then you can compare that to future years as you go along, and you can start to manage your budget for different areas of your overhead according to how they are trending.

Reese: Ya, you will see how each category starts to grow from year to year and keep in mind that fixed costs…they shouldn’t change much in relationship to collections. When you have got all of your numbers in front of you, you are now really empowered to make management decisions. In business school this is what they call managerial accounting. This is when you make decisions on your data. It’s different than doing your books and your accounting. You have actually got to make decisions not just do the job of getting the books and the tax returns filed. That is when it is time to kind of sit down and make some tough decisions. I have had to do that a lot. As you know, we always talk about this stuff and it’s like, “Welllll…now that I have new data”.

Ryan: We were hungry last night when we got into Boston, but we didn’t eat, we cut it off…we didn’t.

Reese: No, ok, we went to the right cafe because I was mad at how much Uber cost at the airport, for five people. It shouldn’t cost like 100$ to drive a block ok people? And we don’t need a limousine, but it’s the only thing available.

Ryan: That was awesome.

Reese: Actually, we ended up getting a Yukon XL, it was fine.

Ryan: Ya, stylish.

Reese: Then back to my point, ok, when you get your data in front of you, you have to kill your darlings. That’s what we say.

Ryan: This is starting to sound a little morbid.

Reese: All right, look, if you got a few things you really like, let’s say you are the guy who loves continuing ed?

Ryan: Every month you are flying somewhere.

Reese: You got to look at that, it might be fun, you might be able to write it off, but still. Or maybe you have got consulting expenses, staff members that you have got to keep around, family that’s been working with you for 25 years?

Ryan: They don’t really work, they just hang around the office. I mean, I’m just throwing this out there, but maybe your interior design costs are creeping up. You know, you might have to hold off on buying that fancy, wall mounted, mirror-waterfall thing.

Reese: Ok, hold on, I LOVE my waterfall mirror! One thing I would say though, is that a waterfall mirror has a lot of value in a practice.

Ryan: Ok. Wait.

Reese: Wait, see my point about this “killing your darlings” here friends? We all have our darlings, now my waterfall mirror might be mine, but you have got to figure out what yours is. Honestly, I don’t mind one time expenses, it’s the on going, out of boundaries overhead where you have really just got to start making adjustments. You can’t run out of line forever. One thing I would say, is that it is easy to go to the marketing line, and chop there. Just say, we don’t need to spend money on marketing anymore.

Ryan: Call the web guy, and shut her down.

Reese: Cut down that marketing budget. You need your marketing line to be at where it needs to be every year so that you can keep your brand in tact, generate patients and leads, (we call them leads, they are new patients in dentistry) and customer communications. You have a lot of things that you need to do from a marketing perspective to make sure you are not declining your collections just as you want to sell your practice as you are aging. I am cutting my overhead, but marketing is at 0, so now you are going to kill collections.

Ryan: Ya, don’t make collections a darling you kill.

Reese: Consulting is not a bad expense and either is continuing education, but you have to have a reasonable balance for what you are going to spend the money on.

Ryan: At the end of the day, let’s help our listeners understand what a good income statement looks like. What should their costs be as a percentage of collections?

Reese: Well, depends on your specialty right? Your total costs including your fixed and your variables should be somewhere between 45-60% of your collections. An endodontist might be closer to 45% and a general dentist or periodontist might be closer to 60%. I mean you are going to be somewhere between those numbers though.

Ryan: That’s before your own salary too though right?

Reese: Yah. You are going to keep the opposite of that for yourself. Your staff will always be your biggest costs. It is somewhere between 15-25%. You have to track that and make hiring and bonus decisions and compensation decisions off of that budget as a range of your collections. So if you are at 27% of collections and you go to 28% and 29% and 30% and your collections start to decline? You can’t do that without delaying your retirement and running into problems. Depending on your specialty and style of practice, that is kind of your range I would say for your largest costs. I should also mention that profit numbers that I listed, or the overhead numbers that I listed, are for an individual producer, right? A single dental practice maybe an associate or two, but the larger they become its just different numbers start to apply. So think of these numbers as one unit of production rather than across a large group.

Ryan: Well, there you have it, Reese, thanks for the insight.

Reese: I don’t know if that was boring, my friends. But I kind of like it because I like numbers.

Ryan: We will leave that there, I liked it, hopefully that gives our listeners something to go and work on for a few days. These are ideas, just a place to start, but before we leave… did you know that Paul Revere’s horse was actually a rental?

Reese: {laugher}

Ryan: He rented his horse!

Reese: He is my kind of guy!

Ryan: Ya, he is your kind of guy, he’s a cheapskate! He couldn’t really get his horse across the river, so he rented it when he got across the river. He rented his horse!

Reese: Oh my gosh, what was that horse’s name anyway? I think it was Brown Beauty.

Ryan: Brown Beauty?

Reese: If you think you should buy an old beater? Perhaps consider leasing a new one, Brown Beauty! This can be the next episode.

Ryan: Very interesting, everyone, thanks for listening. Please leave us a review on this podcast. If you do want more information, go to our website at dentistadvisors.com. We have a free newsletter you can sign up for, we also have our phone number, and a link on the site that you can use to get on our calendar. Give us a call if you are listening to this and feel like this is a good place to start but need more information. Goodbye Boston!

Reese: Goodbye, Paul Revere.

Income, Practice Management
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