Payroll Spotlight: The Cost of Rising Staff Salaries
Feeling the pinch on staff salaries? CPA and Partner Judson Crawford weighs in to guide practice owners on how to get it right.
A version of this article was originally published in the March edition of Dentaltown.
By Judson Crawford, CPA
Looking at your staff salaries by hourly pay rates alone will not give you the insight you need to gauge if they are too high or low. In order to get an accurate check on this metric you will need to know your staff salaries as a percentage of your collections. You can find that by reviewing your practices financial statement. Reviewing your financial statement monthly is one of the most important things you can do to monitor and maintain the overall health of your practice.
Where to Start
When reviewing a financial statement, the most important metric to look at is net income. Net income is the amount the doctor has left after the cost of doing their dentistry work. It gives a view into how much money remains to service debt, run perks through, pay his or her salary, etc. This is also useful because it gives offers a valuable number to be able to compare the practice’s overhead to others.
The next thing to look at is collections. Collections is the total dollar amount brought in by the business. This number is useful to compare with prior years to see if the practice is growing or contracting; it also shines a light on where the business is headed.
Finally, we will focus on expenses. Specifically, the single biggest expense in the practice—salaries. Salaries, depending on your specialty, can make up 15-25% of a practice. Because no other single expense comes close to that category, it needs to be the most controlled.
Salaries as a Percent of Collections
Each specialty can be unique when it comes to salaries as a percentage of collections. Orthodontic practices are typically on the lowest end because they do not have hygiene costs. According to the CWA Orthodontic Practice Comparison Report, for the past 5 years, staff salaries for CWA orthodontic practices have averaged around 17-18% of collections annually. This is total gross salaries and does not include owner perks, staff benefits or payroll taxes.
Additionally, many of our orthodontic practices have positions that are combined, for instance an office manager that also works as insurance coordinator or a front office associate that is also the treatment coordinator. For practices on the smaller end, having staff members perform multiple roles is wise. The decision on which roles to separate out should be based on the ability of the individual to maximize their time.
Can you afford an additional staff member? One way to tell is by looking at the practices overall salary to collections percentage today, and then again as a future estimate based on anticipated growth in your practice. Another opportunity for orthodontists—it’s fairly easy to know where your collections will be in a future year because they are telegraphed in the adjusted production from the previous year.
For example, if in 2019 you are on track to collect $800,000 but your net production is $1 million, you can feel confident that you can collect $1 million in 2020. Doing this can help you feel good about building in additional staff, or even give raises to your current staff. CWA orthodontists have seen a consistent increase in their production every year from 2012 to the present. As production increases, orthodontists can spend more money yet maintain the same overall percentage.
Urban vs. Rural
If managed well, doctors in rural areas can achieve lower overall salary to collections percentages. Salaries in southern states will be lower than those staff costs in the east or west coasts. What is important to note is that it actually won’t be a huge differential and should not be an excuse for urban practices to have a higher payroll percentage. Practicing in areas with a higher cost of living may require one to pay more in salaries, but it also allows the practice to demand higher procedure fees—and the two should balance out.
A stronger indicator for overall salary health other than location is practice size. Our clients that collect over $1.5 million consistently have a lower staff cost as a percentage of collections than those less than $1 million. The reason? Efficiencies are typically gained when people are busy and the doctor is collecting more.
Salary Trends by Position
Next, let’s look at associate salaries. Our 2018 report shows an increase for associate doctor daily rates year over year., One reason associate salaries are increasing is corporate dentistry groups. Why do they pay so much? With no long-term ownership incentive to offer associates, high daily rates are means to attract young orthodontists in, and as a result are driving up associate salaries as a whole.
The only staff salary that is decreasing year over year is the lab technician. Technology is causing a shift in the orthodontics landscape. With future of technologies like 3-D printing, or market leaders like Invisalign who provide lab work, the need to keep lab in house is decreasing. Additionally, as lab companies compete for business, they become more efficient, resulting in many orthodontists choosing not to do their lab in house.
Consistency is Key
If salaries are too high as a percentage of collections, the first thing you need to ask yourself is if you are over staffed. Is there a position not utilized effectively, or are employees having too much free time? If this is not the case one needs to examine hourly rates. This is a difficult task, because if staff members are over payed, the option is to let them go or keep over-paying. Both difficult, and neither ideal.
Strategies for getting your percentage back within average:
– Cross training for different positions. Depending on the size of the practice you may have positions that can be combined. If the practice is on the smaller end, it is essential for employees to take on multiple roles.
– Pay hourly versus salary. For most dental office staff, federal wage and hour laws require these types of roles be paid hourly.
– Minimize overtime. Make sure employees are not riding the clock by coming in early, staying late or working through lunch. Set office standards to cut off employee hours at 40 per week.
– Reduce unnecessary office hours by improving scheduling. Coordinating vacation time with the doctor is another good way to do this.
– Increase use of part-time employees to meet peak production times. Leveraging part-time or temp employees can help reduce fringe benefits and retirement plan costs.
– Try alternative incentives rather than increasing hourly rates. By keeping salaries static and leveraging bonuses, you may be able to still offer incentives while avoiding getting locked into high hourly rates.
As the largest expense on your balance sheet, it’s more important than ever to keep staff salaries consistent. As the practice grows and procedure fees increase, there will be the opportunity to pay staff members more when they have earned it. Allowing staff salaries to get out of line will quickly impact your bottom line. As the owner, if your net income decreases, you will be forced to sacrifice in other areas in order to make up for the overage in this category. The more areas you are over average, the more significantly your net income is going to be reduced.
For a complimentary consultation to examine your collections versus expenses and how you could increase your practice’s net income, contact one of our CPAs at cainwatters.com/contact.