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5 Ways Dentists Can Improve Profit Margins – Episode 66


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Dentistry is what you do, but money is what you make. And unless you keep an eye on overhead, just making ends meet might be hard enough. In this episode of the Dentist Money™ Show, Reese Harper welcomes CPA, Andrew Schwartz who works with hundreds of dentists and understands the science of overhead distribution. He explains how much dentists should spend on staff, when you know your margins are too low, and common themes he’s observed among practices who experience large growth.

Show notes: Schwartz & Schwartz, P.C.

Transcription:

Reese: Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host, Reese Harper, with Andrew Schwarts from Schwarts & Schwarts. That is a mouthful, but I got through it. Right?

Andrew: Yeah, it sounded great.

Reese: Tell us about Schwarts & Schwarts a little bit, Andy, and how you got into tax and accounting. And ended up working with your brother at some point? That’s a pretty unusual story. Listeners probably want to hear just how it all happened.

Andrew: Sure. Back when I graduated from college, my father had an accounting firm and over time we focused more on the medical and dental side of things. We realized that dentists were the better clients vs. physicians and psychologists and people like that.

Reese: And why did you find that that was the better client for your firm? What reasons made you narrow that down?

Andrew: Well, that reason was a lot of dentists go and they open their own office. There’s a lot of single-owner practices out there, and they all need accounting help. While they’re all different, they’re all very much the same so we could gather information and help them run their business better.

Reese: Sometimes the medical guys are in big groups and make decisions as a team. Sometimes it’s harder to get an opinion about which professional to even use.

Andrew: Yeah, the medical is a lot more difficult. Practices are bigger a lot of times, and each specialty has their own challenges. With dentistry there are a lot more one and two-owner practices, and as I said we can collect a lot of information. We collect the information, we repackage it, and we help them understand their overhead, productivity metrics, collections, their profitability and taxes. Because it’s such a homogeneous group we are able to really collect information and help them make good decisions.

Reese: I’m excited because I feel like you’ve had so much dental experience that you’re going to bring a unique perspective to this conversation, and I think I would like to start by just talking about something that comes up a lot, which is overhead and profitability. How much money should I be making? How much should I be paying out into certain areas? Maybe before we get into metrics, give us some thoughts about overhead and how dentists should look at staff and costs of staff. When people tell you, “I’m paying too much for this;” or “I don’t know if I should hire this person.” Or “I don’t know if I’m paying too much for my staff over all. Should my hygienist make this much?” Let’s just talk about overhead generally and kind of some thoughts that come to mind as you have that discussion with clients.

Andrew: Pretty much every practice has overhead. They need to have overhead to have a successful practice. But we see it as the clients who run the leanest—their overhead is about 45% of collections and then it ranges all the way to 60% or more of collections, so there’s quite a bit range there. When we talk about overhead it’s non-doctor overhead, so we back out what the owners get paid and their benefits to what any associate gets paid and their benefit.

Reese: So before the doctor gets any money—the more profitable client might be keeping 55% of what they collect or produce? That’s really profitable though, right?

Andrew: Yeah that’s the ones that run the leanest.

Reese: And what kind of practice does that look like typically? Is that really a small location or do you have some big practices that get to that level of profitability as well?

Andrew: We have good size practices that get to that level. They are just very efficient and productive dentists and they keep their staffing costs down and their other costs down. But a lot don’t get to that point, and their overhead is over 60%, so they are only keeping 30-35% of what they make.

Reese: When do you start getting concerned? Because there’s probably a point in time where you say—that overhead looks kind of high, and we need to address it. When do you start getting concerned?

Andrew: Well, once a year we prepare a report for our clients that compares the overhead of their practice to their peer group, and we go over it with the client. If their overhead is high between staff expenses, dental supplies, lab, facility costs, things like that—we have a discussion about why they are high and what they could do to bring it down. But we don’t look at the one number for total overhead; we look at the different pieces of overhead. And high overhead may not be bad. High overhead may mean this capacity, and it may be more of a revenue issue.

Reese: And in time they can kind of grow out of that high overhead if they get enough more revenue.

Andrew: If they are going to keep that overhead, yes.

Reese: What red flags do you see? Do you ever see hygienists or office managers that are overpaid? Or do you usually find that doctors just complain about it, and it’s usually pretty fair?

Andrew: With any employee, and I’m sure your employees as well, they think they are overworked and underpaid, and the practice owner thinks that their employees are under working and overpaid. A lot of times, not always. So we do look at what they are paying per hour to each of their employees, but just as importantly we look at what their staff expenses are as a percentage of collections, because that is a more important number. How much productivity are you getting out of the staff?

Reese: Do you ever find that you need to coach clients to embrace overhead as something that is useful rather than something that they are just mad or frustrated with? Or do you feel like doctors generally have a pretty good attitude about their overhead?

Andrew: When we meet with clients, we provide them a report following each meeting that shows their overhead by category, and we force them to look at it once a month. It’s part of running a business whether it’s good or bad.

Reese: Do you think dentists struggle more with this managerial stuff and overhead than other business owners, or do you think it’s a common characteristic among all business owners to struggle with it?

Andrew: I go to an accounting conference every year for people who manage accounting practices, and they struggle with working on overhead too—and their expenses and talking to their partners about it. Anyone who has a business has to deal with it. What I find with dentists is they are very smart people; they like to learn and understand things. At first, when someone takes over or opens a practice, thinking about overhead is daunting, but over time they study it and learn it and it’s an important part of their business.

Reese: And they eventually get dialed in, right? We talked about overhead generally, let’s list overhead categories from large to small. We talked about staff, which is obviously the biggest category. Where does it go from there?

Andrew: The categories that we use are staff, expenses (payroll, payroll taxes and benefits). Then there’s dental supplies, lab fees, and facility costs. Those are all about 5-7% of somebody’s collections generally based off the information we collect. Facility costs is rent, repairs and maintenance, utilities—things of that nature. Now we group all the other expenses together: office expenses, miscellaneous and IT and all that runs about 7-10% of collections. Last but not least is advertising and promotions. Which runs about 1-2%.

Reese: That’s what I found is typical, right? People typically spend about 1-3% sometimes on marketing. Do you feel like that’s adequate for most people or is it just the way that they spend?

Andrew: It just kinda works out that way, but spending money on marketing is interesting. There was an article recently in Dental Economics that the best four ways to attract new patients is first, through your current patient base; second is by having a good website; third is by using Google or Facebook ads; and the last one is by getting good reviews on Yelp and Google, and those besides setting up a website are overall inexpensive. The best way to market is through the current patients, and the best way to do that is by maximizing their experience—having them have a really great experience.

Reese: Yeah, so ultimately even though spending money on marketing is important, there’s not a lot of avenues for efficient use of those dollars.

Andrew: No. There’s no way that someone can go and say, “If you spend $25,000 on this marketing, we’re going to get you X number of patients. The print advertising and sending out post cards and all that stuff—people do it so it must be somewhat effective, but it’s very expensive. What I would recommend—you know the 1-800 Dentist guy? Fred Joyal? He wrote a book, Everything is Marketing. It’s worth reading; it’s a quick read. He really drives home some very basic fundamentals of the experience.

Reese: It focuses on the costumer experience? Because you’re saying that’s the way people should ultimately view marketing is if I treat my patients right, if I have a good experience, they’re going to refer and I need to focus on that.

Andrew: They become your walking billboard. If they have a really good experience, they’ll tell people.

Reese: And listeners may not know that, but you have worked with hundreds of dental practices over the years and you’ve probably had these tough conversations a few times about which areas of overhead to cut. I’ve got to cut some staff costs, cut this or that. How do you tell people to cut overhead without hurting their practice?

Andrew: Well we tell them to utilize their overhead more efficiently. So if staff expenses which run mid 20s to high 20s to maybe a little bit over 30 percent collections—there’s things you can do to utilize that cost better. One thing we recommend is to utilize technology to replace labor-intensive activities. There’s programs out there like Lighthouse 360, RevenueWell by Patterson, Solutionreach (which used to be Smile Reminders), and Demandforce which is now owned by Intuit. And those programs sit on top of your practice management program, and it’s how a lot of the conversations between the practice and the patient take place. It’s very efficient and cost effective. They are inexpensive programs, and it’s cheaper than paying somebody to do this stuff.

Reese: Otherwise you might be spending $30,000/year to be paying somebody to make phone calls all day.

Andrew: Yeah, and you use technology to do it better and more efficiently. I actually had a client, this guy bought a practice and he really thought he was going to do great right off the bat, but he struggled for a while. I would go to meetings and he would talk about how he’s not doing that great and all this stuff. I went there one January, and it was the same thing—he was not doing that great. And when I went back after tax season in May to meet with the guy, he said things were booming. I asked him of course what changed, and he told me he started using Lighthouse 360, and I think that made all the difference. It’s a more effective way to confirm your appointments, to fill schedules after cancellations, to send out surveys. Surveys are important to keep track of how your patients feel you’re doing. And lastly, it promotes Yelp and Google reviews.

Reese: Interesting. What are some of the most commons areas you see dentists spending too much money on overhead? Some are some of the most common areas when they are maybe outside of the range? Both with in-staff costs and maybe outside of that?

Andrew: Well there’s in-staff costs, but there’s areas where you can save a little bit of money—one is the merchant and credit card fees. A lot of people sign up with their bank right when they purchase and open the practice and don’t even look at whether they’re getting the best deal. There are better deals out there, and it’s pretty cookie cutter, the whole industry. It’s a commodity industry and you can save some money there. There’s insurance. You definitely want to work with one insurance person to make sure you have adequate coverage, but there’s things they can do by putting all your insurance with one carrier that can save some costs.

Reese: If you sat down with dentists and you kinda talked to a young dentist getting out of school. Image someone who is a new practice owner who is going to buy his first location and he’s intimidated about what’s to come over the next five years. What’s a piece of advice you would give to that younger dentist? Not about overhead, but just general business advice and what you see that younger dentists struggle with.

Andrew: If someone is looking to open a practice, and they come to us with a lot of student loan debt and are worried about making enough money for their new family and all this stuff, we just let them know about the success that all of our clients have had. Dentistry is still very profitable. It takes time. Taking out debt isn’t bad if there’s a plan to pay it off over time. And taking out debt allows them to go and build a business and earn a good salary over the years.

Reese: Sometimes in our conversations with new dentists, we feel like they feel a pressure that by eliminating their student loan out of the gate, it will almost give them financial freedom. Do you ever run into that and have to coach people through the importance of balancing debt reduction with investing in your business and saving and building liquidity? Do you ever have that kind of conversation with people?

Andrew: Yeah, we have that conversation a lot because everybody wants to get out of debt as quick as possible, but there’s a lot of issues there. First of all, you need cash flow to do what you want to do. Generating profitable income and salary and using that money to pay down your debts, there’s going to be taxes owed. A lot of people pay down their debts and get stuck with a little bit of a tax bill every once in a while, and it allows you to be in debt, but it does get paid off over time. And it’s part of the monthly cash flow more than anything else.

Reese: How do you view debt? What’s your philosophy on debt?

Andrew: My philosophy on debt is, like I said, it’s necessary to achieve a lot of financial goals. I don’t think people need to be in debt for the sake of being in debt. If someone has money sitting in a Money Market account earning a tenth of a percent and they have no plans for that money in the short term, they should use it to pay down debt. But I think debt is a great tool.

Reese: When someone says, “Should I save for retirement? Should I start a 401K? Should I start putting money away?” What’s your philosophy on using tax qualified retirement plans?

Andrew: My philosophy on that is that you want to start as soon as possible to put away as much as possible. Any money that someone puts away in the earlier years just grows so much more than money put away later when they are trying to catch up. And putting money away into a retirement plan is the best shelter available to people during their working years. Safe, taxable money goes in and the money grows tax deferred and it’s a nest egg that’s creditor protected. We’re in a litigious society—you can put money in a place where we wont lose it if you get sued; that’s a great thing. And you need to build a nest egg. Everyone needs a nest egg. And I think people should max out their retirement without putting extra money towards student loans. They should pay what they need to pay as long as interest rates aren’t too crazy.

Reese: If a dentist comes to you and says, “My friends got this retirement plan for me. It grows tax free; I can get it tax free.” What am I talking about when I’m explaining this?

Andrew: A nice whole life insurance policy. Yeah. From an insurance person, whole life insurance policy solves every problem. The first thing I say if an insurance agent comes and says the first thing somebody should do is a whole life insurance policy, I tell them to find a new insurance person or new financial advisor. The retirement plan set up by the government is a great way to put away money, save taxes, creditor protection like I mentioned, tax-deferred growth, and there’s a great education savings plan. The whole life insurance policy can’t beat that. Whole life insurance plans are fine at the end once everything is maxed out if it makes sense for somebody. But if someone recommends it as the first thing then my advice is to find somebody else to help.

Reese: What’s your investment philosophy? When somebody says, “I’m scared of the stock market. It’s rigged by the government.” What advice do you give people about investing generally?

Andrew: A nice inexpensive index fund or something like that, people can put money in or add money over time or it’s easy to add money and there’s low fees. It’s the way to go. It’s proven since 1969 to be the best place to put money.

Reese: Do you find that people are able to self-prepare or do people respond and come to their CPA for a lot of their advice regarding their retirement and their money and struggling to get ready for tha? Do dentists struggle with that or do you think most of them have a solution already?

Andrew: No, everybody struggles with it because it’s more fun to spend money than to save money. But as part of what we do, we meet with our dental clients 3-5 times a year; part of the reason we have so many meetings is to have an ongoing dialogue, and one of the things we continually discuss is retirement plans and whether they have the best retirement plan in place. The biggest hurdle we have isn’t the dentist putting away money—a lot of them resist putting away money because they don’t want to put away that much money for their staff. But there’s different ways to set up the plan where enough can go away for them that putting away money for staff (which is a noble thing to do in its own right) doesn’t deter them from setting up a plan.

Reese: Do you think sometimes the struggle for them to look and say, “Well I don’t want to match anything for my staff” or “I don’t want to profit share anything with my staff.” It seems like it comes up a lot, but I don’t know if they know how to quantify that it might still be good for them even if they do give some money away to staff. It’s either to the staff, or it’s going to go to the government.

Andrew: Right, so it’s going to come up a lot. And usually the amount of tax someone will save by putting away money to a retirement plan exceeds what they will put away for their staff. And there are different options out there, so if someone is facing that hurdle and can’t get over it, we try to give them good information to help them realize the importance of setting up a retirement plan.

Reese: Talk to me a little bit about your philosophy on business coaching or practice management consulting and practice consulting. Some people say, “This is a waste of my money, and I always get hijacked. I never get ahead when I do that.” Maybe for certain personality types it might be helpful in certain situations. I think there’s a general perception in the market place that it costs a lot and I don’t get a lot out of it. But is there a time when it’s helpful?

Andrew: We’ve seen some consultants go in and do great work. Different consultants work different ways.

Reese: In which ways do you find it to be helpful?

Andrew: I think to put together a plan, and part of it is that a good consultant will make the business or practice owner accountable to somebody. If somebody owns their own practice, they’re not accountable to anybody except maybe their spouse. So it makes them accountable to somebody; there’s a plan with goals; and also it’s the things that a lot of people and business owners don’t realize to put together. A good coach can help find areas where things can be improved and set goals and make the personal accountable.

Reese: In your experience, how would you grade the practice management industry and consulting industry from what you have seen?

Andrew: Sometimes they get an “A” and sometimes they get an “F.”

Reese: Does it cause damage sometimes?

Andrew: Yeah, they go in and wreak some havoc sometimes. I think the most important thing to make it work is the practice owner has to be committed to change. To have a third party, an outside come in and make recommendations—if the owner isn’t going to implement anything it’s just a waste. But I would like to see a practice consultant put their money where their mouth is, and instead of doing a fixed-fee, $60,000 per year type situation, maybe a much smaller fixed fee and then the rest based on results, but none of them do it.

Reese: Or time, right? Time would be nice at some point. Because a result-oriented approach seems like it would be the best pricing model, right? Even at a minimum level, it’s just nice to know that someone has to earn the value to come back. I have some people I pay a really high hourly rate to, and I realize that’s not ideal, but sometimes it’s amazing to me that even though some people’s hourly rate might be really high—they’re people I keep coming back to all the time because they’re delivering value all the time to me, and it feels like that’s something that rarely happens. I think part of the reason is sometimes I think dentists regret hiring consultants pretty early on in the process. And that’s not always fair to the consultant. Sometimes they spend 20, 50, 70 grand on something, and typically there’s a fair amount of buyer’s remorse after that transaction. Even if it’s a new car sometimes people feel bad about that, you know? But sometimes consultants don’t feel like they can get dentists engaged for a long period of time unless they collect a large fee, at least that’s what I’ve been told occasionally. It’s interesting to me because I feel like dentists need business help. They’re getting a lot of that from their CPA. They are getting some of that from friends, colleagues and continuing education, but they don’t have a lot of business management experience coming into this. It’s really hard to know how to run the business of dentistry without having any education or consulting, but they get frustrated with how expensive it can be to get that advice.

Andrew: It can be expensive, yeah. But they learn and most of them develop good practices over time. They figure it out.

Reese: If you had to list some big mistakes that come to mind—maybe not a concrete list, but the first few things that come up if I say over the last twenty years of doing this.

Andrew: One is when a dentist completely delegates the daily financials of the practice to somebody else, especially to one person. We have seen some embezzlement the last year or so.

Reese: So when you delegate all the financial responsibility—you’re talking about insurance coordination, payments, collections, adjustments, everything up front.

Andrew: Some practices will have one person enter the procedure and the collection into the dental management system, collect the money, write up the deposit, enter into Quick Books and bring it to the bank. Big red flag. And they are completely disengaged from the process. So that’s one no-no.

Reese: Just to stop on that because that’s crucial. How would you recommend delegating those duties? What’s the optimal way to divvy up all those responsibilities?

Andrew: One thing is segregation of duties, so somehow have more than one person involved even if the practice owner is one of the people. So, the practice owner should look at the day sheet every day. Look at what was booked to the production, look at what adjustments were posted, and then make sure that the credit card and the deposit slip matched with the money that came in. On a daily basis, somebody can keep an eye on it. On a weekly, monthly, or yearly basis, they cannot. Another step the owner can do is once a month take a look at the monthly collections for the dental management system and compare that with the deposits in the bank and make sure those are pretty close. If the owner is involved at least with those two steps it provides some accountability to the office manager.

Reese: And eliminates the possibility for embezzlement. Even though it could still happen, it minimizes it.

Andrew: It does minimize it. The practices where there was embezzlement, the owner had nothing to do with any aspect of the collection recording and deposit.

Reese: Any common themes in those embezzlement cases you can think back of? How was the embezzlement done in what you can remember, and what was the specific cause of how the money was being withdrawn?

Andrew: The way they did it, is they would actually hold back depositing checks, and then they would include those checks in when there was cash, and they would take the cash. But every day nobody was looking to make sure the deposit agreed with the day sheet. So look at the day sheet!

Reese: What’s another big mistake that comes to mind?

Andrew: Huge mistake is that people have no website or not a good website. This day in age, if anybody wants to go to a new provider, a restaurant, anything, they’re going to the website. I was with a client the other year, and they were complaining they weren’t getting many new patients. I asked if they had a website, and they said no.

Reese: Interesting. They might be regional, too. Some places I know focus so much on websites, it’s like they are everything. And other cities it seems like aren’t as technology focused or as forward thinking about that.

Andrew: I don’t know. I just see some don’t have it. The third thing is turnover. Employee turnover can be toxic. Managing people is very, very challenging. Somehow, everybody needs to set quantifiable goals, and you need to hold people accountable to reach those goals. As the leader of the practice, keep people motivated and feel like they are doing a good job. But they need to know what they need to do.

Reese: How do you stop employee turnover from happening? What makes employee turnover happen?

Andrew: What they say, is if somebody leaves during the first year it was a bad hire. If someone leaves after the first year, they weren’t properly motivated or incentivized. They didn’t feel like there was any growth or opportunity. The job became stagnant, so they felt like they had no choice but to leave. Part of it is to set these goals. Hire good people, and let them know what they are supposed to do. Talk to them about things they want to learn to improve their own professional lives, and maintain an ongoing dialogue. Let people be engaged in the whole situation.

Reese: That’s great insight. If you had to give any final piece of advice—any tips that you would want people to take away. What would be the top few pieces of advice you would like to leave with the listeners?

Andrew: I think I would say that dentistry is a profitable business, but it is a business. And as any other business, it’s a business that needs to be run and managed like a business. Most of them are very capable dentists, and they want to go in, do dentistry, and leave at the end of the day. But that’s being an associate. Owning a business takes time, discipline, and people should always be striving to learn more. I think that’s the biggest takeaway.

Reese: Well Andy, I really appreciate it. You have got a great demeanor and tone, and I can tell you really care about your clients. It seems like you take a lot of pride in the work that you do, and it’s made a big difference in the New England area. I hope that you continue to have a lot of success. Thanks for being on the show, and I will look forward to having you back again.

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