62. Understanding Your Dental Overhead: The Numbers You Must Know
This episode breaks down why understanding overhead is so important in a dental practice. We talk about how overhead is more than just a number or percentage. It includes everything from staff wages and supplies to lab bills and facility costs, and all of it affects how healthy and profitable a practice really is.
We also go over helpful benchmarks and practical tips doctors can use to keep their expenses under control and run a more efficient practice. One of the big points in this episode is the importance of doing a quarterly break-even analysis so practice owners can catch problems early and make smarter financial decisions before things get off track.
Overall, this episode is all about helping dental professionals better understand their numbers so they can build a practice that is successful both financially and clinically.
Transcript
Before we get started in today's episode, I want to take 60 seconds to talk about something that affects every single number we're going to discuss today, and that's your marketing.
Speaker A:Here at Class Solutions, our marketing division works exclusively with dental and healthcare practices.
Speaker A:We're not a general agency that dabbles in dentistry.
Speaker A:We build patient acquisition and retention systems specifically for practice owners.
Speaker A:SEO, Google business profiles, website design, reputation management, and social media that actually converts.
Speaker A:Here's what I know.
Speaker A:Practice that's leaking overhead and not growing its patient base is fighting a losing battle.
Speaker A:But when your market is dialed in and your overhead is under control, that's when you build real wealth.
Speaker A:If you want to see what class marketing can do for your practice, visit class solutions.com marketing or call us.
Speaker A:Just directly tell them you heard this on the podcast.
Speaker A:So now let's talk about your overhead numbers.
Speaker A:And so, welcome back to the Dental Business Podcast, and I'm your host, Phil Cole, CEO of Class Solutions.
Speaker A:And today, we are getting into the numbers.
Speaker A:Specifically, we're talking about dental overhead.
Speaker A:And I mean really talking about it.
Speaker A:Not just throwing out a percentage or two here and calling it a day, but actually walking through the categories.
Speaker A:What each number should look like, what it means when it's off, and what you do about it.
Speaker A:This is one of those topics that I think gets oversimplified constantly.
Speaker A:You hear people say, oh, keep your overhead at 65%, and that's the whole conversation.
Speaker A:And while that benchmark isn't wrong, it is widely incomplete, because overhead isn't just one number.
Speaker A:It's a collection of moving parts, and each one tells a different story about your practice.
Speaker A:So here's what we're going to do to uncover today.
Speaker A:First, we'll define overhead correctly, because I've seen enough P and LS to know that a lot of practice owners aren't even measuring everything the same way.
Speaker A:Then we'll walk through each major overhead category, give you the benchmarks, explain what drives those numbers up and down, and give you real, actionable things to look at in your own practice.
Speaker A:By the time we're done, you're going to have a framework you can use to evaluate your practice's financial health.
Speaker A:You can use it to evaluate your financial health, but not just for today, but every single month moving forward.
Speaker A:So let's get into it.
Speaker A:Let me start with a question I ask every practice owner I work with.
Speaker A:What is your overhead percentage?
Speaker A:And I'll tell you.
Speaker A:The range of answers is stunning.
Speaker A:Some owners give me a number confidently.
Speaker A:Some give Me Numbers.
Speaker A:That's.
Speaker A:I just, you know, it's clearly wrong.
Speaker A:And some look at me like I asked them to recite the periodic table.
Speaker A:Here's the definition.
Speaker A:Overhead is every dollar you spend to run your practice expressed as a percentage of your total collections.
Speaker A:Simple formula.
Speaker A:Total expenses divided by total collections multiplied by 100.
Speaker A:That's your overhead rate.
Speaker A:Now there's a critical distinction I want to make right here.
Speaker A:When we talk about overhead in the context of a practice valuation or a transition, which is what we do every day at class, we talk about overhead excluding the doctor's compensation, sometimes called owner adjusted overhead, or some people will call it operating overhead.
Speaker A:That's because a doctor's comp is a variable asset or expense.
Speaker A:A solo owner pays themselves 35% of collections.
Speaker A:That looks very different from a DSO associate that's only earning 25% or 30%.
Speaker A:And if you don't strip that out, you're comparing apples to tractors for our purpose Today when I give you benchmarks, I'm going to tell you which version we're talking about.
Speaker A:Total overhead or operating overhead excluding doctors compensation.
Speaker A:That distinction, it really matters.
Speaker A:Now the second piece here is what counts as a collection.
Speaker A:This should always be your net production collected, meaning actual cash in the door after adjustments, write offs and insurance discounts.
Speaker A:Not gross production, not what you build, what you collected.
Speaker A:That's your denominator.
Speaker A:Have it good.
Speaker A:So let's go category by category.
Speaker A:Now, in a dental practice, your overhead is going to fall into four major buckets.
Speaker A:Primarily I call them the big four staff, supplies, lab and facility.
Speaker A:These are four categories alone will typically represent 50%, maybe up to 60% of your collections in a well run practice.
Speaker A:Everything else, marketing equipment, office expenses, your professional fees, ces, all fall into what I call the variable or discretionary bucket, which we'll talk about later on.
Speaker A:So let's start with the biggest one, the staff, or I like to call it the team.
Speaker A:The team is typically the single largest expense in a dental practice outside of doctor compensation.
Speaker A:The benchmark range I use is 25 to 29.
Speaker A:You go to 30% of collections for total team payroll, including benefits.
Speaker A:That includes your front desk, your hygienist, your assistants, your office manager, everyone on payroll except for the doctor.
Speaker A:Now 25 to 30% is a wide range and where you fall within it depends on a few things.
Speaker A:Your specialty matters.
Speaker A:A general dentist practice with a strong hygiene department is going to look different than an oral surgery practice with a leaner team.
Speaker A:Your location matters.
Speaker A:California staffing costs are not the same as rural Tennessee.
Speaker A:And your revenue per visit matters a lot as well.
Speaker A:So here's a story that illustrates that point.
Speaker A:I worked with a general dentist a few years back who came to us because he was thinking about selling.
Speaker A:His practice was doing about 1.2 million in collections and his team overhead was sitting at 37%.
Speaker A:He had seven full time employees.
Speaker A:When I looked at his schedule, I found that two of those employees were largely redundant.
Speaker A:Their roles were evolved and overlapped as the practice grew.
Speaker A:He wasn't a bad manager.
Speaker A:He, he just hadn't had anyone sitting across from him saying your staffing model doesn't match your revenue model.
Speaker A:Once we right sized the team, if you want to put it that way, and very thoughtfully, by the way, no one got fired irresponsibly.
Speaker A:His staff overhead came down to 28% within six months.
Speaker A:Now that was over 100,000 annually.
Speaker A:Flowing back into the business changed his sales price significantly.
Speaker A:The right question isn't do I have too many people?
Speaker A:The right question is am I generating enough revenue per team member?
Speaker A:The industry benchmark is roughly $200,000 to $250,000 in collection per full time equivalent employee.
Speaker A:If you are below that, you're having a staffing efficiency issue, or maybe it's a production issue, or in some cases both.
Speaker A:Now let's look at dental supplies.
Speaker A:Supply should run at 5%, 6%, the national average.
Speaker A:But 5% you could easily run as your percent of collections.
Speaker A:This includes everything you put in a patient's mouth or use chair side, your composites, your impression materials, your anesthetics, infection control supplies, gloves, masks and so on.
Speaker A:5 to 7% sounds tight and it can be, but it's achievable.
Speaker A:And the 7% to me is just too high.
Speaker A:The practices that run high on this number almost always share one of three problems.
Speaker A:No purchasing systems, no preferred vendor agreements, or over ordering systems with multiple vendors with no accountability.
Speaker A:And I can't tell you how many practices I walk into where supplies are just flowing.
Speaker A:The assistants order when they feel like it.
Speaker A:There's no par level, there's no inventory system, no approved vendor list, and the dentist has no idea what's being spent until the accountant sends a year end report and you look and go why am I at 12%?
Speaker A:Best practice here is simple.
Speaker A:First of all, centralize the purchasing.
Speaker A:Appoint one person as a supply manager and instead of negotiating annual agreements with all kinds of different primary distributors, work on getting someone that is concerned about your budget.
Speaker A:Put your budget at 5% and keep it there and find that supply rep that is going to help you alone keep that supply cost at that 5%.
Speaker A:Because going from somebody that brings you 9% supply costs down to 5% on $1 million is a significant dollar amount.
Speaker A:We're talking around $40,000 a year back in your pocket.
Speaker A:Lab should run between 7 and 9%.
Speaker A:Some people will will put it up into the the 10% of collections through and run that through for practices with heavy restorative or cosmetic mix.
Speaker A:You know the 10 or 12% can be acceptable if the production per case is going to justify it.
Speaker A:So I don't get too caught up in that.
Speaker A:But lab is interesting because it's one of the few overhead categories that directly correlates with the type of dentistry you're doing.
Speaker A:Implant cases and full arch reconstructions, full mouth cosmetic work.
Speaker A:These have higher lab costs, but they also have higher revenue.
Speaker A:So the key ratio to watch is your lab spend as a percentage of crown and bridge production.
Speaker A:Specifically, if you're doing a lot of high value restorative work and your lab percentages evaluated, you need to ask is my fee schedule matching the case complexity?
Speaker A:The other conversation here is the in house milling.
Speaker A:So you have your CAD CAM technology, your cerec.
Speaker A:You know, you got your plan mecca or your plan mill can, those are can dramatically reduce your lab costs for single unit restorations.
Speaker A:So if you're doing high volume crowns and you're not doing same day dentistry, it's worth running the math.
Speaker A:The equipment investment is significant, there's no doubt about it.
Speaker A:But many practices recoup it within 18 to 24 months.
Speaker A:Rent and facility costs, that's your next one, should run between 5 and 8%.
Speaker A:I will go to 9% of collections.
Speaker A:So in some cases this includes base rent, triple net charges, common area maintenance, utilities and property insurance.
Speaker A:For most practices, rent is a fixed or semi fixed cost, meaning you can't change it quickly.
Speaker A:Your lease is your lease, but what changes it over time is your collections.
Speaker A:So at practice doing $800,000 a year in a space that was designed for 1.2 million is going to have elevated occupancy costs as a percentage, even if the obsolete.
Speaker A:Obsolete, sorry, rent number is reasonable.
Speaker A:Growing into your space is often the most efficient way to bring this ratio down.
Speaker A:The exception is when a practice is genuinely overpaying for space.
Speaker A:I see this sometimes in high cost urban markets or in legacy leases where rents were never renegotiated at renewal.
Speaker A:If your rent is above 8% and you're not in an extraordinary High cost market.
Speaker A:That conversation with your landlord needs to happen at your next renewal or sooner if possible, if there's a co tenancy clause or, or an early termination option.
Speaker A:All right, let's do that then and let's take a look at that.
Speaker A:Let's keep moving and save ourselves on that rent.
Speaker A:So we've covered the big four staff, supplies, lab and facility.
Speaker A:Now let's talk about the rest of the picture.
Speaker A:Because these so called smaller categories add up fast and are often where practices leave the most money on the table.
Speaker A:Let's look at marketing.
Speaker A:Market spend should sit between 3 and 6% of the collections for a healthy growing practice.
Speaker A:Less than 3% and you're probably not investing enough to sustain or grow your new patient flow.
Speaker A:More than 6% and I start asking questions about what's actually converting.
Speaker A:Here's the thing about marketing overhead that most practices owners don't fully appreciate.
Speaker A:Marketing is the 1 line item in your overhead that should make everything else smaller.
Speaker A:Every dollar you invest in marketing, if invested well, grows your collections, which shrinks every other overhead category as a percentage.
Speaker A:It's the only expense that works like that.
Speaker A:That's why I always say that cutting your marketing budget to reduce overhead is like taking an engine out of your car and saying that you're going to save on gas.
Speaker A:What matters isn't what you spend if your new patient costs, it's your new.
Speaker A:I'm sorry, it's your new patient cost, how much you pay to acquire each new patient and your return on your spend.
Speaker A:If you're spending $5,000 a month on marketing and you're generating 20 new patients a month with an average lifetime value of 3,000 per patient, that math is incredible.
Speaker A:But if you're spending $5,000 and getting four new patients and you don't know why, well, that's a whole different conversation.
Speaker A:This is exactly what our team at Class Marketing specializes in.
Speaker A:It's not just running your ads, but building a system where you know what you're spending and what you're getting for it and why.
Speaker A:I'll come back to that at the end of the episode.
Speaker A:The next one is equipment.
Speaker A:Equipment costs, including financing payments, maintenance agreements and repairs, typically run 3 to 5% of collections.
Speaker A:Now, this number varies significantly based on the age of your practice and the stage of your equipment life cycle.
Speaker A:A practice that just built out a new space and invested in a CBCT digital sensor and a CAD cam system is going to run higher here temporarily.
Speaker A:A mature practice is fully depreciated with a fully Depreciated space with other equipment might run well below 3%, which can actually be a flag that they're underinvesting in technology that would improve productivity.
Speaker A:One thing I want to flag here for practice owners who are thinking about selling equipment that's fully depreciated on your books but operationally functioning doesn't necessarily hurt your value.
Speaker A:But equipment that's old, it's failing.
Speaker A:You have the old adequate trolls and creating chair time losses.
Speaker A:Absolutely.
Speaker A:Does buyers look at this?
Speaker A:We look at it when we do our valuations and the question is always what does the buyer need to spend in year one to get this practice to be fully operational and have full operation capacity?
Speaker A:The next one is professional fees.
Speaker A:Your CPA, your attorney, your consultants should run between 1 and 3% of your collections.
Speaker A:Many practices under invest here, which is just to me shortsighted.
Speaker A:A good dental CPA who understands the entity structuring is looking at your tax strategy.
Speaker A:The practice transition is worth multiples of their fee.
Speaker A:Same with having the attorney on a call who understands dental transitions and dental transactions.
Speaker A:And we work closely with both of these at class across one, our own accounting and tax services, but also with practicing transition lawyers in our transition division.
Speaker A:The practice that gets squeezed hardest during a sale or a dispute are almost always the ones that didn't invest in professional guidance during the growing years.
Speaker A:I do not know how many times I get doctors to say I don't want to involve them.
Speaker A:I'm going to do this on my own.
Speaker A:Administrative overhead.
Speaker A:Administrative overhead.
Speaker A:You now have software subscriptions, credit card processing fees, bank fees, official supplies, and miscellaneous operating expenses.
Speaker A:This typically runs 2 to 4% of collections.
Speaker A:Software is a growing line item here.
Speaker A:Between your practice management software, your imaging software, your patient communication platform, your accounting system and your HR tools, it's starting to add up fast.
Speaker A:And now we can add AI.
Speaker A:Audit your subscriptions annually.
Speaker A:I have yet to work with a practice that didn't have at least one or two software licenses they weren't actively even using.
Speaker A:It's not life changing money, but it's a habit of financial discipline that matters here.
Speaker A:Okay, so now you have the categories and the benchmarks, but information without a system is just trivia.
Speaker A:So let me give you a practical framework for actually using these numbers in your practice.
Speaker A:What I recommend and what we walk our coaching clients through is reviewing your break even point or BEP on a quarterly basis.
Speaker A:Minimum twice a year.
Speaker A:Your BEP or your break even point is the minimum collections your practice needs to cover every dollar of your overhead before you take home a single cent.
Speaker A:Knowing that number and reviewing it every quarter as your expenses shifts keeps you oriented to what your business actually requires of you.
Speaker A:Here's why quarterly matters to me.
Speaker A:Your overhead isn't static.
Speaker A:Team costs shift when you hire or you lose a team member.
Speaker A:Supply costs drift when no one's watching the invoices, lab spend changes with your case mix.
Speaker A:And if you only look at these numbers once a year at tax time, you're always reacting to problems that were preventable.
Speaker A:A quarterly break even point review puts you ahead of it.
Speaker A:You calculate your fixed and variable costs for the quarter, set your break even target, then stack your actual collections against it.
Speaker A:When a team overhead creeps up from 27% to 31% over two quarters, well, you see it.
Speaker A:And now you can fix it.
Speaker A:When your supply spend spikes, you see it.
Speaker A:Your breakeven turns your P and L from a rear view mirror into a dashboard.
Speaker A:To calculate your break even point accurately, you need to accurately categorize benchmarks at the reference point.
Speaker A:So here's what a healthy what healthy looks like, I guess staff or your team is 25 to 30%.
Speaker A:Supply should be 5%, lab 7 to 12, 7 to 10%.
Speaker A:But if you're doing that high cosmetic dentistry, remember 12% once again is not shocking or something to be afraid of.
Speaker A:Facility 5 to 8% and remember I mentioned that that's even creeping up into the 9% would be okay.
Speaker A:Marketing 3 to 6%, equipment 3 to 5%, professional fees 1 to 3% and administrative 2 to 4%.
Speaker A:Add those up at the midpoints and you get roughly anywhere between 56 to 58% and that's your operating overhead.
Speaker A:Add doctor compensation at it, say 25, well let's say 30% and you're looking at total overhead of somewhere in between the 80 to 88% range with your compensation.
Speaker A:Which means your break even point is roughly 80 to 88% of every collected dollar just to keep the practice running the way it was running the day before.
Speaker A:That leaves you with 12 to 20% as true owner earnings before taxes and debt services.
Speaker A:That's the window you're working in.
Speaker A:And a quarterly break even point review is how you make sure that that window doesn't quietly close on you.
Speaker A:Now, 12% margin sounds thin, and for some practices it is.
Speaker A:Which is why understanding each category is so critical.
Speaker A:Because a 2 point improvement in staff or team efficiency, a 1.5 point improvement in supplies, and a better marketing ROI, that could be the difference between 12% margin and now a 20% margin and on a $1.5 million practice, let me give you what the most.
Speaker A:That's a big deal.
Speaker A:Let's just put it that way.
Speaker A:So to move forward, let me give you just the most common red flags I see when I review a practice's financials and what the response should be.
Speaker A:So your team overhead is above 32%.
Speaker A:The first question is, is production per provider underperforming?
Speaker A:Sometimes a team is sized correctly, but the schedule isn't being optimized.
Speaker A:Unscheduled treatment, late cancellations and underutilized hygiene appointments are absolute production killers.
Speaker A:Before you look at headcount, look at your appointment book and your scheduled treatment report.
Speaker A:Second question is, are there roles that have grown redundant without being recognized as a practice grows?
Speaker A:Role shift.
Speaker A:What made sense at $600,000 in collections might be overstaffed at 1.2 million.
Speaker A:Do an honest roll by roll review.
Speaker A:Here's red flag number two.
Speaker A:Supply overhead above 8%, which we see a lot.
Speaker A:Appoint a supply Manager today.
Speaker A:Pull 3 months of supply invoices and identify your top 10 line items that you spend on.
Speaker A:Now look at trying to get a primary distributor and asking them to run you your practice at a 5% budget.
Speaker A:Budget your levels here.
Speaker A:There is a difference between price, which many doctors shop for, versus the cost of doing business.
Speaker A:You, you can get the lowest price you want from your net32s and whatever, and you can think that you're doing great.
Speaker A:But if you're running your overhead percentage, your supply percentage at 9%, it doesn't really matter what the price is.
Speaker A:But if I was to come into your practice and tell you that I can run you at 5% and I'm not even gonna look at the price, I don't care.
Speaker A:Then once again, I win 5%.
Speaker A:The cost of doing business with me at running you 5% I should say, is way better than trying to sit there and find and go through 15 different vendors for the best price, but still run at 9%.
Speaker A:Red flag number three, facility overhead above 9%.
Speaker A:This one usually has basically two solutions attached to it.
Speaker A:Grow your production or renegotiate your lease.
Speaker A:If you're underutilizing your operations, adding a provider extending your hours may close the gap faster than a lease negotiation.
Speaker A:If your collections are strong and your rent is genuinely above market, document comparable lease rates in your area and bring that data to your landlord for the next renewal.
Speaker A:Red flag number four, total operating overhead above 70% excluding doctor's compensation.
Speaker A:This is a practice that needs more than just a line item conversation.
Speaker A:It needs a full practice health assessment at class Our practice health assessment is structured diagnostic where we use to evaluate a practice across every dimension that affects financial performance, fee schedules, insurance participation, provider productivity, case acceptance rate, overhead by category, staffing ratios, and the operational systems holding everything together.
Speaker A:It's not a generic checklist, it's a customized analysis built around your practice's specific numbers, your market, and where you are in your ownership journey.
Speaker A:When we're done, you don't just know what's wrong.
Speaker A:You have a prioritized action plan with a clear path forward.
Speaker A:If your overhead is above 70% and you're not sure where to start, I'm telling you the assessment is exactly where you need to begin a conversation.
Speaker A:I want to close this section with something that I think matters more than an individual benchmark or data point.
Speaker A:The practice owners who build the most wealth, I'm telling you, are the ones who sell with strong multiples.
Speaker A:They retire well.
Speaker A:They sleep at night.
Speaker A:They're the ones who run their practices like business owners and not clinicians.
Speaker A:That sounds obvious, but it is a real shift that a lot of dentists never make.
Speaker A:When you're trained in dentistry, you learn to be exceptional at the clinical side.
Speaker A:The business side was not part of your residency.
Speaker A:No one sat you down and explained overhead categories.
Speaker A:They didn't teach you production targets and what your practice is actually worth.
Speaker A:You figured it out as you went along, hopefully with good advisors around you.
Speaker A:What we're doing today and what we're trying to do every week on this podcast is closing that gap, giving you the framework to look at your practice through a financial lens.
Speaker A:Not to make you a cpa, but to make sure that you're not handing your financial destiny over to someone else because you never learned to read the numbers yourself.
Speaker A:Your overhead tells a story.
Speaker A:Learn to read it.
Speaker A:And if you want help interpreting what your numbers are telling you, whether it's a formal valuation, a coaching agreement, or just a conversation, that's exactly what we're here for at class.
Speaker A:Before you go, a quick word once again from class Marketing.
Speaker A:If today's episode got you thinking about your numbers, here's what I want you to think about next.
Speaker A:The fastest way to improve your overhead percentage is to grow your collections.
Speaker A:And the fastest way to grow your collections is to bring in more of the right patients consistently.
Speaker A:That's what class marketing does.
Speaker A:We build patient acquisition systems for dental and healthcare practices, Google business profiles, SEOs, reputation management websites, and social media that drives real appointments, not just clicks Our marketing team understands dental practices the way our transition team understands practice values from the inside.
Speaker A:If your new patient flow isn't where it needs to be, or if you're spending on marking and not sure what you're getting for it, well, reach out to us, visit classsolutions.com marketing or call our office directly.
Speaker A:We'll take a look at what you have, tell you honestly what's working and what isn't, and build a plan that makes sense for your practice and your market.
Speaker A:That's ClassSolutions.com marketing.
Speaker A:Now go look at your overhead break even point.
Speaker A:See where you're at.
Speaker A:And that's a wrap to today's episode of the Dental Business Podcast.
Speaker A:We covered a lot of ground today.
Speaker A:What overhead actually is, how to measure it correctly, all four major overhead categories and their benchmarks and the variable expenses that round out your P and L a framework for building your monthly overhead scorecard, and the red flags that signal it's time to make some changes.
Speaker A:If you got value out of this episode, well, I hope you'll do me a favor show share it with another practice owner, leave us a review or whatever platform you're listening on.
Speaker A:It genuinely helps us to reach more dentists who are trying to build great businesses and not just great practices.
Speaker A:And listen, if you want to go deeper on any of this, whether it's a practice evaluation, a coaching practice assessment, help with your accounting and tax strategy, or getting your marketing dialed in, Class Solutions is the place to start.
Speaker A:We're@classsolutions.com and you can reach us directly at the contact information on our site.
Speaker A:Next week we're going to be I'm going to be telling you a story about a practice that almost failed, but it ended up becoming a turnaround story.
Speaker A:Until then, know your numbers, protect your margins, and keep building something worth happening.
Speaker A:I'm Phil Cole, this is the Dental Business Podcast and we'll see you next time.
