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| Serena Wixom |
Your Overhead: Blissful Ignorance or Managed Confidence?
Power Thought: Advanced Dental Consulting
Does looking at your practice's profit and loss reports make you queasy? Do you wonder if your expenses are within a healthy percentage range? Are team members asking for raises, but you don't know if the practice can afford it? If so, you are not alone. Questions like these plague many practices, dentists and business owners.
Few things can calm your fears as quickly as getting a grasp on your true overhead costs. This simple step will help you accurately set production goals, identify strengths and weaknesses and determine your practice's true potential for profitability. It is essential to learn what constitutes healthy expense percentages and use them to set benchmarks to achieve a healthy practice.
When determining your overhead there are various expense categories to consider: wages, payroll taxes, dental supplies, lab expenses, loans, leases, any associate expenses and doctor compensation, just to name a few. It takes someone who knows the industry standards to determine good expense percentages for a specific dental practice.
An insurance based practice can be a little tricky to determine the actual production amount. If you have a fee-for-service practice, assessing your overhead is relatively easy.
In an insurance practice, actual production depends on full fee applied to the patient's ledger. Take the total production for a 12-month period then subtract any insurance adjustments made during that time. If the insurance is being billed full-fee to the practice, but the insurance-allowed amount is being charged to the ledger, then take the 12-month total and add or subtract any insurance adjustments. This will give you the actual production number that we will be working with.
In an insurance-based practice, the dentist's full fee for every patient can never be totally collected. Under the PPO contract, the provider is obligated to adjust the full fees to the amount allowed by the insurance, leaving the difference as non-collectible. To determine the collection number, add all the money received during the same 12-month period. To determine the percentage of collection of the practice, divide the collection amount into the actual production number. A healthy collection range is 97% or above. If the collections are in an unhealthy range, use the various reports in your dental software to determine if there is a system that is not being implemented properly. This could stem from outstanding insurance claims, outstanding patient balances, not collecting patient portion at time of service, and many other issues. When you identify discrepancies, write them on an action plan to begin remedying the situation.
To forecast the following year, pull over expenses that will stay the same; look at categories that will change due to new equipment purchases, reduction of loans, continuing education courses and so on. Some of these expenses will be calculated as fixed expenses, while some are considered variable expenses. By analyzing the service categories, we can identify the practice areas that can be improved.
For example, we could look at how many scaling and root planing procedure codes were billed during the 12-month period. If the numbers are low, then we need to look at implementing an effective perio program that would improve patient care. If restorative procedure codes are low, then we need to look at improving case presentations using a relationship based method. Using an action plan to write down what is needed, with deadlines, will help ensure success in improving the numbers in the practice.
Knowing the numbers and improving systems will eliminate fear and create peace of mind. With today's economic pressures, controlling costs and implementing systems to improve the profit and collection margins is increasingly critical. The expense analysis will uncover possible embezzlement or misappropriation of practice funds and resources. Knowing how your practice's expense ratios compare to dental industry norms makes it much easier to perform a break-even and business analysis. Understanding overhead-what it is, where it comes from and how to control it-will empower you to take a stronger leadership role in your practice, and get a good night's sleep.
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