Where does my money go?
Is my dental practice overhead too high?
Have you asked colleagues how much their overhead is? Have you received answers from 40% all the way up to 90%? Don’t worry, most of the confusion is due to how they define their overhead. Some doctors may view their overhead as everything that doesn’t show as profit on their tax return. Meaning, that they didn’t factor in personal expenses, nor their own salary. Industry standard is to take all of your expenses and add back the following:
- Personal Expenses
- All Doctor Salaries
- Interest Expenses
- Loan Fees
A look at Overhead
Let’s start the process of adding back to the profit of the practice. You have probably never stroked a check with the name of Depreciation, yet it shows on your tax return. Depreciation and Amortization help to reduce your tax liability, but aren’t factored in overhead calculations. We also need to take out all of the fees associated with practice debt. All personal expenses need to be removed or adjusted. All dentists need continuing education credits, but do they need to be acquired in Hawaii? Rather than removal we need to adjust the CE expenses to a normalized amount of expenses for the CE, around $3,000 per doctor. What about a family member on the payroll, who has a “no show job”? Their pay needs to be removed. However, if you have an unpaid family member working in the practice, you need to make an adjustment to pay them a fair salary. After we have made all of the adjustments, it is time to compare your practice to those of your peers.
We want to group all of the costs associated with the staff. Salaries, payroll taxes, uniforms, health care, and payroll processing fees need to be in this category. We then divide this cost by your revenue to get an overhead ratio. The following targets are for general dentists:
- 25%-30% Perfect!
- 30-35% Keep an Eye on this
- 35%+ you may need to consider cutting hours or employees
Make sure that depreciation costs have been removed. If you own the building we may need to make an adjustment. Ask a local commercial real estate broker how much your space should rent for on a triple net basis. They will give you a per square foot number which when applied to your useable square footage will be the rent you should charge yourself. The target for this category is 5%-7%. If you live in a big city, like Los Angeles or New York, it will likely be a struggle to keep this category under 10%.
This is a category devoted to all of the other expenses in the practice that aren’t going to be associated with doing the clinical work. Examples of these expenses are:
- Dues and Memberships
- Malpractice Insurance
- Overhead Insurance
- Marketing and Promotion
- Continuing Education
Typically this category will be between 5%-7%, unless the practice is doing heavy marketing. As a rule of thumb, you should be willing to accept up to 5% of your revenue for marketing costs is the practice is seeking growth.
The more dentistry that you do the more these costs will go up. This is where you should put:
- Clinical Supplies
- Lab Costs
- Credit Card Fees
- Office Supplies
This category is usually in the 15%-18% range for general practitioners.
If a practice were to hit the low end of each of these categories the total overhead would be 50%. Meaning that the owner is 50% profitable, so for every dollar that comes through the door one would expect to be able to keep $0.50. Were the practice to find themselves on the high end of each of these categories, they would be at about 67% overhead. So for every dollar they bring in they would expect to make about $0.33.
I just ran a query through Pratt’s Stats which when filtered down to look at gp dental practices yields a median overhead of 59.1%. If your practice overhead is lower than this, you are doing better than half of your peers.
Please respond if you want to know what category an expense goes into.
Ross is an expert in the field of business and medical practice valuations. He is an accredited senior appraiser (ASA) with the American Society of Appraisers and has over a decade of experience leading financial projects for small to large sized businesses including medical, dental, and optometry practices. Ross received his MBA degree from California State University, East Bay in 2001 and his Bachelor’s degree from the University of California at Berkeley in 1998. Ross was also the co-founder of a national medical strategy and acquisitions firm. Ross Landreth’s CV