CWA Client Case Study: Using Data Tools to Make Confident Decisions About Salaries and Other Overhead Costs*
Dr. Smith was in a bind. Her staff had not received raises in a couple of years and she was starting to hear the clamor. She knew the practice was doing well. The collections were up 10 percent over the previous year, but she didn’t feel like she had cash to give, and she wasn’t sure how to assess and allocate raises. Her primary concerns:
- How to appropriately evaluate the decision to give staff raises or not;
- How to determine whether her staff costs fall in line with industry averages.
These are common concerns that every business owner has to tackle. And they aren’t limited to staff salaries. They apply to every expense in the practice.
Add Tools to Your Toolbox
Tool #1 – A Usable Profit and Loss Report
At Cain Watters & Associates (CWA), the first place we guide clients to for help assessing decisions such as these, is the profit and loss (P&L) of their practice. It is imperative to have a P&L document that can serve as a usable tool for the doctor, if for no other reason than ensuring that the work and money spent to prepare it in the first place is not lost. We recommend a format where the expenses are grouped in the following manner:
- Direct Expenses – Salaries, Lab, Supplies
- Fixed Expenses – Rent, Advertising, Utilities, etc.
- Non-Operating Costs – Interest, Depreciation
- Doctor Costs – Doctor Salary, Family Salaries, perks
Conduct Periodic P&L Review
Once organized, P&L reports become a highly-effective tool for the doctor’s decision-making that should be prepared and reviewed monthly. Monthly and quarterly reporting shows how the practice has performed over the short term, but should also be compared to previous years to see the trends in the practice. Compare revenues and net income to ensure growth, and compare expenses line by line to assess where you can increase or decrease expenses.
Tool #2 – Industry Averages Data
In addition to comparing expenses to her own previous performance, Dr. Smith, and dentists in her situation, should know the industry averages for revenue and expenses. For instance, staff salaries in a general dental practice should run between 22 and 24 percent of collections (gross wages, not including payroll tax or associate wages). If a practice is operating at a level less than this, it is an indication that they are efficient and/or that they have room to grow. If they are operating above this level, then this is a good time to assess whether they are overstaffed, or paying higher than market wages.
Having data that shows where practices similar to your own fall in line in terms of income and expenses provides powerful insight that can be used as another effective tool in decisions that impact expenses such as giving your staff a raise.
Dr. Smith sat down with her financial advisor for review. When they began looking at her profit and loss, they were able to confirm the good increase in collections that Dr. Smith knew she had achieved. When they looked at her staff costs, however, her advisor noted that they had increased to 32.2 percent of her collections. This was well above her 28 percent average from the past few years, and 8 to 10 percent above the industry average. Furthermore, her advisor told her that despite the increase in collections, the net income in the practice was at 28 percent of collections and this was a full 12 percent below the industry average in general dentistry of 40 percent.
Dr. Smith was taken aback. She worked very hard to grow the practice and she questioned the validity of the industry averages. Was it really possible for a general dentist, like herself to have staff in line at 22-24 percent of collections and have a net income of 40 percent?
Annual Data Report for Side-by-Side Comparison
Dr. Smith raised fair questions. For as long as she could remember, people had thrown around the same industry averages, but how could she be sure these were accurate. Her financial advisor pointed her to the 2015 edition of CWA’s How Does Your Dental Practice Compare?** Our firm uses financial data from a cross-section of clients nationwide, to compile this annual report and benchmarking tool. It provides practice income averages, broken out by practice size and specialty, and includes collections and overhead expenses.
Dr. Smith reviewed the data in the report for “General Dentist- 1 Doctor” practices and saw that the staff salaries for her peers broke down as follows:
Salaries – Office 6.63%
Salaries – Hygiene 8.76%
Salaries – Chairside/Other 6.76%
Total Salaries 22.15%
Dr. Smith found that she was indeed averaging just over 10 percent higher than the average general practice with one doctor. Furthermore, Dr. Smith looked at the average net income in these practices and saw that these practices were netting 39.93 percent before non-operating and doctor costs. This confirmed that she was netting just under 12 percent less on her collections than her peers.
So what conclusions could her financial advisor and Dr. Smith take from these findings?
- Staff wages were increased despite not having any raises or hiring additional staff. This led Dr. Smith to believe her staff was working more hours, though she had not increased the number of days she was working. It was time for an internal review of her hours. Could the staff members be clocking in early, or clocking out late? …taking shorter lunches than the time allotted? These small differences can make a large financial impact.
- Dr. Smith simply could not afford to give her staff raises at this time. Increasing salaries would have cut further into her profitability. This is not only important from an annual income standpoint, but would eventually matter to Dr. Smith when she prepares to transition the practice to another doctor. Lower income means a lower practice value.
- Dr. Smith and her advisor noted that her average collections were less than the average one doctor practice. The average one doctor practice was collecting $1,245,000. If Dr. Smith could grow her practice to this level, an increase of $200,000, then the staff salaries would decrease as a percentage of collection by approximately six percent. Dr. Smith needed to focus on her own daily productivity to get her practice back in line.
These types of decisions can feel like a burden when you are running a dental practice, but equipped with evaluation tools, doctors can make wise decisions that will positively impact their bottom line and the health of their practice with relative ease.
*This article has been adapted and co-published in the Seattle Study Club Journal.
**Download a copy of the latest How Does Your Dental Practice Compare? Report by clicking here.