Creeping practice overhead is one of the biggest problems facing the practice owner today. Before you look at strategies to reduce the overhead, you need to know first of how to calculate it. And most dentists are not sure what the true overhead of the practice is. This lack of knowledge is not the dentist’s fault. The accountant prepares the income statement purely for tax purposes and not as a management tool for the dentist. In addition, knowledge about controlling overheads in practice management courses is generally not part of the dental student education curriculum.
How do you calculate the true overhead of your practice?
Firstly, calculate the collectible practice revenues, after making all the fee adjustments.
Secondly, tally the expenses that are directly related to the operation of your practice, including lab fees, dental supplies, staff salaries, facility costs, office expenses, marketing costs, clinic insurance, bank charges, and accounting fees. Remember to exclude financial costs, such as bank loan interest and lease payments. Discretionary expenses (i.e., continuing education, salaries to “non-working” family members, auto expenses, and travel) are likewise not part of the overhead calculation. Also, exclude the non- cash items of depreciation and amortization, all of which are purely an accounting calculation. By dividing the overhead costs into the revenue figure, you now have the true overhead percentage of your practice.
How do you reduce the overhead percentage?
Assuming you are not overstaffed, it is difficult to trim expenses. Even if you manage to cut your dental supply costs by 30% from 10% of gross to 7%, the overhead is only reduced by 3%.
For a drastic drop in overhead, you need to increase revenues rather than making cuts. If you increase your volume from $800,000 to $1 million, your 70% overhead will drop down to 60%. By doing so, you will increase your income by 60% from $240,000 to $400,000. In this illustration, I assumed that all costs remain the same except for the variable expenses of dental supplies and lab at 20% of gross revenues.