Nov 23, 2015
Profitable Practice Rule #1: Focus on Production
Written By: Nate Williams
In my last blog post I addressed this question: “Why is running a profitable dental practice is so important to a good life?” If you haven’t read the post, please check it out here.
I also promised that my next three blog posts would address the next logical question: How can I run a more profitable practice?
There are many different answers to this question – running a small business is complicated. But over the years we have learned a lot by analyzing hundreds of practices from all over the country, and by observing the doctors who run them. Additionally, the average PFG client has an Operating Profit Margin1 of almost 10% higher than the average dental practice in America. So we know we’re learning from some of the best.
So here is how:
Rule #1: Focus on Production/Collections
Two years ago I met with a doctor who had an Operating Profit Margin of 71%! I asked him, “how do you keep your expenses so low?” His answer intrigued me.
“I don’t pay any attention to my expenses, in fact I don’t know what they are until you tell me,” he said. “I just focus on treating my patients and doing good dentistry.”
This truth is actually self-evident. If you consider the cost structure of a dental practice, most of the costs are fixed, meaning you have to pay them whether you produce or not. Rent, utilities, staff costs2, property taxes, etc. These costs incur while you sleep! (That’s why dentists have a hard time going on vacation).
What’s the point? The point is that whether you produce $500,000 or $1,000,000, most of these costs won’t change. So to get to higher levels of Profit Margin (the % of what you keep, after paying overhead), you simply need to produce and collect more.
For example, let’s assume that it costs $400,000 of fixed costs to run a practice. And let’s also assume that the Variable Costs3 are 10% of collections, consider the following three practices:
In each case the fixed costs are the same, and so were the variable costs (as a % of collections). But the doctor with the highest profit margin (lowest overhead) wasn’t doing anything to lower her costs – she was just producing more.
We could also consider this on a monthly basis. The fixed costs are $33,333 per month. This means that up to the first $37,037 of monthly production (including the 10% variable costs), the doctor hasn’t made a dime! But after the fixed costs are paid, the profit margin is 90%!
Hence Rule #1 for running a profitable practice: Focus on Production (and collections, of course).
How do you focus on production? What does this look like?
The first thing to understand – don’t just gloss over this idea, get it deep into your soul – is that when you’re not producing you’re losing money!
What does this really look like? Several years ago one very profitable doctor told me his strategy for focusing on production:
“I would bring a stop watch into work with me. Every time I stopped producing I would start the watch; I wouldn’t stop the watch until I was producing again with the next patient. At the end of the day I would circle up my team and tell them ‘Today I wasted 23 minutes of lost production time. What were you doing to make it so that I was producing during that time?’”
The most profitable doctors I know get this principle. They focus on production. Doing anything else themselves is way, way too expensive. They don’t do their own accounting. They don’t pay bills (these are mostly automated). They don’t clean the office. They produce.
Some other implications to this principle:
- Don’t buy or start a second office location! Bad idea. Why? You double the fixed costs.
- If at all possible, don’t do temp or part-time work in another office. Remember, you don’t start making money until AFTER your fixed costs are paid.
(Of course there are rare exceptions to these rules.)
How have you been able to free yourself up so that you can focus on production?
Notes from above:
- Operating Profit Margin. The percentage of how much is left over after paying all overhead, not including debt service, taxes, or the doctor’s pay.
- Operating Profit = Collections – Overhead
- Operating Profit Margin = Overhead / Collections
- Employee costs are more of a “laddered” cost, meaning they’re fixed for a range of production before you have to hire another employee. For example, you might be able to make it from $0 to $400,000 of production with two employees; but to get from $400k to $500k, you’re going to have to hire another employee.
- Variable Costs (a.k.a. Direct Costs) “vary” with production, e.g. dental supplies & lab. As such, these are more commonly, and appropriately, represented as a % of production.