Friday, 9:32 AM—Dr Smith takes a few minutes to review his financial numbers. One of the first things he notices is that overhead percentages have risen. Overhead was hovering near 80%. He begins to become anxious as he thinks about the implications. He already has noticed that he hasn't been saving enough lately. Now, he knows why. Panic begins to set in. "I have to cut costs! I need to cut costs!" he says to himself. In his mind, he runs down an entire list of things he can cut back on. What should he cut back on? What shouldn't he cut back on?...

Few dentists escape this scenario during their careers. Some overcome the problem, while others struggle with it for decades.

A dentist can experience many benefits through his or her chosen career, such as a high quality of life and the ability to retire comfortably after a gratifying professional career. However, there are obstacles keeping many dentists from being able to reach financial independence. One of the most costly roadblocks is the kind of high practice overhead encountered by Dr Smith. A practice that operates with excessive overhead prevents the dentist from reaching financial objectives. High overhead significantly reduces profitability and is often an indication that the practice is not as efficient and productive as it should be.

In the course of 22 years of consulting to thousands of practices, Levin Group has seen far too many practices struggle with a high overhead percentage. According to the 2002 American Dental Association Survey of Dental Practices, the national average for overhead in a general practice is 60.5%.¹ Unfortunately, we have encountered many practices experiencing overhead of 65% or more. Levin Group teaches practices to strive for an overhead of 60% or below. Although 65% may not sound like a big problem, just a few percentage points can make a considerable difference to your bottom line.

A practice grossing $800,000 in revenue annually with an overhead of 66% is spending $528,000, while the practice with 60% overhead incurs expenses of only $480,000. A 6% difference in overhead can mean $48,000 or more additional profit for your practice. Increasing profit is the key to reaching financial independence faster, which allows you to retire earlier or keep practicing just because you enjoy your work.

Cutting Overhead Is a Comprehensive Process

Decreasing overhead in the long term is a result of more than just slashing expenses. Indiscriminate cost cutting usually ends up being a temporary solution with dangerous implications for quality of care. Dentists who implement cost-control measures are typically not able to sustain that strategy successfully over the course of their careers. Consequently, high overhead continues to be a problem without the development and implementation of effective practice finance systems. Dentists should closely examine their practice overhead, monitor expenses, and set realistic, deadline-driven goals to increase production. To achieve optimal financial performance, overhead must be controlled regardless of the level of practice production. However, it is important to distinguish what type of overhead the practice is experiencing.

Fixed and Variable Overhead

Many dentists do not think about the relationship between profit and overhead. For every dollar of overhead spent, a dollar of profit is gone. However, overhead is necessary to operate a practice. There are 2 types of overhead:

1. Fixed Overhead
   These expenses will be incurred whether the practice is producing or not. Examples of fixed overhead include rent, mortgage, labor costs, utilities, and insurance. Fixed expenses are always present and do not rise or fall significantly based on the level of production. Dental bankruptcies are rare. However, when they occur, high fixed expenses are often the culprit.
2. Variable Overhead
   On the other hand, variable expenses can be considered a good thing. Why? Variable overhead does not occur unless the practice is producing. The more that you produce, the higher your variable expenses will be. Variable expenses include laboratory costs, dental supplies, and staff bonuses. Variable expenses are positive because they come about from increases in production and case acceptance (positive factors for the performance of your practice).

Levin Group's approach to optimal practice finance performance focuses on increasing production while reducing unnecessary costs. In most cases, high overhead is a result of the practice not operating efficiently or productively enough. For instance, a practice experiencing a high volume of cancellations and no-shows will usually have a high fixed overhead because of decreased production. By taking the proper systematic steps to operate more efficiently, production will increase and overhead will fall into a healthier range. Boosting productivity will ultimately lower overhead as a percentage of a practice's operating costs.

Analyze, Evaluate, Budget

If overhead is to be controlled, practices must develop a comprehensive budget. However, it's important to note that budgeting means more than simply writing expenses down on a sheet of paper and adding them up. Budgeting involves carefully analyzing all the key numbers in your practice including expenses, revenue, and determining the percentage of revenue allocated to each cost category.

The best way to develop a valid budget is to analyze past performance and evaluate how it relates to your practice's future potential. Simply put, budgeting requires financial decisions to be made after careful analysis of all the positive and negative financial consequences for each action. Thinking of the finances of your practice in this manner ensures you make the best use of practice resources and attain maximum profitability.

A budget should break down not only the total expenses your practice incurs over a month, quarter, or year, but it also should categorize these expenses into set overhead categories such as staff compensation, lab costs, and dental supplies. It is through analyzing expenses and comparing present performance to established goals that you can see the exact areas of your practice where overhead can and should be reduced.

This systematic approach to budgeting allows you to set specific goals to reduce overhead gradually without affecting the quality of care and customer service delivered by your practice.

Conclusion

Overhead is a necessary part of running a practice, but eliminating unnecessary expenses can ensure the financial health of the practice. To run a successful dental practice, the dentist must manage expenses. Uncontrolled overhead can have a devastating effect on a practice's cash flow. Practices should control overhead by reducing unnecessary fixed expenses, enhancing efficiencies to increase productivity and production, and developing a comprehensive budget that puts the practice on target to achieve its financial goals.

Reference

1. American Dental Association. 2002 Survey of Dental Practice: Income from the Private Practice of Dentistry. p. 87.

For no-cost consultation on controlling practice overhead, call (888) 973-0000 or e-mail your name, phone number, and address to with "Overhead" in the subject line.

Dr Roger P Levin is founder and chief executive officer of Levin Group, Inc, a leading dental practice management consulting firm that provides a comprehensive suite of lifetime services to its clients and partners. Since 1985, Levin Group has embraced one single mission—to improve the lives of dentists.

For more than 20 years, Levin Group has helped thousands of general dentists and specialists increase their satisfaction with practicing dentistry. Levin Group may be reached at (888) 973-0000 and