Ep. 116: Demystifying Practice Profitability
There’s nothing more frustrating than working hard and producing a whole lot—only to realize there’s almost no profit left at the end of the month. So this week, Jeff tackles profitability: where dentists often go wrong in calculating their overhead/profit and what to focus on to bring that profit margin up.
Links:
Overhead Calculator Spreadsheet & Guidelines - https://mgeonline.com/overhead-materials/
MGE Communication & Sales Seminars - https://mgeonline.com/mge-communication-and-sales-seminars/
Fees & Plans Analysis - https://mgeonline.com/fees-and-plans-analysis/
Free consultation - https://www.mgeonline.com/free-practice-analysis/
Listen to full episode :
Have a question for Jeff?
Fill out the form and he will get back to you.
Questions From This Episode
Why does the standard 50 to 55 percent overhead rule of thumb quietly mislead an owner doctor about their real profitability?
That overhead figure typically covers staff, lab, and supplies, but doesn't account for what the owner doctor should actually be paid for the doctor job itself, since owner and doctor are two entirely separate roles with two entirely separate forms of compensation. An owner is paid in profit, a doctor is paid based on production, and lumping the two together makes a practice look far more profitable than it actually is.
How do you calculate a practice's true profit margin?
Figure out what it would cost to replace the owner doctor with an associate doing the same production, typically around 30 percent of that doctor's production, add that figure to the practice's existing overhead, and see what's genuinely left over. A practice that looks like it's running 45 percent profit under the simple formula can turn out to be closer to 22.5 percent once real doctor compensation is factored in.
What's a healthy profit margin to actually target, and what's the bare minimum?
Roughly 30 percent, once every job, owner, doctor, and any associates, is properly compensated at market rate. 20 percent is the realistic floor, mainly for a fully associate driven practice the owner isn't chairside for at all, anything below that signals real room for improvement.
Why can heavy clear aligner volume quietly wreck a practice's profitability even when production numbers look strong?
A clear aligner case and a crown and filling case can show up as the exact same dollar figure on the day sheet, but clear aligner lab fees run dramatically higher, sometimes 35 percent or more of the case value versus roughly 12 to 19 percent on typical crown work, so the practice ends up collecting the same revenue while keeping far less of it.
How does an underperforming hygiene department quietly inflate doctor compensation as a percentage of revenue?
If hygiene should represent roughly 30 percent of collections but is instead producing far less because marketing keeps pouring new patients toward the doctor's chair, doctor pay as a percentage of total revenue climbs even though the doctor's actual pay rate never changed, since a properly built hygiene department is what keeps that percentage down. In the episode's example, doctor pay shifts from 21 to 25 percent of total revenue depending purely on whether hygiene is properly built out.
Episode Transcript
-
Funny thing about profitability, it's one of the prime objectives every business owner is chasing, while also being one of the least understood subjects out there, especially for a small business owner running an owner operated business like a dental practice. Case in point: if I asked you right now what your average monthly profit margin actually is, would you know it off the top of your head, or would you have to go dig up a profit and loss statement? And would that P&L even account for the compensation you're paying yourself as the owner doctor, and is that compensation at a genuine market rate? Ultimately the real question is, how profitable are you? Questions like this, and a few others, are what inspired this week's episode.
This week we're going to demystify the subject of profitability, and I'm going to cover four things. First, how often profitability in a dental practice tends to get miscalculated. Second, how to determine an accurate number you can actually rely on. Third, how to tell whether your profitability genuinely needs work. And fourth, at least a bit of what to actually do about it if it does. My name is Jeff Blumberg, and I'm your host.
The best place to start is with a solid, basic definition of profit. Before I get there, a quick disclaimer: I'm not an accountant, a CPA, or a tax attorney, so nothing here constitutes accounting, tax, or legal advice, and I'd recommend having good professionals in those areas you can rely on for your specific questions. As with anything on this podcast, or really anything in life, I believe people are responsible for their own situation, so do your own due diligence to see what genuinely applies to your business.
So, what's the basic definition of profit? It's the amount of money left in a business once revenue exceeds expenditures. If I make a million dollars and spend $750,000, I have $250,000 in profit. You can apply this at the level of an individual product or service too. Say you charge $1,300 for a crown, you could drill all the way down, labor cost per hour for yourself and your assistant, materials, lab fee, fixed expenses for that hour of chair time, and land on a number, say you net $814 on that crown, that's your margin after all expenses. You could run this exercise for a single procedure or for your whole business. Either way, it tells you the profit formula has two components: income and expenses. If you're making a million and spending $750,000 and want more profit, you either need to make $1.1 million while still spending $750,000, or make a million while spending $650,000 or $700,000. It's always income versus expenses.
Here's where this gets confusing for a dentist, especially an owner operating their own private practice, and this is where I think the miscalculation really happens. Look at how overhead typically gets discussed. Someone will tell you a dental practice should run at 50 or 55 percent overhead. So if you're collecting $100,000 a month, your overhead should be $50,000 to $55,000, leaving 45 to 50 percent profit. Using 55 percent as our number, that would suggest 45 percent profit. But what that simple formula usually leaves out is what the owner doctor should actually be earning, because you genuinely have separate jobs happening here. You have the owner job, the doctor job, and the salesperson job, though I won't get into that third one in this episode. Let's stick with owner and doctor.
Each of those jobs has its own job description and its own method of compensation. The owner's compensation is profit. The owner provides planning, vision, establishes the business and its policies, and so on, and the owner's pay is profit, meaning if there's no profit, the owner doesn't get paid. The doctor's job is to treat patients, complete procedures professionally, and make people well, and a doctor is typically compensated based on production. These are two completely separate forms of pay. But if you're looking at yourself as owner slash doctor and you calculate 55 percent expenses, 45 percent profit, that 45 percent never actually accounted for paying you as the doctor. Do you see the gap? This is exactly where the whole profit conversation gets strange for a small business where the owner is also the primary producer.
Let's step outside dentistry for a second, since that sometimes helps clarify things. Say I own a large furniture store and also personally serve as its CEO, both owner and CEO. We do $5 million in sales for the year, and our total expenses, including my $400,000 CEO salary, along with furniture, labor, sales staff, and everyone else, come to $3.8 million. $5 million minus $3.8 million leaves $1.2 million in profit.
Now here's where I want you to start thinking more like a genuine business owner, not just a doctor who happens to own the office they work in. If I wanted to step back and replace myself as CEO, what would that take? I'd need to find someone capable of doing the job at the same level, and I'd likely have to pay them something comparable to what I was making, say that same $400,000 market rate. Once I've hired that replacement CEO, I'm no longer the CEO, I've stepped back into being purely the owner. So what do I get paid now? My profit, which is $1.2 million, while carrying out genuine owner functions. Before, I was compensated as the senior executive because I was actually doing that job. Now that I've replaced myself, all I earn is profit. If the business becomes unprofitable down the line, I might need to step back in and take over as CEO again, but fundamentally, the owner's pay is profit.
Now bring this back to a dental practice, still thinking like a genuine business owner, since this is exactly where things get muddled. Take that earlier example: 55 percent overhead, but that overhead never included paying you as the doctor. There's no way your own compensation is tucked inside that 55 percent, it's coming out on top of it. So your real overhead is actually higher than 55 percent. Picture an owner doctor collecting $100,000 a month, with staff salaries, lab, and other expenses totaling 55 percent, or $55,000. That leaves $45,000. Say the owner doctor is personally taking a $12,000 monthly salary. Add that $12,000 to the existing $55,000, and you're at $67,000 in total expenses, leaving $33,000 sitting in the account at month's end, the so called profit. The doctor isn't sure whether to draw some of it, all of it, or leave it, and yes, taxes are owed on it, which is entirely appropriate. But here's the real question: what is that $12,000 actually compensating the doctor for? Because there's no way you'd find an associate willing to produce $75,000 of that $100,000 total for only $12,000 a month. It simply wouldn't happen.
So let's rewind. If that doctor owner had replaced themselves specifically as the doctor, not the owner, remember, the owner's pay is profit, with an actual associate doctor, they'd likely need to pay that associate somewhere around 30 percent of their production. Let's run the real math: total collections of $100,000, base expenses, salaries, lab, and so on, of $55,000, with the doctor personally responsible for $75,000 of that $100,000 in production. Paying an associate 30 percent of that $75,000 works out to $22,500. Add that $22,500 to the existing $55,000 in expenses, and your true overhead is actually $77,500. Since profit is whatever's left after all expenses, that leaves $22,500, or 22.5 percent, as the real profit margin, meaning true overhead is actually 77.5 percent, not 55.
As the owner, you're not required to be chairside at all, and honestly, the owner role shouldn't require that. That's the doctor job specifically. The owner job isn't about being physically present nine to five doing clinical work, it's setting policy and direction, a genuinely different job description, something I could dig into further in a future episode, we actually covered an owner checklist a few weeks back, though that was built on the assumption of an owner doctor specifically. If you want to calculate profitability correctly, you have to account for the doctor expense separately, rather than blending the owner job description together with the doctor job description.
So what should that profit margin actually be if you were compensating yourself as a doctor at genuine market rate? In that example, the real margin came out to 22.5 percent. The realistic floor, and this would apply to a scenario where you've built out a practice full of associates and you're not chairside at all, just overseeing clinical quality and checking in periodically, something we're seeing more and more clients move toward, is around 20 percent. Ideally you'd want to be closer to 30 percent. In other words, total expenses out the door should be no more than 80 percent in the worst case, and ideally closer to 70 percent. If you have an associate driven practice collecting $200,000 a month, that margin should be at least 20 percent, or $40,000, ideally closer to $60,000. A 25 percent margin, $50,000 a month in that example, isn't bad either.
You can run this exact calculation for your own practice. A lot of doctors who buy a practice default into thinking of themselves as an owner worker, but instead, take the owner's viewpoint for a moment and ask, what would I actually have to pay a doctor to do what I'm currently doing? Start with a baseline of 30 percent. Look at your production, including any associates already in the practice, and calculate: if I paid everyone 30 percent of their own production, and we collect X in total, what's genuinely left over? That's your real profit. If it comes out below 20 percent, you have real work to do, and honestly, if it's below 25 percent, I'd say you have room to improve and should be aiming for that 30 percent figure, accounting for what you'd pay yourself or another doctor at genuine market rate if productivity stayed exactly where it is now. Run these numbers for your own practice and see exactly where you stand.
If you want to actually tighten up profitability, there's obviously a lot we could cover, but let's focus on a few of the bigger levers. First: monitor your expenses. The core problem most people run into with expenses is simply not knowing what a healthy number actually looks like, how much should I be spending on marketing, on rent, and so on. To help with that, we have the MGE overhead sheet, a significantly expanded version now covering nearly any expense category you could think of, along with a companion overhead percentage by expense category guide. I'll put both as downloads on the episode webpage if you'd like to compare your own numbers against them.
The other lever for lowering expenses is efficiency and productivity. If you have a hygienist with a lot of open time on the schedule, you're still paying them the same either way, whether they're producing $800 a day or $2,000 fully booked. The same logic applies to a scheduler doing a poor job with a schedule full of holes, you're likely paying them about the same as you would a scheduler who keeps the book completely full. Maximizing efficiency means you're genuinely getting your money's worth for what you're already spending, which helps lower effective expense and eliminate waste without cutting anything.
The next lever for improving profitability is increasing income, and there are three basic ways to do that in a dental practice. First: case acceptance. Say your close rate currently runs around 20 to 30 percent, and you present six crowns but the patient only agrees to two because that's all their insurance covers. If you learned to communicate the value of that treatment effectively enough that the patient genuinely wanted the full treatment, you could spend that exact same 30 minutes and walk away with all six accepted instead of two, turning a $2,400 case into a $7,200 one, with real impact on your overall revenue and productivity. I've mentioned the MGE Communication and Sales Seminars before, where we actually teach these sales skills directly, I'll link that on the episode webpage, along with our sales training for doctors on our online platform, DDS Success. If you're not sure whether you're currently underproducing, you're welcome to fill out our production calculator and talk with one of our practice management experts about what you could be doing differently, I'll link that too.
The second and third ways to increase income are fees and managed care participation, and I'll keep this simple. Chances are you're charging too little. Take a hard look at your fees, since this is exactly why they tend to drift low in the first place. Maybe you never adjusted them after buying an existing practice, or you set them appropriately when you first opened but haven't kept pace with where fees have actually moved in the years since. I've seen this constantly, a client who's been in practice twelve years with a fee structure sitting in the 30th or 40th percentile, meaning 60 to 70 percent of other doctors in their zip code charge more than they do. Your fees are very likely too low, and worth a real review to make sure they're actually tracking where they should be.
Which brings us to managed care participation. If you're heavily locked into low fee plans, you're charging too little and there's really nothing you can do about it within that plan itself, the only real fix is getting out of the plan intelligently, which we can help with. I've been saying for a while now that getting out of managed care has shifted from would be nice to genuinely necessary. Inflation ran close to 20 percent from March 2020 to March 2023, and the longer you wait, the worse this problem compounds, until eventually your prices are so far below where they should be that turning a real profit becomes nearly impossible.
So we've covered reducing expenses and increasing revenue. The third lever affecting profitability has to do with how your practice is actually structured, and I'm speaking mainly to general practitioners here. I want to focus on two specific patterns I see often. The first involves clear aligner cases. To be clear, I'm not saying don't offer them, they're great, and you should. But I've seen practices build their entire identity around clear aligners, marketing almost exclusively around them, making it the centerpiece of the whole practice.
The issue is that regardless of which company you work with, clear aligner lab fees run very high. Here's the problem: on the day sheet, four crowns and a filling totaling $5,000 look identical to a $5,000 clear aligner case, both show up as $5,000 in production, and eventually $5,000 in collections. But the real difference shows up in the details. Say I'm paying a relatively high average of $150 per unit lab fee on those crowns, so $600 total, while charging $1,200 per crown, meaning the crowns and filling together total $5,000. My lab fee on that case works out to 12.5 percent, with roughly $1,050 in margin per crown, not counting labor. Even on a PPO crown at $800 with that same $150 unit lab fee, my lab fee runs 18.75 percent, with about $650 in margin, still reasonably healthy.
Now compare that to a $5,000 clear aligner case with an $1,800 lab fee, which could run lower or higher depending on your specific provider, that's a 36 percent lab fee, leaving only $3,200 net. On the day sheet, both cases read as $5,000. The difference only shows up once the lab bill actually comes due. If a large share of your production is clear aligner based, it tends to feel great going in, similar to eating something you know you shouldn't while on a diet, satisfying in the moment, followed by regret once the bill lands. You don't want to go overboard here, absolutely keep offering them, just don't make them the centerpiece of the practice, or your overhead creeps up in a way that quietly eats into profitability.
The second structural issue involves hygiene. Whether you're running an associate driven practice paying associates 30 percent, or paying yourself 30 percent as the owner doctor, if hygiene isn't pulling its proper weight, doctor pay as a percentage of overall collections climbs higher than it should. Here's the math, and it's worth following closely. If hygiene should represent about 30 percent of your revenue, which is a reasonable target, and the doctor accounts for the remaining 70 percent, and you're paying either an associate or yourself 30 percent of doctor production, doctor compensation as a percentage of total practice revenue should only be about 21 percent.
Let's walk through it concretely. Say a practice collects $150,000 total, with the doctor producing 70 percent of that, $105,000, whether from one doctor or two, and hygiene producing the remaining 30 percent, $45,000. Doctor pay at 30 percent of that $105,000 comes to $31,500, which works out to just 21 percent of the practice's total $150,000 in collections.
Here's where it goes wrong: say doctors are producing aggressively, marketing hard and bringing in a flood of new patients, which isn't inherently bad, but hygiene gets neglected in the process. Same $150,000 practice, but now doctors are producing $125,000, or 83 percent of collections, with hygiene contributing only $25,000, or 17 percent. Doctor pay at 30 percent of that $125,000 comes to $37,500, now 25 percent of the practice's total $150,000 in collections.
So by suppressing hygiene and pushing harder and harder on doctor production alone, doctor compensation climbs as a percentage of overall revenue, and profitability shrinks correspondingly, since hygienists simply aren't compensated at the same rate as doctors. A hygienist producing $2,000 a day at $50 an hour, for instance, is earning roughly 20 to 25 percent of their own daily production, a far more favorable ratio. Since hygiene, properly fee based and without heavy managed care involvement, should carry lower material costs and lower relative compensation costs than doctor production, a properly built hygiene department, representing roughly 30 percent of monthly revenue, is genuinely one of your better levers for improving overall profitability.
I apologize for how number heavy this episode got, I'm not usually a fan of running deep into numbers on the podcast, but this was something that struck me recently watching doctors casually describe themselves as running 45 or 50 percent profitability, while quietly still thinking of themselves as the chairside doctor, since what you should be earning as the doctor was never actually part of overall practice profit in the first place. Instead, think about what would genuinely be left over if you replaced yourself entirely, that's your real profit.
Here's one more way to think about it: if what you're currently paying yourself is less than what you'd pay an associate producing the same amount, say you're collecting $100,000 a month, personally producing $70,000 of it, and paying yourself only $15,000, when you'd genuinely expect at least $20,000 based on that production, but there simply isn't extra money available to pay yourself more, that's a real signal something's off. You're probably not complaining about it loudly, since who exactly would you complain to, you're the owner, so it just becomes quiet internal frustration. But that's precisely the moment to step back and ask, why isn't my practice more profitable, and what needs to change to fix it. Profitability genuinely matters here, it speaks directly to the overall health of the business and its future potential.
Again, sorry for all the numbers this week, folks, I genuinely hope this was useful and gets you thinking a bit differently about what ownership actually means, beyond simply being the professional slash owner. Don't forget, I've got all the downloads on the episode webpage, the new overhead sheet, the new overhead guidelines, information on our online platform, the Communication and Sales Seminars, and the production calculator. That's everything I have for you this week. I really hope it helps, have a great week, and we'll see you at the next episode.