Your dental practice overhead is all the expenses you incur in running your dental practice.
Once upon a time, dental practitioners worried little about business factors such as overhead, as prices and profit remained relatively stable. However, as costs continue to rise as quickly as competition, and low insurance reimbursement rates and dwindling patient loyalty continue to hinder a practice's financial outcomes, cost control has become imperative to profitability.
It can cost quite a bit to operate a successful dental practice. But by exerting some discipline over how you manage your expenses and keeping your costs in check, you can improve your profit margins and add thousands of dollars to your bottom line.
Let's take a look and how you can calculate your overhead, including the full dental practice overhead breakdown, the ideal percentages for each of the different overhead categories, and how items in each of your categories should be allocated.
First, look at your Profit and Loss (P&L) statement, and you should see your quarterly or yearly gross income, followed by a list of your expenses. These expenses, of course, come out of your profits and make up your overhead and should consist of:
If you don't see these expenses broken down on your P&L report, you'll have to find the expense accounts they're located in. However, to ease things moving forward, we suggest you use separate expense accounts for each of these items in your chart of accounts.
Once you've located all your costs, you can start to add up each of your expenses. Once you have the total expenses, you can calculate your dental practice overhead by dividing them by your gross income.
For example, if your expenses total $100,000 and your gross income totals $75,000 then: 75,000 divided by 1,000,000= .75
.75 x 100= 75% overhead (as a percentage of your income).
Note, one important thing to remember is to exclude any compensation or related expenses of the owner, associates, dentists, or the owner's family. Here are some examples of expenses you should not include:
Dental overhead benchmarks act as a measuring stick, allowing you to compare your dental overhead costs to the industry average.
By understanding what your dental practice overhead consists of and setting benchmarks, you can set targets and make sure your costs don't get out of control and erode your profits. Paying close attention to and controlling your costs ensures that more of your revenue makes it to your bottom line.
To benchmark your results against industry averages, the average percentage of income per category is as follows:
Personnel costs include your staff's compensation expenses, recruitment or hiring costs, and employee benefits.
Personnel expense accounts include:
The goal is to get a big clear picture, so avoid separating every small expense and keep things simple by separating only essential expenses such as your staff's gross pay.
Dental supply costs and laboratory fees fall under the clinical costs category.
Clinical cost expense accounts can include:
If your dental organization has an in-house lab and a lab tech employee, you'll want to include the lab tech compensation in the clinical category. However, any outsourced lab work is to be included in the Laboratory fees expense account.
Also, dental equipment over $2500, and the financing secured for the equipment is not to be put into the dental supply expense account. Instead, place these into the Dental Equipment fixed asset account.
The facility costs category includes the practice's physical space and any equipment within the space.
Facility expense accounts can include:
Do not include:
The above expenses are to be placed in the general business cost category.
General business costs are items most businesses would require to run but are small enough not to require their own categories, such as office supplies, bank fees, and membership dues.
Other business expense accounts can include:
Do not include:
Office equipment between $500- $2500 (record these in your small equipment account under your facility costs category).
Discretionary costs include costs such as travel or business lunches that aren't strictly necessary for running your business and, therefore, are up to your discretion. But if you want to cut costs, your discretionary expenses may offer some opportunities for easy savings.
Expense accounts included:
It may be hard to figure out which costs fall under other business costs and which should go into discretionary costs instead. However, it's important to keep them separate and not unfairly inflate one or the other. Remember, discretionary costs are nonessential, so if your business can run without it, the expense should be considered discretionary.
This expense category includes the practice's net profit (found at the bottom of your P&L statement), benefits and compensation for owners and all doctors, and other income that isn't derived from patient fees. Note, non-patient fee income may include any government grants or Covid-related funding you've received, employee retention credits, interest earned, and any credit card rewards.
Expense accounts can include:
Do not include:
Draws or distributions — these do not impact your profit and loss as they are not considered expenses and belong in your owner's equity account on your balance sheet.
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