Ep. 180: Creating & Maintaining Profitability
In this week’s episode, Jeff goes into the key strategies for ensuring long-term financial success in a dental practice. From understanding your practice's financial health to mastering effective cost management, we break down the essential steps you need to take to boost profitability. Whether you're a new practice owner or an experienced dentist looking to optimize your operations, we cover practical tips for increasing revenue, managing overhead costs, and creating efficient systems that allow your practice to thrive.
MGE Power Program - https://www.mgeonline.com/power-program
DDS Success - https://ddssuccess.com/
Overhead Spreadsheet & Overhead Percentage by Category:
https://www.mgeonline.com/overhead-materials
Jeff Blumberg – jeffb@mgeonline.com
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Questions From This Episode
How often does Jeff recommend reviewing your overhead sheet?
At least once a quarter if expenses are staying relatively static. Review it immediately, ideally before committing, whenever you're adding a major expense like equipment or a new hire, and monthly during a genuinely inflationary stretch, especially in categories like postage or supplies that are being hit hardest.
Why does Jeff say your P&L and overhead sheet should use the same expense categories?
If one lists "subscriptions" as a category and the other doesn't track software costs the same way, comparing the two becomes genuinely confusing and unreliable. Keeping the categories identical makes it possible to directly compare what you budgeted against what you actually spent, category by category.
What process does Jeff recommend for catching financial problems early each month?
Once your P&L is current, ideally within the first few days of the following month, compare it against your overhead sheet by category, and prioritize investigating the biggest disparities first, whether a category is running noticeably over or suspiciously under its budgeted amount. He also recommends reviewing credit card statements directly, since small, easy-to-miss charges can otherwise go unnoticed for months.
What does Jeff say about catching embezzlement, and how simple is it to prevent in most cases?
He estimates that close to 99.99 percent of the embezzlement cases he's personally encountered would have been caught early if someone, ideally the office manager, had simply been reviewing day sheets regularly and confirming that collections actually matched what was landing in the bank.
Why does Jeff recommend actually looking at how much you're writing off by staying in network?
He contrasts it with the pre-PPO era, when the collection benchmark was 97 percent of production since there were no contracted write-offs, versus today, where a large write-off gap can feel normal simply because it's built into the system. He encourages doctors to confront the real dollar amount being written off each month, since seeing it clearly tends to be the push needed to start working toward getting out of network.
Episode Transcript
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The profit formula for a dental practice, or any business for that matter, is painfully simple: income, or revenue, minus expenses equals profit. If I make $100,000 and my expenses are $80,000, I've got a $20,000 profit. So if I'm trying to increase my profitability, I'd want to work on both sides of that equation simultaneously, increasing income while also cutting or at least controlling expenses so they don't climb right alongside income, otherwise there's no actual profit left over.
I've talked a lot about increasing income, marketing, case acceptance, dropping plans, and I've spent a bit of time on overhead too. It's a dry subject, but it's genuinely half the equation. And when it comes to controlling expenses, it doesn't end with doing a budget or an overhead sheet once. Some people think that's the whole job, it's like building a house, sure, the house is there, but you still have to maintain it. If you want to actually control your expenses, there's something you're supposed to do on a regular, ongoing basis.
I know some people genuinely don't enjoy this. I was talking to a business owner recently who told me, "I'm not the bean-counting guy." I was the same way once, those days are further behind me now, but I came from sales originally, I was the person who sold or delivered things, not the one managing expenses. The problem is, once you move into an executive or ownership position, if you have no knowledge of this area, or you actively avoid it, it can get you into real trouble. If you own a business, you have to know how to control your expenses, and I'm using "control" there as a verb, it's something you actively do, a basic series of steps you follow regularly, because that's the key to unlocking the other half of the profit formula. That's what I want to talk about this week. My name is Jeff Blumberg, and I'm your host.
Quick disclaimer first, I'm not an accountant or a tax attorney, and laws vary depending on where you're listening from, so it's best to have a good CPA or tax advisor on your team, and to rely on them when actually implementing anything in your practice.
So if I want to control my overhead and unlock that second half of the profit equation, where do I start? The first step, which I've covered before, is actually knowing what your overhead is. We have a genuinely thorough overhead sheet, painfully thorough, honestly, which is exactly why people tend to avoid this area, it's a lot of busy work, but it's necessary. I'll put a link to download it on the episode webpage. Figuring out your overhead shouldn't be difficult once you have the right tool, and if this is an area you struggle with, it's something we address early with MGE Power Program clients, the first executive training seminar many clients attend is the financial seminar, where we walk through exactly this. We also recently released a four-part financial management course series on our online platform, DDS Success, the first two are live as I record this, with two more in editing. The first course is called How to Accurately Determine Your Overhead, so if this is a weak spot for you, that's a good place to start, or come to the seminar if you're an MGE client and we'll walk through the whole thing together.
Once you've got your overhead figured out, the next step is seeing how you measure up, are there areas where you're spending too much or too little? This naturally varies by where you practice, and the standard overhead sheet is mainly built for general practitioners, if you're a specialist, I can offer individual guidance, feel free to email me directly at jeffb@mgeonline.com, I'll put a link on the episode webpage. For GPs, we also have an overhead percentage benchmark by category, basically, what percentage of revenue each expense category should represent. So if you're collecting $100,000 and rent shouldn't exceed 4 percent of that, you shouldn't be spending more than $4,000 on rent. Once you've built your overhead sheet, compare it against these benchmarks and look for anything wildly out of line. One thing worth keeping in mind if you're a newer doctor, meaning you recently bought your practice, you're naturally going to be carrying more debt than a more established doctor. Don't worry about that specifically, debt is a variable that resolves itself over time.
Assuming you've got both the overhead sheet and the percentage-by-category benchmarks, how often should you actually revisit this? It depends. If your expenses are staying relatively static, no major new equipment, loans, leases, or new hires, I'd review it at least once a quarter. If you're adding a major expense, review it right at that moment, ideally before you add the expense, not after you've already committed to something you're not sure you can actually afford. If you're in an inflationary environment, and compounded over the last four-plus years, official government figures put that at over 23 percent, and honestly, based on what I've personally observed since 2020, I suspect the real number runs a bit higher, you'll want to review your overhead more frequently than quarterly, especially in categories where inflation is hitting you hardest. Postage is a good example, it went from somewhere in the mid-40-cent range before 2020 to over 70 cents now. If you're sending out even a thousand pieces of mail a month, that's a real, meaningful swing to your bottom line. So those are the three triggers I'd use: quarterly if things are stable, immediately when adding a major expense, and monthly if you're in a genuinely inflationary stretch.
One more thing on the overhead sheet itself: make sure you're including quarterly, semi-annual, and annual bills on your monthly overhead too, things like malpractice insurance or property tax that don't come due every month. If you have a $12,000 annual tax bill, represent that as $1,000 a month on your overhead sheet, so you're actually setting that money aside and have it ready when the bill comes due, rather than scrambling or drawing your account down too far at the last minute.
So, assuming you've got a solid overhead sheet, your work isn't done yet, you actually have to manage your finances against it on an ongoing basis. For that, you need two things: a regular profit and loss statement, and awareness of those quarterly, semi-annual, and annual expenses I just mentioned.
Let's start with the P&L. I do a fair amount of lecturing, and whenever I say "P&L," I'll see a third of the room's eyes glaze over, it's just not something people want to deal with. But it's genuinely not complicated to read. A P&L shows your gross revenue, what you actually collected, with any refunds subtracted, sometimes a "cost of goods" or "cost of services" line where lab and supply costs might live depending on how your accountant has things categorized, and then every expense broken out by category, dental supplies, lab fees, rent, and so on. At the bottom, you get a single number, your net profit. If I collected $100,000 and my expenses totaled $80,000, that bottom number reads $20,000.
What throws people off sometimes is depreciation. Depending on how your accountant has things set up, a major equipment purchase gets depreciated, written off for tax purposes, over a set period, maybe a year, maybe longer, and something like acquired goodwill from a practice purchase might depreciate on a different schedule entirely. Depreciation is really just a tax write-off mechanism, if I spent $100,000 on equipment last year and I'm depreciating it over two years, I counted $50,000 as a deduction last year and I'm counting another $50,000 this year, even though I didn't actually spend any new money this year, it already went out the door last year. It shows up as an expense on this year's P&L, but it's not real cash leaving your account right now. Worth understanding, but don't get too hung up on it, your accountant is generally only touching depreciation once a year. On a month-to-month basis, your P&L should mostly just reflect what came in, what went out, and what was left over.
Here's a practical example of why those semi-annual and annual bills matter. Say I'm normally collecting $150,000 a month and spending $100,000, netting $50,000. Then one month my $12,000 annual tax bill comes due. I still collected $150,000, but now I spent $112,000, so my net reads $38,000 instead of $50,000. If I didn't know that bill was coming, I might panic, "my profit just dropped." It didn't, really, I'd been setting that $12,000 aside all year specifically to cover it, this is just the month it showed up on paper. Being aware of these timing quirks keeps you from chasing your tail over something that isn't actually a problem.
So what do I actually do with my P&L once I have it? First, ideally, I'd want my P&L categorized the same way as my overhead sheet. If my overhead sheet has a line for subscriptions, software, HR services, whatever recurring monthly tools I use, I'd want my P&L using that same category label, so the two actually line up when I compare them. A lot of business tools have shifted to subscription, or software-as-a-service, models over the years, think of how Microsoft Office used to be a one-time purchase on a CD, and now it's an annual subscription, if the categories on your overhead sheet and your P&L don't match, the comparison becomes genuinely confusing.
Now, the part that really matters: when are you actually getting your P&L, and can you pull one in something close to real time? Going back to how this traditionally worked for professionals, doctors, lawyers, and so on, you'd send your checkbook to your accountant at the end of the month, everything was analog, and you'd get a P&L back in the mail around the 15th or 16th of the following month, along with a reconciliation report telling you how to adjust your checkbook balance. That approach isn't wrong exactly, and plenty of people still operate that way, but I'd personally recommend a more active approach, especially since the technology now exists to make that easy.
To get your P&L in something close to real time, you need accounting software where information is entered consistently, QuickBooks, FreshBooks, Sage, Zoho, there are plenty of options, with QuickBooks being one of the most widely used, ideally the cloud version, with your accountant given their own login. Whether you're entering the data yourself, which you may not have time for, or you've hired a bookkeeper, in-house or someone who comes in weekly, keeping your books genuinely current means you can pull an accurate P&L with little to no delay. If I want to see how June went, I'd want to be sitting down with that P&L by the third, fourth, or fifth of July, not the fourth itself if you're in the US, that's a holiday, but right around there.
At that point, I'm comparing my P&L against my overhead sheet, category by category. Take lab expenses, I'll look at what I've allocated on my overhead sheet and compare it to what I actually spent that month according to the P&L. Lab is a variable expense tied to production, so if production climbed, I'd expect lab costs to climb proportionally too, but assuming production stayed roughly steady, I want to see whether my actual lab spend is reasonably close to what I budgeted. I'm looking for categories that are noticeably over or under where they should be, and I'd prioritize investigating the biggest disparities first. If my marketing budget is $5,000 a month and my actual marketing spend for June was only $2,000, that's a real problem too, even though it looks like I'm "saving money," since it might mean a planned campaign never actually ran, or whoever's managing my ad account simply didn't do the work I was paying for. If I budgeted $6,000 to $7,000 for supplies and the actual bill came in at $16,000, that's the one I'm jumping on first, pulling the actual invoices, finding out exactly what happened. Catching this kind of thing early means you're stopping a potential financial leak in its first month, before it quietly repeats for six months and the damage really adds up.
Next, I'd go through the practice's credit card statements directly. You might wonder why, since credit card activity technically shows up on the P&L too, but when I'm comparing the P&L to the overhead sheet, I'm looking at broad categories, I'm not drilling into line items unless something already looks off. It's genuinely easy for an unnecessary charge to get buried in a credit card statement and go unnoticed for months. Reviewing it directly, on a regular basis, catches that kind of thing before it becomes a pattern.
How long should all of this actually take? If you're doing it monthly and everything's tracking reasonably well, maybe an hour, often less. If you do find a major category that's genuinely out of line, say payroll suddenly runs one and a half times normal because of unplanned overtime, you can't undo what's already been paid, but you can make sure it doesn't happen again the following month.
Once you've reviewed the categories and checked the credit card statements, there's still that bottom-line profit number to think about. I'd want to confirm that number genuinely represents real cash sitting in my accounts, since in certain cases, part of what you pay toward loan principal can technically count as profit for tax purposes, that's a conversation for your accountant, not something I'll get into here. But since that bottom-line number is technically profit, I'll eventually owe taxes on it whether I actually take the money out of the business or not. So I'd ask my accountant roughly how much I'll owe on that figure, say the P&L shows $30,000 in profit and my accountant estimates I'll owe around $10,000 in taxes on it, I'd set that $10,000 aside in a separate tax account right away, so it's genuinely there when quarterly taxes come due, rather than discovering I've already spent it. That also tells me, honestly, whether there's real profit available to disburse to myself at that point, once taxes are properly set aside.
That's roughly 90 percent of what most people never actually do, and just doing that much gives you a real sense of control over your own profitability, rather than feeling like you have no idea what's actually happening in your practice.
There's one more area worth some oversight, beyond expenses: the income side itself, since it's possible to be losing money even while you're bringing more of it in. Take the worst case scenario, embezzlement. In my experience, the overwhelming majority of embezzlement cases I've encountered in my career, I'd put it close to 99.99 percent, would have been caught early if someone was simply reviewing day sheets regularly. You'd see something like "Mr. Jones paid us $6,000, why does the day sheet only show $5,500 with a $500 courtesy discount?" and start asking questions. Your day sheets should be reviewed, ideally by your office manager, weekly if you'd like, or by you directly, confirming that what you're actually collecting eventually matches what's landing in the bank.
If you're running a larger practice with treatment coordinators operating somewhat independently under an office manager, I'd also periodically review treatment plan sales specifically. This isn't a knock on treatment coordinators generally, but say someone's having a rough day and sitting across from a patient with a $19,000 treatment plan, and offers, "if you pay today, I'll knock another $4,000 off." They walk out of that room looking like a hero for closing a $15,000 case on the spot, but the practice just lost $4,000 it didn't need to give up, and that's worth catching and correcting, the same way embezzlement is, since in both cases, you're actually losing income in the process of generating it.
Which leads to one more thing worth genuinely confronting, even though it's really a topic for its own episode: how much you're actually writing off your full fees by staying in network. It tends to be a real shock the first time you look closely. Years back, before managed care really took hold in dentistry, in-network fee schedules weren't typically entered directly into practice software the way they are now, software just wasn't built for it yet. So you'd bill your full fee, say $500 for a crown back in the early nineties, genuine money at the time, and if the insurance plan only allowed $400, your explanation of benefits would come back showing the $100 difference as a write-off, which someone would then manually post. Over time, if you were in-network, you'd watch that write-off total accumulate, and honestly, I think that visibility was a good thing, it showed you in real time exactly how much you were giving away. I remember sitting down with newer clients back then who were in network, producing $150,000 and only collecting $100,000, a genuinely large, visible gap.
Go back even further, before PPOs existed, when it was just standard indemnity insurance, and the benchmark collection rate in dentistry was 97 percent. If you produced $100,000, you were expected to collect $97,000, since insurance simply paid whatever it paid, no contracted write-offs involved. If a doctor back then were producing $150,000 and only collecting $110,000, that would have been a massive red flag, something's wrong, claims aren't being filed properly, copays aren't being collected, something's genuinely off. With the arrival of PPOs, that same $150,000-to-$110,000 gap became normal, just contracted write-offs, but at least it was visible, right there on the books, which is exactly why I'd encourage you to actually look at it. If you discover you're writing off $40,000 a month in treatment, that's worth confronting directly, and it's exactly why I'd recommend working your way out of network, done thoughtfully and strategically, not all at once.
So those are the basics: perform real oversight on both your expenses and your income as it comes in. If you genuinely know and control what you're spending, keep investing in good staff and good marketing, and train the team you have, which, shameless plug, is exactly what we help clients do here at MGE, your income should climb, and if you're controlling your expenses alongside that, your actual profitability follows right along with it.
That's about all I have for you this week. Don't forget the links I mentioned, both overhead forms, the overhead sheet itself and the percentage-by-category benchmarks, along with links to DDS Success and the MGE Power Program if you'd like to learn more. I know this isn't the most thrilling subject, but understanding and actually applying this is genuinely the gauntlet you have to run to reach real profitability, which is something most of us are after, a bit like sitting through a mediocre movie to get to the part you actually came for.
I hope this helps. If you have questions, I'll put my email on the episode webpage, it's jeffb@mgeonline.com. You can also find us online at mgeonline.com or call us at (800) 640-1140. Folks, have a great week, and we'll see you at the next episode.