Dr Phillip Palmer, January 2003 - One of the hardest things for us to do as dentists is to carry out all the roles that come our way. We need to be:
And we need to have skills in all these areas in order to run successful practices. Often, we take for granted some of our abilities, and beat ourselves up for our deficiencies in some field or another.
One of the most difficult tasks that we must tend to is the evaluation of the financial merit of a business decision. The types of decisions that dentists struggle with are:
Lets look at these and see if there’s some way of establishing the financial results needed to make the investment into any of these decisions worthwhile.
With respect to any decision, firstly I have to state that I don’t believe any investment is ever worthwhile doing to ‘breakeven’. We are not in practice to breakeven, and we need to be mindful of the results of breakeven decisions, as shown in the following example. Consider a dentist with a gross production of say, $100,000, and expenses of, say $50,000.
What happens after the dentist makes 5 breakeven decisions, each costing $20,000? Lets examine what happens to gross production, profitability, and how many days needed to work to cover expenses.
Production is now $200,000 (remember 5 decisions costing $20,000 that breakeven thus also bring in $20,000 each), expenses are now $150,000, and the profitability is still $50,000, even though our overheads have gone from 50% to 75%. However, the breakeven point used to be Wednesday at noon. Now its Thursday afternoon at about 3:30pm, before he/she starts earning any money for himself. What stress does that add to their lives? What happens if they’re sick on Friday? Or there’s a public holiday? In that case they are virtually working that week for nothing!
That is the cumulative effect of breakeven decisions, and why we must avoid them. However that isn’t what most salespeople tell us. Usually we get told that if we sell just one more crown a week, this object will pay for itself! (Read that to mean-it’ll breakeven.)
Then there’s the problem (opportunity?) of adding another dentist into the practice. You’ll need to get an additional chairside assistant for her (lets say $40,000 package), she’ll be paid 35% (all up including super and holiday pay), and there’ll be variable expenses (lab and supplies) of say 20%. How much does the dentist need to produce to ensure that you make a 20% profit (remember-why would you do it if not to make a profit)?
Production needed = $40,000/(100-[20+35+20%])= $40,000/25%= $160,000.
But if you, like most dentists, find that you also need to have a half a hygienist (total cost $20,000) as well as outfit another surgery (even if its going to be used by you, and he/she gets the old one), at a cost of $15,000 a year lease payments, then the equation starts to blow out somewhat.
Production needed = $40,000+20,000+15,000/ (100-75%) = $75,000/25% = $300,000.
The last issue that I’ll deal with here is what do you need to produce in order to do a marketing campaign (yellow pages, advertising etc) that will cost say $50,000, in order to make your assistant dentist busier.
For this problem, the figures are very different if it’s for the direct benefit of the principal dentist. If that were the case, and variable expenses were, say 20%, and 20% profit were needed, then the incremental amount of production needed to justify the expense of the campaign would be as follows:
Production needed = $50,000/ (100-40%) = $50,000/60% = $83,333. If it’s for an assistant dentist, then more variable expenses come in to the equation. In that case, production needed = $50,000/ (100-[20+20+35]) = $200,000. That means that $50,000 worth of marketing would need to bring in $83,333 for the principal dentist before it carries out its intention of being 20% profitable for the practice. And if there were an assistant dentist earning the money, it would take $200,000, before the criteria were satisfied.