Overhead – will it continue to increase?

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Overhead costs have been part of practice control since the launch of the first modern dental practice. Every business has overhead, and overhead is essential to building successful dental practices. The real questions are what expenses make sense, how to eliminate unnecessary waste, and how to keep overhead from rising.

In 2022, overhead costs have increased significantly in most practices, partly due to significant increases in personnel costs and due to PPE and supply costs.

What drives up overhead?

By researching thousands of dental practices, Levin Group has found that in most cases, overhead costs are about 4-6% higher than they should be. Inefficiency and waste are part of this overrun, but a lack of planning, tracking and analysis of expenses also contributes to the problem.

This 4% to 6% overrun is equivalent to a significant sum of money. It’s a simple calculation. If an $800,000 practice has overhead costs that are 4% too high, that practice loses $32,000 per year in profit (income). (Note that this is revenue, not revenue.)

If the same practice has overhead costs that are 8% too high, it loses $64,000 in revenue each year.

So what’s driving up overhead? Each year, labor costs, supply and material costs, practice insurance costs, etc., will increase.

Some years they will increase faster than others. In a long-term bottom-up economy where practices are experiencing levels of organic growth, overhead percentage may not increase due to increased practice production. However, in times of low, no, or negative growth, the overhead percentage will begin to increase.

Control costs and reduce overhead

Large companies have departments that focus exclusively on cost control.

Each department must submit annual budgets which must be approved and are designed for the company to achieve the desired profit margin. While sophisticated budgeting may be overkill for dental practices, here are three suggestions for reducing short- and long-term costs that should be adopted as lifelong practice behaviors.

  1. Bid on your main expenses. Dental practices develop excellent relationships with suppliers. However, it is always good for business to periodically check the cost of the products you purchase with other resources. Not only dental care products, but also insurance products, maintenance and service contracts, etc. You should solicit several offers for these services in order to get the most attractive one. By bidding on the largest expenses, you get an idea of ​​market rates. You don’t have to leave your current vendor, but you can go back and let them know you’re looking to cut costs in that area by a specific percentage and ask them for creative ideas. You will be happy to see how many will be able to work with you in this direction.
  2. Join a buying group. There are many dentistry buying groups from all kinds of different organizations. When you join a buying group, you are essentially entering the realm of volume-based buying. While your practice may not have the power to negotiate better costs, banding together with other dentists through an organization will give you that opportunity. Just pay attention to how much the organization takes in commission on purchases made. Some will be higher than others.
  3. You don’t have to be the first. Technology has advanced dentistry in wonderful ways, but you don’t have to be the first. Those who are first often end up buying technologies at double or triple the cost of what those technologies will be a few years later. The cost of technology generally decreases over time. We see too many practices investing heavily in technology, only to find that it creates a higher level of debt, a lower level of cash, and does not necessarily improve practice performance or quality of care. Be strategic about what technologies you buy and don’t be motivated to “keep pace with the neighbors”.

SUMMARY

Overheads are necessary but should be used strategically. Most firms operate with overhead 4-6% too high. There are many steps available to any dental practice that can have an immediate impact on overhead, including having your major expenses compete, joining a buying group, and waiting for the drop. prices for the latest technologies.

A practice with general controls in place will be much more profitable in the long run.


ABOUT THE AUTHOR

Roger P. Levin, DDS is the CEO and Founder of Levin Group, a leading practice management consulting firm that has worked with over 30,000 clients to scale production. A recognized expert in dental practice management and marketing, he has written over 60 books and over 4,000 articles and regularly presents seminars in the United States and around the world.

To contact Dr. Levin or to join the 40,000 dental professionals who receive his Practice the production tip of the day, visit levingroup.com or email [email protected]


FEATURED IMAGE CREDIT: Gerd Altmann from Pixabay.

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