Ep. 53: The Top 6 Profitability Killers in a Dental Practice, Part 2
This week we wrap up our series on “profitability killers” and the top changes you can make in your practice to have the greatest impact on reducing expenses and improving profitability. This episode focuses on staffing, payroll, labs/supplies, and a few other key tips for management overhead.
Topics:
1:05 – Are your fees too low?
6:47 – Profitability Killer #4
16:14 – Profitability Killer #5
22:56 – Profitability Killer #6
Links:
Downloads for this episode - https://www.mgeonline.com/overhead-materials/
Coaching Session- https://www.mgeonline.com/overhead-and-profitability-coaching-session/
Learn more about MGE - https://www.mgeonline.com
Learn more about DDS Success - https://ddssuccess.com/
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Questions From This Episode
What three overarching factors distort every overhead category at once?
Excessive managed care participation, since a discounted procedure still costs the same to actually deliver, so heavy PPO write-offs shrink revenue without shrinking any expense. Outdated fees, since a practice that hasn't reviewed pricing in years is collecting less than it should on every single procedure. And a weak collection percentage, since accounts receivable sitting for two or three months of production starves the practice of the cash flow it needs to keep up with its own bills.
What's the actual payroll percentage benchmark, and what does it include?
Roughly 22.5 percent of revenue in the US, 20.9 percent in Canada, including employer payroll taxes, but excluding the owner doctor and any associate doctors entirely, since their compensation is tied to their own production instead. Most practices run well above this benchmark, commonly 30 to 33 percent, without realizing it.
How do you calculate what a practice actually needs to be collecting to justify its current payroll?
Divide the payroll total, excluding owner and associate doctors, by 22.5, then multiply by 100. A practice with $33,750 in monthly payroll, for example, needs $150,000 in monthly collections to keep that payroll at a healthy 22.5 percent, revealing a real shortfall if actual collections are lower.
What's the difference between misallocated personnel and genuinely underproductive personnel?
Misallocation means the practice has the right number of people but in the wrong places, three front desk staff supporting only one doctor and one assistant, for instance, leaving the back of the practice understaffed relative to demand. Underproductive personnel is a training or fit issue with a specific individual, and it's worth comparing how long it's taken to train other people in that same role before concluding someone simply isn't a fit.
Why does a high lab bill percentage often point to an underperforming hygiene department rather than a lab pricing problem?
When a highly productive doctor's schedule is packed with high end restorative work because hygiene isn't fully staffed, or bread and butter procedures are being pushed out or referred elsewhere, nearly all of the practice's revenue ends up tied to lab heavy procedures, inflating the lab bill as a percentage of collections. Properly building out hygiene and adding an associate to absorb simpler procedures grows overall collections enough that the same, or even a slightly higher, lab bill drops back into a healthy percentage range.
Episode Transcript
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This is part two of a two part series called The Six Profitability Killers in a Dental Practice. If you missed part one, feel free to pause and go back to catch up first, or if you're like me and prefer to just jump in, you can roll through this episode and go back to part one afterward without getting lost.
This series covers specific categories of expense that tend to spiral out of control the fastest in a dental practice. My name is Jeff Blumberg, and I'm your host. If you'd like to follow along as I go through these, you can download our overhead sheet on the episode webpage, along with a handout showing our recommended overhead percentage by category. We track about 20 or 21 categories on that sheet, and the accompanying percentages represent the general range we recommend each category stay within.
In last week's episode we covered the first three profitability killers: unrealized or wasted potential, loans and leases for equipment and similar items, and marketing, the expenses that tend to go out of control the fastest. This week we'll cover the final three, but first I want to make a point that applies across all of these, since it comes up repeatedly.
Say your rent is running too high, at 10 percent of revenue instead of a healthy range. There are three basic overarching factors that can throw off any of these percentages, since they're always calculated as a percentage of what you're actually collecting. First, heavy managed care participation. Say 85 percent of your practice is PPO, and you're writing off 30 to 40 percent on every procedure, a $200 procedure only nets you $120 or $130. That's going to catch up with you eventually, because it shows up directly in your revenue. Just because you're only collecting 60 percent of a procedure's normal fee doesn't mean you get to pay your hygienist less, or spend less on supplies, or use less electricity to run that operatory. Whether you collect $120 or $200 for that appointment, your actual expense stays the same. So heavy managed care participation will demolish your overhead percentages across the board. The usual instinct is to try to make it up on volume, doing three or four $800 crowns instead of two $1,400 crowns, but you're still incurring the same expense either way, aside from a modest lab fee variance, assuming you're using the same lab regardless of which plan the patient happens to be on. So if your rent should run 4 to 5 percent and you're at 10 percent, that might simply be because you're writing off 30 percent of your revenue, and recovering that write-off would bring your rent percentage right back into normal range.
The second factor is fees. I've covered this extensively in other episodes and videos. We used to recommend clients review their fees annually with a modest increase to track inflation, back when inflation ran 1.4 to 2 percent and 3 percent felt significant. Now we're seeing inflation around 8.5 to 9 percent, and it's been running that way for a while. Worth remembering, prices don't come back down once inflation cools, they simply stop rising as fast. Coffee that goes from a dollar to a dollar fifty doesn't drop back to a dollar, it just stays at a dollar fifty. So if you haven't substantially raised your fees in the last two or three years, you likely have a real problem, and it's an area people tend not to actually check, so your fees could be significantly out of range without your knowledge. We typically see new clients charging around the 30th or 40th percentile for their zip code. If you're at the 50th percentile, half the doctors in your area charge the same or less, and half charge more, meaning you'd ideally want to be closer to the 60th or 70th percentile. If you haven't reviewed your fees since 2019 or 2020, act on this quickly. Say your practice does $80,000 a month and you should be charging 10 percent more across the board, you're losing $8,000 to $9,000 a month in revenue, which then throws off every overhead category calculated against that lower collections number, including that same 4 to 5 percent rent target.
The third overarching factor is simply a poor collection percentage. This shows up less often now, but you'll still see it in practices doing a lot of insurance work with weak insurance follow-up, or without solid financial arrangements on larger treatment plans, a big case gets diagnosed, nobody's really nailed down how the patient will pay, the patient ends up on some extended payment plan, and the practice's accounts receivable balloons to two or three months worth of production. Your accounts receivable should really never exceed about a month of production, ideally a bit less. If it's running higher, that's a genuine problem, since it means you're not collecting and turning over income fast enough to keep pace with what you're actually producing, and production is what drives your bills, supplies, lab, and everything else.
So those are the three overarching factors that distort every overhead category as a percentage, since they all come down to how much revenue you're actually collecting relative to what you should be collecting. Now let's get into the final three profitability killers.
Number four: payroll. Payroll is normally one of your largest expense categories. On our overhead sheet, payroll shouldn't exceed 22.5 percent of revenue in the US, including employer payroll taxes, FICA, Social Security, and Medicare, on top of whatever the employee's paycheck itself totals. In Canada, accounting for slightly different tax structures, we landed on a more precise figure of 20.9 percent, not including employer taxes like the Canada Pension Plan. One more important qualifier: this percentage never includes the owner doctor or any associate doctors, only everyone else, office manager, hygienists, assistants, a lab tech if you have one. Doctor and associate compensation would push that number higher, but their pay is generally tied directly to their own production, so it tends to balance out over time. Having reviewed several thousand overhead sheets over my career, I can tell you this benchmark is almost always exceeded in practice, commonly landing at 30 or 33 percent instead of 22.5.
Here's a simple exercise: pull your average payroll, excluding yourself and any associates, over the last four months, a reasonably solid sample size, and compare that total against your overall revenue for the same period, including payroll taxes. If that comes out to 22.5 percent or lower, you're in good shape, lower is fine too. If it's higher, you've got a problem worth addressing.
If your payroll percentage is running high, the next step is figuring out what you should actually be collecting to justify it. Here's the formula: take your payroll figure, excluding owner and associate doctors, divide it by 22.5, then multiply that result by 100. Here's a concrete example: say Dr. Smith collects $100,000 a month, with payroll, excluding Dr. Smith and any associate, totaling $33,750, which works out to 33.75 percent. Divide $33,750 by 22.5, you get $1,500. Multiply that by 100, and you get $150,000. In other words, $33,750 in payroll represents 22.5 percent of $150,000, meaning Dr. Smith would need to be collecting $150,000 a month, an additional $50,000, to justify that payroll at a healthy percentage.
So why might a payroll percentage run this high? A handful of common reasons, along with their solutions. First, poor case acceptance, which I covered at length last week. Weak treatment acceptance suppresses revenue, but doesn't meaningfully affect payroll, if more patients start accepting full treatment plans, six crowns instead of two, payroll barely moves, maybe slightly for additional assistant time, but revenue climbs substantially, which improves the payroll percentage from the revenue side.
Second, excessive managed care, which we already covered as one of the three overarching factors. Third and fourth: paying the person rather than the position, or simply overpaying someone relative to their role. It's worth knowing what each position in your practice should reasonably be paid. The employment market over the last year and a half has been genuinely unusual, starting wages jumping from something like $13 an hour to $18 seemingly overnight, a jump that wouldn't normally happen gradually over a year or two. Resources like salary.com can offer a baseline, though I'm not fully confident they've kept pace with how fast wages have shifted recently, I've seen listings showing hygiene pay around $39 an hour in an area where I personally know hygienists are earning $45.
What tends to happen is paying the person instead of the position. Say you have a genuinely excellent receptionist who's been with you for ten or twelve years, and the pay range for that role in your area runs from $14 to $22 an hour, with $18 as the median. If that receptionist is already at the $22 ceiling and you keep giving raises simply out of loyalty, eventually they're at $25 while your dental assistant is at $42. I'm not questioning whether that staff member is great, only that a given position has a ceiling on the actual value it can add to the business. If someone at the top of their position's pay range wants to earn more, there are really two paths: an incentive plan tied to overall practice collections, or genuinely taking on more responsibility, moving into a role like a junior manager position, with someone else brought in beneath them. I'm not a fan of raises based purely on longevity, productivity and responsibility should drive pay increases. I've personally visited well over a thousand small businesses, mostly dental practices, across the US as a consultant, and I've seen situations where an assistant maxes out around $18 an hour in their market but is earning $35 purely from 25 years of tenure. That's not a criticism of that employee, it's simply that you can't indefinitely keep paying a position more than the actual work justifies unless the role itself has genuinely expanded.
The last two reasons are misallocation of personnel and underproductive personnel. Misallocation means having the right overall headcount but distributed in the wrong places. I remember a practice with three people at the front desk, a manager, a scheduler, and a financial coordinator, supporting just one doctor and one dental assistant, far more administrative staff than needed to keep that small a clinical team busy. Compare that to a practice with four doctors, six hygienists, and eight assistants, but only one front desk person and a part-time helper, nowhere near enough administrative support to keep that much clinical capacity running, and that lone front desk person is probably visibly overwhelmed. In either case, the fix is repurposing personnel to create better balance between the front and back of the practice, sometimes requiring new hires in one area and a reduction in another.
Underproductive or non-productive personnel is the last one, and I think everyone knows exactly what this means. The main mistake I see here is actually going too far in either direction, almost like a pendulum. Before understanding the importance of staff training, an owner might assume every underperforming employee is simply a bad fit and needs to go. After learning how much training matters, that same owner can swing too far the other way, insisting someone who's struggled for six straight months just hasn't been trained enough yet. You want to land somewhere in the middle. Yes, build real onboarding systems, even something as simple as a job description and a couple of training videos if that's genuinely all you have time to build right now, we offer positional training on our online platform, DDS Success, specifically to help with this, I'll link it in the description. But regardless of how thorough your onboarding is, you should still expect anyone you hire to contribute something genuinely useful without needing indefinite hand-holding. There comes a point where it simply isn't working, and only you can judge that, since you're the one actually in your practice.
Here's a useful comparison: if you've trained someone on phone handling, role played it repeatedly, and they're still hanging up on people or misrouting calls three or four weeks in, compare that against how long it's taken you to train people in that same role previously. If your last three receptionists were fully up to speed within a week or two using the same training materials, and this fourth person still isn't functional a month in, that's a real signal, maybe this particular person simply isn't the right fit for your business, not a reflection on your training materials. Especially right now, with hiring genuinely difficult, there's a real temptation to hang onto people you might not have kept a few years ago, which isn't a great way to run things long term.
If someone is underproductive, problematic, or worse, actively toxic to the rest of the staff, you'll need to make a real decision, and I'd urge genuine caution before assuming who the actual problem is. Say you have two dental assistants who get along well, and a highly productive hygienist who patients love and who generally interfaces well with the team. If that hygienist starts getting frustrated with one of the assistants because instruments aren't being sterilized properly or sterilization isn't flowing correctly, or similarly, a financial coordinator is picking up slack because the receptionist isn't handling calls well, you might notice the hygienist or financial coordinator seeming constantly irritated, while the underperforming assistant or receptionist frames it as, so-and-so is just mean to me. Who's actually the problem there? We're not at work purely to be friends, we're there to get things done, so the underperforming employee is very likely the actual source of friction, not the person visibly frustrated by having to pick up their slack. Be careful not to misidentify who the real issue is simply because one person seems more outwardly upset than the other, who might just be pleasant and smiling while still not doing their job.
Those are the main factors that tend to push payroll off as a healthy percentage. Now, our fifth profitability killer: dental supplies. On our overhead sheet, dental supplies should run between roughly 6 and 7 percent of revenue, lower is fine, but not higher. The core problem with supply spending is almost always a lack of an actual budget. Whoever's doing your ordering, often a lead assistant, has no clear budget or guidance, and when a supply rep mentions a sale on composite material, they buy a large quantity that eventually expires unused, without any real sense of what the monthly spending ceiling should actually be.
The fix is straightforward: set a real budget. Start by reviewing recent spending, assuming you're already reasonably satisfied with how ordering has gone, no stockouts, no significant waste from overstocking, and settle on a monthly figure, say $7,000. Hand that number to whoever's ordering as their actual monthly budget, with one hard rule: you can never run out of anything, no calling other offices because you're out of bibs, no running out of impression material or composite. Within that constraint, you can even let them roll unused budget forward, if they spend $6,000 one month, that extra $1,000 carries into the next month's budget, letting them eventually save up for something genuinely useful for the office, with your approval. This gives them real ownership and responsibility over that number, while giving you a clear, watchable budget and a clear point of accountability. Just build in reasonable flexibility, unexpected equipment failures, like losing a couple of handpieces unexpectedly, or a month where production jumps significantly, both justify a temporary budget increase, since the underlying supply need has genuinely gone up.
Our sixth and final profitability killer: lab bills. Lab expenses as a category have actually trended down over roughly the last decade, per-unit costs for crowns and veneers have gotten cheaper on average, though this varies enormously by which lab you use, and I know doctors who still happily pay $300 to $400 per crown with a lab they love, which is entirely their call as the clinician. Our overhead guideline lists lab expense between 8 and 10 percent, though the realistic average today often runs lower than that.
If your lab bill is running high as a percentage, that's not necessarily bad news on its own, a rising lab bill often just means you're doing more restorative work, which is generally a good thing, as long as revenue rises proportionally alongside it. If your lab bill climbs but revenue doesn't keep pace, or your lab bill is simply high relative to your average collections, there are two main explanations we see most often. First, you're a prosthodontist, doing exclusively large restorative cases with no hygiene department and no general dentistry mixed in, in which case a lab bill in the 12 to 15 percent range is completely normal, since there's no other revenue category to offset it. That applies to a very small percentage of practices.
The far more common reason, beyond heavy managed care, is that other parts of the practice are underperforming. Here's a concrete scenario: a practice collecting a little over a million dollars a year, five chairs, 3,000 active charts. The owner doctor is highly productive, doing $70,000 of the practice's $85,000 monthly total, with a part-time hygienist contributing the remaining $15,000. Lab bill runs $9,000 a month, since most of what the doctor is doing, crowns, veneers, inlays, onlays, is lab-intensive work. With that many charts and such a busy, highly productive doctor, fillings and other simpler procedures are getting pushed weeks out on the schedule or referred elsewhere entirely, since the doctor simply doesn't have time for them amid all that high-end restorative work.
But 3,000 active charts should reasonably support two to three fully booked hygienists, especially with a strong perio program or new patients routed through hygiene, and a doctor this productive alongside that much hygiene volume likely needs an associate too. Right now, the normal bread and butter dentistry that would typically balance out a practice's revenue mix simply isn't happening or is being referred out, which is why the lab bill looks disproportionately high as a percentage, nearly all the revenue is coming from that one highly productive doctor's lab-heavy procedures.
Now imagine properly building this practice out to its actual potential. Bring hygiene up to two or three hygienists doing a combined $50,000 a month, and add an associate handling simpler procedures, single crowns, fillings, and so on, at $30,000 a month. The owner doctor, previously capped by an overloaded schedule, now has more room and more patient flow feeding in through hygiene, and their own production climbs from $70,000 to roughly $90,000. Overall collections jump from $85,000 to $170,000. What happens to the lab bill? It rises somewhat, from $9,000 to roughly $12,000, driven by the owner doctor's increased production and a bit of associate work, but as a percentage of collections, it actually drops, from 10.5 percent of $85,000 down to about 7 percent of $170,000. So underperformance elsewhere in the practice, specifically in hygiene, is what was inflating that lab percentage in the first place, not the lab pricing itself.
Those are the six profitability killers I've covered across these last two episodes, the areas that tend to spiral out of control fastest, and correspondingly, the areas where real attention can produce the biggest and quickest improvement in profitability. I'd genuinely recommend reviewing each of these in your own practice, especially during periods of economic uncertainty like we're in now, where it's genuinely unclear whether we're heading into a recession, though certain sectors are clearly slowing. This is exactly the environment where it pays to make sure you're maximizing revenue and not quietly wasting money.
A couple of final thoughts. Just as we track supplies and lab as a percentage, I'd recommend doing the same with your marketing budget, and letting it scale with your growth. Say you're budgeting marketing at 7 percent of revenue while collecting $100,000 a month, that's $7,000 in marketing spend. If that marketing is working and driving growth toward $120,000, $130,000, or $140,000 a month, your marketing budget should scale up proportionally too, staying at that same 7 percent as your revenue climbs, which in turn fuels further growth. If at some point you decide to stabilize rather than keep expanding, say you've comfortably hit $200,000 a month and you're satisfied, it's fine to dial that percentage down to 5 percent instead, but keep paying attention to it either way.
Last question I get asked often: how frequently should you actually review your overhead? I'd say quarterly at minimum, though you should be reviewing your finances generally on a regular, closer to weekly, basis. A full overhead review to catch anything that's drifted out of range should happen at least once a quarter, or monthly if you've recently gone through a period of unusually rapid growth or production. I'd also recommend reviewing overhead any time you add a significant new expense, a major piece of equipment, or additional staff, factoring in how that addition is going to affect your overall overhead as part of the decision itself.
I was genuinely a little worried about how well an overhead-focused topic would translate to a podcast format, I hope this was useful, feel free to let me know in the feedback section on the episode webpage. Don't forget the downloads, our overhead sheet and the overhead percentage by category handout, both genuinely thorough and worth having on hand. If you'd like help getting this area of your practice under control, we're currently offering a free overhead and profitability coaching session, I'll link that on the episode webpage as well.
That's everything I have for you this week, folks. If you have any questions about MGE, you can visit us at mgeonline.com, or call us at (800) 640-1140. Have a great week, and I'll talk to you at the next episode.