Managing Your Overhead and Profitability, Part I
The subject of finance, or money in general, tends to create quite a reaction in people.
People “worry” about it, marriages run into trouble for lack of it and wars are started and fought over it.
You’ve probably experienced this “odd reaction” firsthand when presenting treatment to patients. “Mrs. Jones” might be the nicest person in the world during the presentation, asking all the right questions and seemingly interested in her dental health. You’re happy, she’s happy. Then financial discussion begins. At the mention of the cost, Mrs. Jones changes into someone completely different. Her face gets red. She’s belligerent. You have trouble believing that this is the same person you were having such a great conversation with thirty seconds ago. And all this at the mere mention of cost (money).
This article is the first in a five part series on the subject of how to increase profitability and manage your overhead. We’re going to talk about money. How you spend it and how to increase profitability. Being that this subject is so “charged” I wanted to lay out a few ground rules to ensure you get the most from it:
1. Due to the various “feelings” about the subject of money it tends to be one of the most volatile, misunderstood and poorly handled subjects.
2. As a result, there may be times in the process of going through these next few newsletters where you feel like increasing profitability or managing overhead is too “confusing” or too much “trouble” and avoid the subject altogether. This reaction is NOT uncommon. I assure you it’s a very simple subject. It’s a subject that, as a business owner, you MUST understand and I’ll do my best to help. So, persist. Your reward will be more control of your finances.
3. I’m not an accountant or investment professional. The purpose behind these articles is to show you how to create a SURPLUS; in other words, more profit. What you do with this “surplus” is up to you, your accountant and/or your financial planner.
Having said that, I’ll say this: Due to the confusion on the subject, along with the onerous and confusing tax codes and the general financial psychosis (for lack of a better word) associated with investing and estate planning, people’s eyes tend to glaze over when talking to accountants and financial planners. Sure they’re the experts. But that doesn’t mean that you should shirk all of your responsibility and just let them handle it.
Guess what, if a patient has no idea what you’re talking about with regards to treatment, it’s your job to explain it to them. Well, the same thing applies to your lawyer, accountant and financial planner. If you don’t understand why they are doing what they are doing, make them explain it. And if you don’t like the explanation, you have the power to choose someone else.
Bottom line: Don’t relinquish control because the subject seems difficult or impossible to understand. Find out. You’ll be the better for it.
4. Lastly and most important, finances work best when the subject is handled in a “clean” manner. What do I mean by this? Simple: obey the law. If your accountant or other financial professional suggests that you “hide income” or offers questionable tax strategies, I have one suggestion: Get a new accountant or financial professional who doesn’t do this. If what you’re being asked to do financially seems weird or sounds too good to be true – it probably is. The amount of time, effort and potential penalty associated with trying to “skirt the system” is not worth it. It’s also to sum it up in one word – wrong, and could potentially be illegal! If you disagree with various legislation the answer isn’t to violate it. Follow the law-abiding, standard route: join organizations that are committed to changing the laws or elect a representative that will change them, etc. Handle your finances in a manner where you could care less who looked at your books – life’s great when you have nothing to hide.
So, now that we have the “ground rules,” let’s move onto the “meat.”
What is Your Overhead Percentage?
You’ve at one point in time been asked, or have asked yourself this question. Most people answer with a percentage, i.e., “60 percent.” Some people plan their future on these percentages, “Well I can cut my overhead to 55% if I pay this off or fire this person,” etc.
The subject of overhead percentage can get pretty deceptive. Without getting into all of the variables, you can see that some expenses are more or less fixed (i.e., rent) and others are variable (i.e., lab). With this in mind, let’s take it back one step further, specifically to how an “overhead percentage” is derived.
This is simple enough; you divide your total expenses by your revenues.
Example: If you spend $40,000 per month to pay bills and the like while making $55,000, your “overhead percentage” is 72.7%.
$40,000 ÷ $55,000 = .727 (72.7%)
So far so good.
When discussing overhead percentage, the focus usually goes to expenses. This is only half the equation. It ignores what is, in my mind, the more important other half of the equation – revenues.
Let’s use the example above. We’ll say expenses are still $40,000, but in this scenario revenues are $80,000. Well, now our “overhead percentage” is 50%.
In an effort to increase profitability, the doctor with the $40,000 overhead and $55,000 in revenues, will more often than not place all of his or her focus on cutting expenses. They join supply co-ops, use a cheaper lab, refinance debt (the list goes on).
I’m all for cutting wasteful expenses. Why waste money? It misses the bigger point though, which is: If you’re looking to improve profitability, the FIRST action and focus should be to increase revenues.
Now, if you have some grossly ridiculous, hugely wasteful expense, feel free to cut it. But, and I say this with almost twenty years of experience, “penny pinching” for profit isn’t going to work as fast or as well as making your office produce the revenues it’s capable of.
What’s the starting point when it comes to increasing revenues? Simple – patients accepting and paying for their full treatment plans.
I’m not talking about just fancy full mouth reconstructions either. I’m talking about basic, bread and butter dental treatment. Like the patients you saw this past week who needed, but didn’t accept or put off, the crowns, implants or bridges (or endo, etc.) that they needed.
Now, you’ll have hardship cases where a patient cannot possibly pay and you handle these accordingly, you might do some of the work as a charity case and that’s great. I personally appreciate and enjoy doing work like that.
However, you’ll find – very often – that the patient who doesn’t accept treatment could pay for it. They just don’t. They pay for their vacation or other “stuff.” Why? They don’t understand the importance of it. They’re not “sold.”
It’s not uncommon to have a client go home and collect an additional 50% (or more) after their first seminar. I see this very frequently. And, I’m not saying this to “pump MGE up,” I’m just stating fact.
How do they do it? Well, usually it starts with them actually presenting full treatments and asking the patient to pay for it. Shocker – isn’t it? Look, there’s a lot more to this, it’s about the subject of sales. Which, if you’ve read our newsletters, you know that we teach a very professional, easy and actually fun way to handle this subject. We show our clients how to really connect with and communicate with their patients. I don’t want to go too far off on this, but it starts with sales.
I’ll give you two very simple case histories. And, I want it known that I didn’t “pore” over every client’s statistics to pick the “two best,” I’m too lazy for that…. I simply grabbed two successful clients to demonstrate my point. I’m not going to use names – but the numbers are real. While all of these doctors have gone on to even greater success statistically, I wanted to demonstrate how things changed in the beginning of the MGE program with primarily marketing and communication and sales training.
Case #1: General dentist (practicing solo) with three operatories collecting about $59,000 per month (three month average). Attends MGE sales training and starts applying it. Within six months, with little staff change, is collecting about $81,500 per month (three month average). There was no change of facility, equipment or the like. No huge additional expenses. This doctor was spending less time in the office (as they were coming to MGE to train). Yet, despite all of this, they were collecting an additional $22,500 per month, most of which was profit. Keep in mind that there is no way they would have been able to “cut” $22,500 out of their expenses to become more profitable. It would have been impossible!
Case #2: Solo practice with three ops, general dentist, averaging $78,500 per month. Does two MGE seminars on communication and sales. Next three months following first seminar average about $115,000 per month (has increased far more since). A change of over $36,000. Again, no appreciable increase in expense (other than lab and supply of course), which means this additional revenue is profit.
If you look at these examples, you can deduce a few things:
1. The primary “change” which spurred increased productivity and revenue was training the doctor, not adding a piece of equipment or burdening the overhead with heavy expense.
2. These additional moneys were primarily profit.
3. Everybody wins in this set-up, patients get the treatment they truly need, the doctor gets the satisfaction of doing the type of dentistry they enjoy and the practice is more profitable.
4. Here’s the proverbial “kicker”: If these practices grew so fast, the potential to produce or collect that much was always there. It was just unrealized. So, using this logic, you could say had these folks started six months earlier – they would have been so much the more profitable!
My point? We’re dealing with overhead, profit and expense in this series. If you want to improve your profitability, look first to increase productivity. As you do this, you can then improve on and manage expense.
Look, you don’t have to do it this way. And by all means, as I said earlier, if you have any particular expense that is out of control, don’t “wait” to handle it.
But, if you want to be successful, focus on the income – not the expense to start. If you are not an MGE client, I’d suggest the MGE New Patient Workshop or the MGE Communication and Sales Seminars. If you’re already a client and you want to improve even further, check out the MGE Graduate Sales Team Seminar.
With all of that said, next week, we’re going to dive into expenses. We’ll detail various expense categories, along with percentage guidelines by category. We’ll also start to look into some common overhead trouble spots.
I thank you for your time, apologize for any “long-windedness,” and look forward to “seeing you” (electronically at least) next week.
Next article in this series: Managing Your Overhead and Profitability, Part II – Overhead Guidelines
Jeffrey Blumberg provides this general dental practice management advice to furnish you with suggestions of actions that have been shown to have potential to help you improve your practice. Neither MGE nor Mr. Blumberg may be held liable for adverse actions resulting from your implementation of these suggestions, which are provided only as examples of topics covered by the MGE program.