Should You Increase Your Revenue, or Decrease Your Expenses?
We have previously addressed the issue that practice value is a function of profit. Increasing your profit not only provides you with more cash flow, it also increases the value of your practice. Profit is the result of subtracting your expenses from your gross revenues, so to increase your net profit you can do it by increasing your gross, decreasing your costs or a combination of the two. A combination of the two would make the most amount of sense however if you had to focus on just one, which one would it be? Above all else, your focus should be on increasing your revenue.
Expenses can be categorized as either “Fixed”, “Variable” or “Stepped”. Fixed expenses are expenses that do not change as a function of the amount of business an enterprise produces. Rent is a good example of a fixed expense. Your rent stays the same regardless of how much revenue you do or don’t generate. Variable expenses are expenses that do change in some relationship to the increase or decrease of gross production. Dental supplies are a good example of a variable expense. The more dentistry you do, the more you are going to spend on dental supplies. Stepped expenses are a combination of fixed and variable; they stay relatively constant but every once and a while they will increase to a new and higher constant. Salaries are a good example of stepped expenses. Your staff costs stay relatively the same until you need to hire an extra person which increases your salary costs but then they stay relatively stable until you once again hire more staff. If you look at the nature of your expenses, you will find that most of them are fixed and you cannot arbitrarily reduce them. You cannot call up your landlord and ask him to lower the rent because you’ve had a bad month! The same holds true for your utilities, your phone bill, your insurance and unless you fire someone, it is also true for your staff.
If we want to increase profit by reducing expenses, the most obvious place would be to cut dental supplies. Suppose your practice is grossing $1.5M and your dental supplies cost 8% which would be $120,000. How much can you really cut? If you could reduce it to 6% you would save $30,000. If you could cut it in half, you would save $60,000. That $30,000 or $60,000 would go right to the bottom line and increase your profit by 100% of the savings. Not bad. Unfortunately, dental supplies are about the only expense category that can be cut that way and have that effect on the bottom line. Dental supplies, by the way, should range between 4% and 6% of gross after lab in a general practice so if your dental supplies are 10%, you likely will have some savings to generate.
Let’s now consider the revenue side of the equation. We assumed the practice had a gross production of $1.5M. A 10% increase in production would mean an extra $150,000 of gross revenue for which there would be no additional fixed costs. That would equal about $12,500 of extra billings per month.
Split that 50/50 between dental and hygiene revenue and assume 20 working days per month, which means only an extra $325 of hygiene or dentistry per day which is an easy improvement for increasing the bottom line. Even after making an allowance for additional “Associate Fees” it is likely that 60% to 70% of that extra revenue will go right to your pocket which would equate to $90,000 to $105,000 of additional profit. In truth, a practice should grow at least 10% (or even 12%!) per year, so instead of trying to cut costs you should devote your time to increasing revenue above and beyond your average growth. If you increase the gross by 20% (and most practices could accomplish this) that would be an additional $300,000. Even if 60% to 70% remains after costs, that would be an additional $180,000 to $210,000 of cash flow or profit.
You are looking at between 3 to 6 times the increase in funds than you could get by just reducing your dental supply costs.
And since you likely could never cut your costs by more than $60,000, you could on the other hand theoretically increase your revenue without limit simply by increasing your production.
Yes, of course, you would run out of room and need more staff, etc., but wouldn’t that be a nice problem to have?
If you would like to talk to Derek about how you could go about increasing your gross profit and bottom line, please call him at 905-932-3403 or email him at email@example.com