Chapter 20: Knowing and Limiting Your Costs
Do you feel like you already have a handle on what your costs are going to be to run your new dental practice? Or, do you feel overwhelmed just thinking about it? Either way, a little education on the economics of cost may help you understand your situation better. Remember as you read this chapter that costs are actually investments in your business. They may seem like burdens at times, but the truth is that if a cost does not give you some benefit at some point in time past, present or future,, there is no reason whatsoever to keep paying it. That is one reason you need to reassess your costs periodically to ensure that you are not paying for something that has no value to you or your practice. This chapter explains the nature of dentistry business costs and suggests ways to reduce them.
Three Kinds of Costs
In dentistry, you will have three basic types of financial costs. They are:
- Fixed costs, which do not change no matter how much or how little dental work you produce.
- Variable costs, which change in direct proportion to the amount of work you do.
- Fixed-step costs, which increase in steps as production increases.
Some examples of fixed costs are:
- Your lease payment
- Continuing education
- Utility payments
- Depreciation for office and dental equipment
- Bank charges
- Legal expenses
- Professional expenses
The name “fixed cost” can be a bit confusing in some of these instances. For example, you will not pay the same amount for utilities every month. But, unless you close down the office and turn off all the utilities, the fluctuations will not have any direct relationship with the amount of work you produce.
Examples of variable costs include:
- Dental laboratory fees
- Dental supply costs
- Office supply costs
Remember that these costs vary based on how much work you produce. So, if you do more procedures than you usually do, you will have likely be paying the dental lab for more of their work. You will use up more dental supplies. And, your team members will be using up more paper to print off EOB (explanation of benefits) paperwork or to send out patient billing notices.
Examples of fixed-step costs include:
- Employee wages
- Employee benefits
These costs rise in steps according to production. So, for example, if you have more patients and are performing more procedures, you might need to hire more office staff to keep up with the extra workload.
How Much Should Your Overhead Be?
A typical smoothly-running dental office will typically use up 50% to 65% of its revenue paying for overhead. That usually breaks down somewhere around 25% for the fixed-step costs, 25% for fixed costs and 15% for variable costs. You should be able to pocket or reinvest 35% of your overall revenues. If your profits are less, you need to reevaluate your business from the ground up. You can work with a business consultant and/or accountant to examine the revenue vs the costs for your practice. It helps, though, to go into the meeting with a good working knowledge of how costs can affect your bottom line.
Get the Lowest Possible Rate on Your Business Loan
When you are first getting financing for your business, get the lowest possible loan rate available to you. How do you do that? Don’t just take the first loan you can get. As a dentist, you are a desirable client for loan companies because there is a very low risk your business will fail to the point you cannot pay your loan. So, get the figures from several different brokers before you settle on a loan. This will decrease your costs from day one of your new practice.
Know Your Break-Even Point
How much dental work would you have to produce to break even? This is a valuable calculation because it can help you know how much more you will need to produce to have the income you desire. The basic formula for the break-even point of a dentistry business is:
Collections – Variable Expenses – Fixed Expenses = 0 Net Income
Collections will be your production multiplied by the percent collected. Variable expenses will be a percentage of production used on variable expenses. Fixed expenses is the dollar amount you spent on fixed and step-fixed expenses. Net income, as stated is 0. To find out how much you need to break even, solve for collections. This is your break even point.
Don’t Evaluate Costs vs. Production Too Often
Looking at your cost vs. production too often can either make you worry too much or become overly optimistic. The reason is that these figures will vary greatly over days and weeks. So, it is best to do this evaluation annually, or no more than once per quarter, to get a broader and more accurate view.
Focus on Major Cost Items
Being thrifty on the small expenses in your practice can definitely have an impact on your bottom line. And, those little things are often easy to do without. However, when you are working to make a major difference in your income, you need to focus on big-ticket items. One example might be an office staff position you can eliminate.
Tips for Cutting Costs
You can cut costs throughout your practice by being alert to waste. You can also control your major expenses, if not in the short-term, then over a longer period of time. Here are some tips for cutting costs in your practice:
- Negotiate a lower rent payment whenever it is time to renew the lease.
- Negotiate lease terms so the landlord pays more of building and parking lot expenses.
- Keep up with maintenance of office and dental equipment to avoid the need for replacement.
- Give employees annual bonuses rather than annual raises.
- Pay a reasonable hourly rate to employees – not too high or too low for the industry.
- Comparison shop to get the best price on supplies.
- Buy supplies at conventions.
- Be precise in making impressions to avoid unnecessary lab fees for rework.
- Negotiate phone, internet and cable bundles.
- Avoid buying more dental equipment after first setup unless it adds significant value over its cost.