Probably the single, most cherished benefit of owning your own dental business is ‘being the boss’ – you know, no-one telling you what to do, dictating your own schedule, holidays, days off, etc. After all, you do need something to compensate for the management responsibility, stress and paperwork mountain you endure on a daily basis!
Another key driver for business ownership is that the boss ‘calls the shots’ and gets to keep the profits. Assuming the basics of the company structure are already in place to maximise your potential tax savings, as the ‘head honcho’ it’s your choice how you wish to run your practice – what gets done, who by and at what cost. Quite simply, this is your business model.
Choosing the right business model for you and the practice needs careful consideration, and can vary depending on the stage of your dental career. In the early years of practice ownership, you are likely to have to satisfy investors (banks, family or both) with serviceability of loan repayments, but you are also likely to have the drive, ambition and energy to be clinically active during the majority of opening hours to generate maximum levels of income personally.
Later on in your career, with loans repaid and retirement on the horizon, you may feel that you have earned the right to slow down, deserve more time off to pursue leisure interests, and are happy to delegate more of the daily workload.
Covering your costs
Margaret Thatcher once said: ‘Pennies do not come from Heaven. They have to be earned here on Earth.’ If you are a single-handed practitioner, you need to generate enough income to cover fixed costs (rent, staff wages, etc) and to pay for the costs directly related to the provision of treatments (laboratory fees and materials) as well as general expenses like light, heat, cleaning, waste removal, advertising, telephone, etc… the list goes on. This is all before you can pay yourself!
Although the day to day running of this type of business may be considered by many to be less stressful due to the reduced management time involved, it can be a risky proposition for many buyers and banks due to the onus of performance relying on a single clinician. If you were able to expand into a second, or even third, surgery, increase the number of patients and treatments provided, this will have a direct positive impact on turnover. And this will mean more profit. Right? Not necessarily.
The structure of your business and the split of the workload between clinicians is a key driver to profitability, in addition to the careful management of the operational expenses incurred by just being able to open the doors to patients.
A leap of faith
Engaging the services of an associate is a leap of faith for many – will the patients like the new dentist?
If you were able to expand into a second, or even third, surgery, increase the number of patients and treatments provided, this will have a direct positive impact on turnover. And this will mean more profit. Right?
Will he/she be reliable and ‘fit in’ with the practice team? Will they add to profit or (unthinkably) actually reduce profitability?
The concept of an associate actually costing the practice money can be a relatively contentious one – particularly, and not surprisingly, for the associate. If an associate is paid around the national average of £10 per unit of dental activity (UDA) and/or sub 50% of gross (current average is 45-47%) after the contribution to laboratory fees, then surely the principal is keeping the rest as profit?
If that is your understanding of the principal/ associate profit relationship then it really is time for a reality check.
Take a moment to consider your answers to the following questions. Would your associate be able to generate an income in your practice if:
- You didn’t provide the practice premises, hadn’t bought the freehold/paid the mortgage or didn’t pay the rent. What if you forgot to pay the insurance premiums?
- You didn’t provide a surgery with working and safe equipment? Could he/she work without a chair or hand-pieces? What about the X-ray machine? Who pays for the electricity and water? What if you forgot to order and pay for materials, gloves, drugs, etc?
- You didn’t employ a receptionist to welcome patients, manage the appointment book, answer the phone? What if you didn’t pay the phone bill?
- You didn’t employ a nurse to work with the associate? Don’t forget that’s an ongoing 52-week commitment each year with Employers National Insurance contributions on top – and employees need to be paid even if the associate is sick or on holiday
- You stopped all advertising activity and took down the website – perhaps the biggest generator of new patients enquiries in this web-led world?
- You removed the decontamination room/equipment that you paid for? What about the ongoing costs of Care Quality Commission (CQC) registration and compliance? Would they clean their own surgery and part of other communal areas at the end of the day so that you didn’t need to pay a cleaner?
The list of scenarios is endless but I’m sure you get the picture. There is a cost to running a dental business, and there is a cost to you for providing the platform for an associate to generate additional income for the practice and a living for him/herself.
The burden of costs
A business owner needs to ensure that each associate’s contribution to the business profit is a positive one and a proper analysis per associate is the only way to fully understand the position.
Using an allocated costs and apportioned cost technique, this effectively clarifies the true profit (or loss) being generated by the clinician. Each cost is analysed and either ‘allocated’ to the clinician in whole (for example, a laboratory fee for a particular treatment) or is ‘apportioned’ between several clinicians (for example, a nurse who divides work time between more than one clinician throughout the week).
BUSINESS PLANNING CASE STUDY
Mixed practice with principal and two associates in the south west.
Turnover of £785k with net profit of £75k, falling year on year.
By learning how to make the right decisions and implement the necessary changes, moving to tactical pricing, repositioning the brand, monitoring marketing, changing associate remuneration, changing the people structure and streaming the cost base, this business in three years now reports a net profit of £185k from a significantly higher turnover of £900k.
‘SOBP undertakes every financial exercise that exists within your business and you begin to see patterns emerging. I very quickly learnt to stop saying “I think,” – everything has to be evidenced, just like your dentistry. ‘It wasn’t a single exercise. I can only describe our practice as “a sieve”, lots of little holes that all needed plugging. One by one we sorted out the problems and began to see the figures changing. It’s like turning an oil tanker around slowly. ’Everything made a difference: we learnt to be more efficient with stock; we learnt to improve our marketing and our reporting; we improved our appointment book utilisation; we checked our pricing was correct and profitable. We distributed the work more efficiently; we increased sundry sales and made the most of our new patients. Our company structure was even sorted too.’
I have seen many businesses where the principal’s income is actually subsidising one or more associates but, don’t despair, it can generally be turned around to everyone’s advantage.
As they say, ‘knowledge is power’ and with robust facts and figures opening up communication channels to successful and, most importantly, fair renegotiation of terms and expectations, a mutual agreement with incentives for all parties to achieve a win-win situation is entirely possible.
A business owner needs to ensure that each associate’s contribution to the business profit is a positive one
As part of our forthcoming Business Planning seminar* in association with Spot On Business Planning, we look at associate profitability in particular detail, and delve into every facet of the everyday running of a real life dental practice.
Whether you attend as an existing practice owner, or in readiness for a forthcoming purchase, we will help you to fully maximise the potential and profits of your business, exemplified by the case study above of a dental practice owner who increased profits by over 250% in just three years (most clients double their profits in three years) by implementing the tools and knowledge learned.
With profitability being intrinsic to practice valuations, ensure that your business is in the best possible condition for the new financial year ahead and is worth the maximum amount possible in readiness for your future exit strategy. It will (probably) be the best investment of your time so far this year!
Over the next few months, as well as our regular Practice Sales Intelligence feature with details of recent values achieved, we’ll be focusing on key areas for profit improvement in your business. Including shining a spotlight on practice managers. Does yours effectively ‘manage your practice’?