This article is part three of a five part series on how to increase practice profitability and manage overhead. To view part one, click here.
In last week’s article, we did a basic review of overhead categories and percentages. For a copy of the MGE Dental Overhead & Expense Sheet, click here. We also identified the six overhead categories that tend to cause the most trouble.
In this week’s article, we’re going to cover the overhead category that in my experience causes more trouble than all others combined–payroll and staff compensation. We’ll look at the primary reasons it may be higher than it should be and how you could go about getting it under control.
Staff Payroll Percentage
As I mentioned in last week’s webletter, staff pay should not exceed 22.5% of your monthly expenses. Let’s get into specifics:
This 22.5% WOULD include:
1. All of your administrative staff (office manager, front desk and other, including part-time bookkeepers).
2. Your clinical staff—namely assistants and hygienists—full or part-time.
3. Any payroll taxes associated with paying your staff.
The 22.5% WOULD NOT include:
1. The doctor’s salary.
2. Associate’s salary—unless you are employing an associate in lieu of a hygienist to do hygiene at a flat rate per diem.
Are you paying too much?
Determining this is pretty simple.
1. List out all of your staff as noted in #1 above.
2. Figure out what they make each month. A note here when you work out employee payroll: remember that there are more than 4 weeks a month. I say this based on years of asking doctors and other business owners what they were paying a specific employee and getting the wrong answer—i.e., “What are you paying Jane the receptionist?” Reply: “$2,000 per month.” “How much per week?” “$500 per week.” If you’re paying Jane $500 per week, you’re actually paying her $2,166.67 per month. Figure out employee monthly compensation as follows:
a. Employee hourly pay multiplied by hours worked per week (assuming this is more or less fixed).
b. Multiply “a” by 52 (weeks in a year).
c. Divide by 12 (months in a year).
a. Jane makes $12.50 per hour for a 40 hour week = $500
b. $500 x 52 = $26,000
c. $26,000 divided by 12 = $2,166.67
So, you would do this for each and every one of your staff that would be included in the 22.5%.
3. Take the total from #2 above (all of the staff’s pay) and add 7.65%. This is the amount you have to match for FICA (Federal Insurance Contributions Act Tax which covers Social Security and Medicare).
Example: Your total employee compensation (managers, front desk, assistants, hygienists, etc.) comes to $12,000 per month. Add 7.65% of this figure to the $12,000.
Step 1: $12,000 x 7.65% = $918
Step 2: $12,000 + $918 = $12,918
$12,918 would be total employee compensation for our purposes here. Note that there may be other taxes depending on your situation or locale. Unemployment percentage is not included here as this varies by state and your history. Ask your accountant for more information.
4. Now we want to know—is our payroll too high? Well, we’re going to do two things here:
We’ll first a) figure out what our payroll percentage is.
b) If it’s too high, we’re going to figure out how much we should be collecting to justify such an expense.
“a” (our actual percentage) is figured very simply:
We take our payroll amount $12,918 as above and divide it by our average collections for the past three months. Let’s say we’ve been averaging $40,000 per month. So,
$12,918 divided by $40,000 = .322 or 32.2% – too high by almost 10%!
Now if it’s too high, let’s take a look at what we should be collecting if we’re paying that much. I’m going to do this the old fashioned way:
1. We take our payroll amount and divide it by 22.5.
2. We then multiply this figure by 100.
Using the numbers above, here’s an example:
1. $12,918 divided by 22.5 = $574.13
2. $574.13 x 100 = $57,413
In other words with a payroll of $12,918, we should be collecting at least $57,413, which is $17,413 more than what the office has been collecting. If you find yourself in this boat and were wondering where your profit has been going— you now have some idea.
So, what do we do about it? Depends. You could fire people—which I loathe to do unless justified. If someone is really underperforming this may be an option. I wouldn’t keep someone who refused to get the job done and didn’t improve despite efforts to get them to do so. As I mentioned in our first issue of this series, I’d rather get the office producing to its potential.
In my experience, high payroll usually traces back to a few basic reasons:
1. Treatment acceptance is low, or the office is disorganized and as such isn’t reaching its potential.
2. You’re paying the person—not the position.
3. Someone (or two) on your staff (and therefore the office) is underproducing.
4. Your staff are misallocated.
We’ll take each of these up separately.
1. Treatment acceptance is low or the office is disorganized and as such isn’t reaching its potential.
I spent a good amount of time on this one in the first issue in this series.
2. You’re paying the person—not the position.
Ideally, compensation should be linked to value. How would you measure someone’s value or potential value? This breaks down to two factors:
a. Their position in the office.
b. How well they do their job.
With one decision, a corporate CEO, who really knows his or her job, can make tens of millions of dollars for their business. Due to their position, they have sweeping impact on their organization. Now, this can of course be good or bad (i.e., remember “new” Coke?). The point is: the higher up you go, the more responsibility you have, the more your decisions and actions affect the activity. Generally (you would hope), people in these positions would also have more skill, knowledge and/or ability than the people that work for them (history does not always agree with this unfortunately).
Due to their potential impact, skill-set and ability, they are compensated more than say—the guy in the mail room, whose decisions—while not unimportant—do not have the same impact or potential exchange value for the company.
Using a dental scenario, let’s say you have a great office manager. He or she really keeps the office booked, hires great staff and makes your job a breeze. As a result of their work, practice revenues are up by $600,000 per year or $50,000 per month. This gives you some insight into their value to your office in dollars and cents. You notice that when they’re out for vacation, things don’t run as well and collections drop (which as a side-note they shouldn’t if they were a great executive—but that’s another subject). Based on the numbers, someone like this should be well compensated. You’re making a lot more (as proven by statistic) than you would if they weren’t there.
You could apply this to just about any staff member. Look at it this way: If you were to hire a Schedule Coordinator, what would you expect? I would expect that the office would produce a lot more. If production didn’t go up and no-shows didn’t go down, then what would be the point?
This, by the way, is why we teach MGE clients how to use statistics to grade performance. Statistics are unbiased—they don’t have opinions—they are what they are. They are based on nothing more than performance. Using statistics to decide on promotions makes life easy—the people who do their jobs move up and those that don’t do their jobs don’t, or they may move out.
Looking further we see that someone’s position in the office has a lot to do with how they can impact the place. A receptionist is a very important position. We go into this in a number of these newsletters. But, if you were compare the greatest receptionist in the world and the greatest office manager in the world—the office manager would have more impact and thus more value to the business—just based on their position alone. Again, this is not to minimize the receptionist’s importance—it’s just that from that position they don’t have the same responsibility as the office manager. As such, they are compensated differently.
Where this goes off the rails is when I see somebody complaining about profit and they’re paying their receptionist over $70,000 per year. Unless you’re charging $2,500 for a crown—I wouldn’t see how this could work. I don’t care how “great they are.” If they’re making that much money, they should have more responsibility and hence more potential impact. Maybe they should be manager or junior manager—or something! A receptionist has a certain value. How they are compensated usually has to do with your locale. A receptionist on the upper west side of Manhattan is going to make more than a receptionist in Wyoming due to cost of living adjustments. When clients have questions about what to pay, I usually, due to variances by locale, refer them to an applicable website like www.salary.com. These sites lay out, based on your zip code what the low, median and high rate of pay is for various positions and can help you gauge wage levels for your area.
While I don’t object to paying someone well or even a little high for what they do if they perform well, grossly overpaying by position because the person is “great” or they’ve been with you for umpteen years is a fast way to cause overhead issues. Rather pay them well and have a bonus system. Bonus systems offer you a potentially unlimited means of compensating someone. The better the staff does their job, the more the office makes. The more you make, the more the staff makes and everyone wins. If you’d like a sample office bonus system based on collections, you can send an email to info@mgeonline for a copy.
3. Someone (or two) on your staff (and therefore the office) is under-producing.
Here’s the kicker. You have six staff and four of them are running around working themselves half to death. One is indifferent and doesn’t get much done and the other is actively counter-productive to the organization. All of this results in a stressful working environment and struggling office barely paying its bills.
Let’s use an analogy. You’re part of a team in a tug-of-war contest. You have six people on your team, including yourself. You and three of your teammates are in there pulling. While some are stronger than others, the four of you are giving your all. The fifth teammate is standing next to the rope—staring at the team, having a coffee, secretly thinking about joining another team, explaining how “tired” they are and how they’ll be “right there.” Teammate five is a distraction. The four of you are annoyed with him or her, but you keep pulling. The sixth teammate is pulling the wrong way (while pretending to pull the right way) and sabotaging the four of you who are working your hearts out. With teammate six, some of you suspect something is wrong, but you can’t quite put your finger on it.
Whether your team wins or loses depends on the combined effort of the group to pull harder than the other team. You and three others are working towards that objective. One isn’t really helping and another is actually working against the objective. You could get rid of “teammates” five and six and the overall effort would actually improve. Why? Two reasons:
a. The obvious one, teammate six (who’s pulling against you and making it harder for the four of you to pull) would be gone—making it that much easier and
b. The annoyance associated with teammate five (which is counter-productive in and of itself) would be gone, making the rest of the team happier and less distracted.
Better yet, cutting teammate five and six loose gives you an opportunity to get a new teammate five and six who can add their effort to winning the tug-of-war. With the addition of these two new “pullers,” your team has more power.
Now, transpose the example above into an office setting. The only thing worse is you’re paying teammate five and six for their lack of work or downright counter-productive activity.
The activity of teammates five and six result in lower productivity, income and morale. Eventually, you’ll have an overhead problem because your income is too low and your payroll percentage goes up. Again, here’s where statistics are invaluable. Teammates five and six would be found out fast and would have to change their ways or move on.
So, keeping non-productive personnel on board will not only keep your office from reaching its potential (as discussed in the first newsletter in this series), you’ll have a hard time making it in general.
4. Your staff are misallocated.
By misallocated, we mean that people are placed in the wrong positions of the organization based on workload. It could also mean that some areas are to a small or large degree overstaffed (too many personnel based on workload).
Example: Dental office with one doctor, one assistant, two chairs, 500 active charts, an average of seven patients per day and three full time staff up front. In a small one-provider office like this, you don’t need that many administrative staff. There’s not enough for them to do. If they seem busy all of the time, especially if you’re not very productive, you probably have one of these counter-productive types causing trouble and creating work for the other two to do. Regardless, you’d be better served moving one in the back to work as an assistant. In this scenario, one front desk person would probably suffice.
Let’s look at the reverse: Eight-chair office, five thousand active patients, two doctors and four full time hygienists, five dental assistants (four for the doctors and one for hygiene), with one full-time person up front. In this case, the inadequate administrative staff can’t keep the doctors and hygienists booked.
Both of these examples illustrate a misallocation of staff. This is solved in some cases by reassignment (to another area based on workload) or in more drastic cases, potential lay-offs/dismissals.
Again, I’m not a big fan of getting rid of people—especially productive people. If you have a productive, performing person, you can usually find something worthwhile for them to do at your office. Non-productive, non-performing personnel are an entirely different matter.
Misallocation happens a good amount of the time due to poor organization—not malice. Lack of a good organizational structure opens the door to inefficiency, duplicative work and any number of things. For this reason, we spend a good amount of time with MGE clients teaching them how to set up an effective organization structure that allows for stable and profitable growth.
All right—that was a long one! I’ll leave you til next time. In our next issue, we’ll start off with a bit on associate compensation and then we’ll cover some of our other overhead “troublemakers”: advertising, loans and supplies.
See you next week!
Next article in this series is: Managing your Overhead and Profitability, Part IV—Associate Compensation & Other Overhead Trouble Spots
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.