Higher overhead often leads to lower profit, but the good news is that with the right strategy, any practice can improve profitability.
There is an unfortunate trend beginning to affect more dental practices. Production is increasing (which is a good sign), yet many practices are finding that income is down at the end of the year. It’s a frustrating scenario that leaves dentists wondering why it’s happening and what they can do about it.
Focus on increasing production
Dr. Roger P. Levin.
For 42 years, Levin Group has focused on increasing practice production using more than 200 proven methodologies. The good news is that approximately 25% of those methodologies account for 80% of the increases experienced by dental practices. This reflects the well-known 80/20 principle: that roughly 80% of results are driven by 20% of actions. In other words, a small number of impactful actions can produce significant outcomes.
Here are three specific actions you can take to increase production:
- Reactivate all inactive patients. Levin Group defines an inactive patient as anyone who does not have their next appointment scheduled. This is critical, because inactive means no production. By increasing the number of patients who maintain upcoming appointments, a practice will naturally boost production over 12 months. Seeing more patients -- and performing more procedures and complex cases -- drives higher production.
- Increase elective services. Most practices can increase production by 20% by improving communication about elective services. The best place to start is during the dental hygiene visit, when hygienists can educate patients on available options. People care more about their appearance than ever and are willing to invest in aesthetic services. This understanding creates a significant opportunity for practices that may not currently emphasize elective care. In addition to in-office conversations, implementing a monthly email newsletter can help keep patients informed about services.
- Offer interest-free patient financing. Many patients will not move forward with treatment unless they know financing options are available. During the COVID-19 pandemic, we helped practices maintain -- and often increase -- production by training their front-desk teams to effectively communicate interest-free financing options to patients. This remains a powerful tool for case acceptance.
The impact of overhead
While many practices are increasing production, overhead is rising even faster, which is resulting in lower income. This should not be taken lightly. A 3% drop in profit over five years equates to a 15% reduction in income that can’t be recovered, which is significant. It often means working longer and harder while earning less.
There are only so many ways to reduce overhead. In most cases, the best achievable reduction is 4% to 6%, depending on current levels. If your overhead is already near recommended benchmarks, further reductions may be limited. Additionally, cost cutting is finite -- once a specific expense is reduced, those savings cannot be repeated indefinitely.
Why is overhead rising?
Three primary factors are driving increased overhead:
- Dental inflation. Dental inflation typically runs 1% to 1.5% higher than general economic inflation. The rising cost of supplies and services is impacting nearly every practice.
- Staffing shortages. Compensation for dental staff has increased significantly, and practices are feeling the pressure. As with any labor shortage, wages rise. The key metric is not just what you pay, but what percentage of revenue staff compensation represents. Ten years ago, Levin Group targeted approximately 25% for total staff compensation in a general practice. Today, that target is closer to 27%, with many practices exceeding 30%. Given ongoing shortages, most practices are unlikely to reduce these costs in the near term.
- The cost of dental technology. Advances in technology have significantly improved dentistry, but they come at a price. Technology is now an essential part of modern practice operations and contributes to higher overhead.
Higher overhead often leads to lower profit, but the good news is that with the right strategy, any practice can improve profitability.
Take an intentional approach to increasing income
Practices that are serious about increasing income must take a strategic approach: Grow production, control overhead, and ensure that production increases at a faster rate than expenses. When this balance is achieved, income rises, and the goal should be consistent year-over-year growth.
Implementing the right systems can allow a practice to increase production by as much as 40% over a three-year period followed by steady, ongoing growth. This type of financial strategy is essential in today’s environment.
Even if your practice is currently experiencing strong production growth, it’s not guaranteed to continue. There was a time when dental practices grew almost automatically each year. Today, economic pressures make growth less predictable. Practices that want to sustain success must remain focused on increasing production, improving efficiency, eliminating waste, and managing costs.
Dentists work too hard and invest too much to see diminishing returns. The observations and recommendations outlined here can help any practice improve income, both quickly and consistently over time.
Dr. Roger P. Levin is CEO of Levin Group, a leading practice management and marketing consulting firm. To contact him or to join the 40,000 dental professionals who receive his Practice Production Tip of the Day, visit LevinGroup.com or email [email protected].
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
