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Taking the Pulse of Your Practice by Brittany Frazier

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Categories: Practice Management, HR and Accounting;
Taking the Pulse of Your Practice 

These changes can help ensure your net profit is in line with industry averages

by Brittany Frazier

The past three years have been a roller coaster for dental practice owners. From COVID-19 closures to the stimulus-fueled production boom to historic inflation and the looming possibility of a prolonged recession, dentists have navigated some rocky terrain. Through it all, they have shown remarkable resiliency in keeping their practices healthy and profitable.

When I’m working with my clients, I like to describe net profit as the “heartbeat” of a practice. It’s the simplest way to assess your practice. The question is, what exactly does a healthy net profit look like these days? Should dentists expect the same profit margins they enjoyed before 2020? Or is there a new normal to which the industry should steer itself for the near future?

Like most industry trends, the answers lie in the data. Each year, the Cain Watters & Associates team compiles client data across six dental specialties to create a benchmarking tool for doctors to compare their numbers with industry averages. The latest edition of the How Does Your Practice Compare? report shows that a healthy net profit for 2022 should fall in the ranges seen in Table 1. (Because of economies of scale, a multidoctor practice would lean toward the higher end of the range, whereas a single-doctor practice can typically expect to be in the mid to lower range.)

If your practice’s net profit fell into one of the ranges in Table 1, congratulations! You’re doing well. Even still, it’s always wise to keep an eye on areas in which you could be doing even better. And if your net profit came in lower, don’t beat yourself up: These are extraordinary times. The first step is to arm yourself with the information you need to diagnose your practice, evaluate areas that need improvement, and take the steps to get your net profit back in line with—or even above—the averages.
Dental Finance
Table 1

Focus on what you can control
With all the external economic stressors we’re dealing with right now—inflation, interest rates, economic uncertainty—it’s easy to get overwhelmed with factors we can’t control. That’s why I always start by shifting my client’s mental outlook from a fear-based approach to a more data-centric, goals-based approach focusing only on what we can control. Things like how many new patients the practice is bringing in, how much the practice is writing off, and where the practice is buying supplies are all areas to start evaluating. We also want to take a step back and ensure there is a rock-solid, goals-based financial plan in place for both the practice and the doctor.

By leveraging tools like the How Does Your Practice Compare? report, as well as the advice of a trusted CPA or advisor, it’s easier to pinpoint where to focus and put a solid growth strategy in place.


Identify areas to improve
For most practices, the first area to look at is expenses. Even if your net profit fell within the range, it’s worth diving deeper into the report’s numbers to find areas where you could improve.

The report not only shows direct and fixed expense averages but also breaks them out with detailed expenditures under each. For example, how did your lab fees compare to those of an average practice like yours? Did you spend more on drugs and supplies? Are your advertising and promotions costs higher than like-sized practices? If you find yourself above the averages, you’ve found a good place to focus on for improvement.

With inflation, it was expected that direct expenses such as staffing, supplies and lab would increase. But also pay attention to fixed costs in 2022. The report shows that fixed costs have increased more than we’ve seen in the past—no surprise there. What is surprising, though, is the category that most notably went up is one we call “Other Fixed Costs.” These are line items such as subscriptions, janitorial and consultant fees. This is likely also a direct result of inflation, because most of the line items in this category are also services. In all types of businesses, we are seeing miscellaneous cost increases because of supply and demand for services.

Another interesting note about expenses: They might not be the reason your net profit wasn’t within range at all. Suppose your expenses are in line with the averages, yet net profit was outside the norms. In that case, there’s a clear indication you need to focus more on increasing production instead of lowering expenses.

Revenue drivers include new patient flow, treatment acceptance, procedure mix, insurance makeup of the practice and conversion speed. To illustrate how the factors work together to determine net profit, first review, then evaluate each component of the profitability formula seen in Fig. 1.
Dental Finance
Fig. 1


Reassess your insurance write-offs
Taking a close look at your insurance write-offs is essential, because they can factor heavily into your profitability. I’ve seen clients who increased their revenue considerably but didn’t see an appreciable jump in net profit. Upon looking deeper, we saw that the practice was getting paid only 60 cents of every dollar of revenue.

Obviously, the percentage a practice should be writing off varies dramatically based on whether the practice is 100% insurance-driven versus fee-for- service only. Talk to your CPA to determine the “normal” range for the type of practice you operate.

Write-offs are especially important now, because practices are raising fees more consistently to keep up with higher operating costs. It’s more imperative than ever to continue to maximize cash flow by making adjustments with insurance providers.


Check your collections rate
Another important area to determine the health of any dental practice is its collections rate, which should be around 98% of adjusted production. This metric is easy to overlook in times of prosperity, but in times of adversity like we’re navigating right now, its impact becomes all the more glaring.

A collections rate that is out of the 98% range could indicate a variety of issues. The practice could be comping too many procedures, or your collections procedures aren’t as efficient as they should be. Whatever the reason, all systems must be functioning correctly in the collections process to ensure a healthy profit line.


Summary
In the end, it’s all about knowing your practice’s data, how it’s changed over time and what those numbers tell you. For many busy doctors, this is a difficult thing to pin down. Even with valuable benchmarking tools at their disposal like the CWA comparison reports, practice owners are often too busy running their business to take the time to properly analyze their practice and create a solid growth strategy.

That’s why we recommend you have a team of trusted advisors in place to help you implement the right systems to increase profits in the short term and be better prepared to weather the next storm—whatever that may be.

Cain Watters is a registered investment advisor. Cain Watters only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets. Past performance is not an indicator of future results.
Author Bio
Brittany_Frazier Brittany Frazier is a certified public accountant and investment advisor representative at Cain Watters & Associates (CWA). In addition to her role as a financial planner, Frazier also founded the CWA Women in Financial Planning group, which coordinates mentorship programs that support the firm’s female advisors. For more than 10 years, she has volunteered at the 3to1 Foundation, which educates Dallas Independent School District students on financial literacy topics in both English and Spanish.
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