Last updated on April 22nd, 2022
Reduce financial stress by creating a set of standardized measurements you can compare from month to month. Being a business owner brings with it great potential — for financial security and lifestyle choice — along with risks and, for many, great anxiety. One of the best ways to reduce anxiety is to develop some numerical benchmarks, aka key performance indicators (KPIs). Think of your dental practice as a medical patient. For humans, things like weight, height and heart rate are benchmarks that can be assessed quickly to understand how that patient is doing. By having a set of numbers to measure the health of your practice, you’ll know when you can relax and which areas to focus on for improvements.
Before setting KPI benchmarks for your practice, think first about your goals. Are you early career and mainly concerned about growth and sustainability? Are you mid-career and looking to maximize profits? Are you thinking about positioning the practice so that it can be sold in the next few years, either to fund your retirement or a change in lifestyle?
While a range of benchmark numbers have been put forward by dental economists and business advisors, remember that benchmarks are just a rule of thumb, not an absolute prescription that fits every case. A small dental practice in Whitefish, MT is unlikely to have the same patient count, volume and average revenue per patient as a multi-office practice in southern California. However, its overhead (rent, utilities, salaries) might be a smaller percentage of revenue. Likewise, a practice that’s heavy on patients referred for periodontal treatment will look different on paper than one focused on primary care.
Your goals should shape the benchmarks you decide to use. For example, rapidly increasing numbers of active patients and a large volume of treatment procedures booked will make a practice more attractive to potential buyers. A slower increase in new patients with a solid number in treatment contracts might be more effective in maximizing profits over the short- to mid-term.
You should already be getting a profit and loss statement from your accountant, but understanding the health of your practice requires more information. In addition to topline revenue and total expense, some of the numbers used to evaluate dental practices include:
The actual numbers for each of these categories vary from practice to practice, but this outline will give you a framework to begin a month-to-month and year-over-year comparison.
To fill in the blanks, first make sure that the data is accurate and is recorded correctly.
Define “active patient” for your practice — is it someone who comes in twice a year for cleaning and an occasional filling? Is it someone who has a treatment program in progress? Or do you have reliable, long term patients who only visit once a year?
While all of the parameters listed above are useful in evaluating the health of a dental practice, if you’re doing this analysis yourself without the help of a team of outside accountants, the time required could itself make a dent in the number of visits you’re able to complete. Just as heart rate and temperature are used to quickly check a patient’s health, limiting your analysis to just the “vitals” will give you a fast read on your practice.
New patients per month: How many new patients are you seeing per month? This should be broken out between restorative procedures and hygiene. Ideally, it should also be broken out by each doctor and each hygienist.
Active patient count: How many patients meet your definition of being active? If your your actives are declining, you’re winding down your practice — whether you intend to or not.
Average dollar amount produced per visit: Total billed revenue divided by total number of patient visits.
Annual patient value: How much annual revenue are you receiving from each patient (revenue divided by number of active patients)?
Revenue pipeline: Multiply the pre-appointments booked by the average revenue per appointment. Then add the value of payments that remain on existing treatment contracts. Dividing this by your monthly overhead will show how many months your booked business will cover your expenses.
Percentage of billed services collected: This is calculated after any adjustments for insurance have been taken. If you’re carrying a lot of uncollected revenue on your books, that’s a danger sign as you’re expending labor and supplies to do work that you’re not getting paid for. Tune up your collection process and/or require larger down payments for treatment plans.
Overhead: What’s your total cost of doing business when you account for rent, utilities, services (such as cleaning and biohazard disposal) and all of the other things that go into opening the door in the morning? For most practices, this should be around half of total revenue or less.
Officer compensation: This is the money the practice owners get to keep. A healthy practice will produce 30% to 40% profit. If overhead is half, and officer compensation is 30-40%, you can see that all other costs — staff salaries, lab fees, supplies — will need to be between 10% and 20% of revenue.
To make this even simpler, assign a “range” to each one of the numbers in your quick-read analysis. Have your assistant, bookkeeper or account then use a color (green, yellow, red) to indicate where you are for each parameter on a one-page “scorecard.” Naturally, anything orange or red needs to be investigated (why is annual revenue per patient down?). But don’t let green blocks fool you either. Beside each block have them put a +, – or NC (no change). If something is continually trending down (or up), look at the underlying numbers.
Once you have a system in place, it will give you a quick read on how healthy your practice is, so you can relax knowing you’re on the right track.
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