Maintaining Practice Income and Value

What is the most important practice parameter you should constantly monitor, whether you have been in practice for two or 20 years? Based upon my experience as a practice appraiser and broker, it is practice overhead.  Why? Because if you are in control of your overhead, then you are in control of your practice. Being in control lets you weather the normal strains of private practice in relatively good shape. However, if you are constantly fighting the end-of-the-month checkbook balance, it takes energy from providing the best clinical care for your patients.

Practice income definition
I define practice income as cash flow coming out of your practice after you have paid the normal expenses of operating the practice. This operating income is the cash flow that you can use for personal living expenses, taxes, debt service, and new equipment purchases. In my experience, a typical, well-run practice will have an operating cash flow that is about 40 percent of practice collections.

How do I calculate operating cash flow? I add the following: profit; dentist and associate salaries; dentist health and life insurances; excess travel, continuing education, and entertainment; interest; depreciation; family member salaries; and retirement contributions. I consider “normal” to be what a new dentist probably would spend, based on a limited budget.

If all of these items add up to 40 percent of collections, this means the practice overhead is 60 percent of collections.

Overhead impact on income and value
I recently appraised the following large practices.  They were very similar in size, clinical style, and other variables affecting practice value.

The owner of Practice A has over $300,000 per year in extra cash flow versus the owner of Practice B. If Practice A’s owner wanted to decrease time in the practice, it would be possible to hire more associates. Alternatively, early retirement funding is a possibility. The owner of Practice B is really under the gun to keep the practice solvent, since associate salaries probably consume 50 percent of the operating income.  My appraised value of Practice A was over $250,000 more than Practice B. This was true even though Practice B had $200,000 more in equipment than Practice A.

The secret to controlling overhead
Invariably, when a practice has a high overhead, the cause is staffing costs. A general dentist should have total staffing costs of 26 to 28 percent of collections. How do you control personnel costs? The worst thing to do is to pay low salaries. When I appraise a practice, I look for staffing continuity as a sign of a well-managed practice. You cannot keep good staff long-term with marginal salaries. Typically, the cause of high personnel costs is excess, or inefficient, staffing. Ranking employees in order of value
to the practice can address this. Keep the ones with high values. Do not replace employees who leave your practice. You can replace a full-time employee with a part-time one.

The future
Many of my transition clients are evaluating going digital, using in-house crown machines, or looking at lasers. These are all high-ticket items. Before making this decision, make sure your operating cash flow can absorb these costs. In addition, these technologies can reduce your need for staff. Make sure you realize any staffing savings through increased productivity. Remember, watching your overhead not only increases your current income, but it also can increase your future practice value.

Gary Schaub

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