Spring 2005 Table of Contents
     
Best Practices: Practitioners Plus
Business Practices Equal Profitability
 
The Power of Profitability By Roger P. Levin, DDS, MBA, CEO and Founder, Levin Group

This is the second in a series of articles by Dr. Levin that will appear in Global Health Nexus.

Dental schools do an excellent job of teaching the clinical skills necessary to practice dentistry, but those skills alone will not guarantee a successful practice. Dentistry is both a profession and a business. A dentist can have top-notch clinical skills but run a less-than-stellar practice due to lack of business systems training. According to Levin Group research, most practices stand to lose $6 million to $9 million in revenue over a span of 20 years if data-driven business systems are not implemented.

Successful dentists realize that combining clinical skills with practice management knowledge is the best way to run a high-performance dental practice. Patients usually do not judge a practice by the dentist's technical skills; rather, they look at the practice through the prism of other systems, such as customer service and scheduling.

But too many dentists believe that clinical excellence is the only skill required to manage a thriving dental practice. As a result, they ignore the business side of their practices. Without documented business systems in place, however, even the most clinically skilled dentist will find it almost impossible to run a low-stress, high-profit practice.

The Goal of the Dental Business
Achieving maximum profitability without sacrificing quality patient care should be the business goal of every dental practice. Indeed, maximizing profitability is critical to achieving excellence throughout the practice. Practices cannot maximize profitability by providing poor customer service or by exclusively performing single-tooth dentistry. Nor can practices achieve acceptable profitability without closing a certain percentage of cases or having a sufficient number of new patients to provide many of those new cases.

Systems and Profit
Nevertheless, an alarming number of dental practices operate without systems to secure daily production and collection goals. This makes controlling financial performance nearly impossible. When a practice achieves a high level of profitability, it is a result of other systems operating at or near maximum efficiency.

Inefficient systems often create a vicious cycle in regard to profit. In an attempt to resolve or work around bottlenecks, the dentist spends more time on administrative matters and less time chairside with patients. The dentist's operatory time is the main driver of practice production and profitability. When that chairside time is negatively affected, profit decreases -- sometimes quite steeply. This can affect long-term investment in the practice.

The point is that without a strong focus on systems, the doctor cannot evaluate what is contributing to the practice's overall success and what is detracting from it. While a dentist may be able to live comfortably, even though a practice has widespread inefficiencies, that is no substitute for being able to save enough to achieve financial independence at a reasonable age, especially compared to colleagues who have implemented the necessary data-driven systems.

Profit is the other critical factor for dental practices and should be a daily priority. A proper focus on profit can lead to:

  • excellent business planning,
  • the design of outstanding business systems,
  • a well-compensated and highly satisfied staff that is salaried within budgeted percentages,
  • sufficient retirement savings for the future along with a comfortable lifestyle now, and
  • overhead that is at the optimal level.
Understanding the role of profit in a dental practice allows the doctor to capitalize on the business potential of the practice.

Numbers Matter
The only way to measure profit is by the numbers. While the Levin Group Method™ has guidelines for small and large practices alike, each practice is unique and has to be evaluated individually. A critical tool for understanding and managing profitability is Key Performance Indicators or KPIs. KPIs are those core variables that drive practice performance. Examples of the most critical KPIs include:

  • production,
  • collections,
  • overhead,
  • number of new patients,
  • average production per new patient,
  • average production per patient,
  • no-show and cancellation percentages,
  • net profit.
Every practice has about 12-15 KPIs that determine success. Each of these indicators is clearly related to the others and should be evaluated within statistical boundaries. By examining KPIs on a regular basis, practices can register immediately whether or not they are experiencing problems reaching their goals.

For example, when a practice that averages 30 new patients a month suffers a drop to 18 new patients, it will more than likely have a lower production and profit over the next months. Unless the production or services rendered per patient is significantly higher among the 18 new patients, a one-month shortfall can significantly affect the practice's bottom line for the entire year if it is not accounted for elsewhere.

The Status of the Practice
KPIs should be easy to establish, fast to review, and evaluated daily or, at the very least, weekly.

KPIs allow a dentist to understand what has happened in the practice that day, week, month, or year. They allow a dentist to predict whether or not a practice will be able to achieve its goals, including profit, on an annual basis.

Using KPIs, dentists can ask questions and create solutions for the business side of the practice due to a greater understanding of what is happening in their practice on a regular basis. Without this type of regular numerical and statistical evaluation, it is all but impossible to understand practice performance. When KPIs are not being met, the dentist should make adjustments as early as possible to get the practice back on track to achieving its goals. Establishing profit targets and measuring KPIs regularly are the best ways to focus on the business side of the practice. Documented business systems allow practices to measure performance.

In today's economic environment, dentists know that their practices -- even previously high performing practices -- are no longer guaranteed success. Although they may still be providing a modest income, a large number of practices are finding themselves flattening out or even declining.

By maintaining a constant analysis of the KPIs, practices can remain keenly aware of their financial performance and be nimble enough to change when economic and technological trends deem it necessary.

Goal Setting
Goal setting is one of the most basic business tenets and yet one of the least understood. By setting specific, measurable, realistic, and time-specific goals, proper systems can be put in place that will allow practices and dental team members to do far more than simply get through each day. When the dental team has targets and goals for different practice areas, it engenders a performance-driven culture. Of course, the dentist must communicate goals clearly and provide training opportunities to the team.

Making practices complex from a business standpoint can be detrimental and overwhelming for the dentist and the dental team. Despite all of the business theory available, the basics still work best.

When running the day-to-day dental practice becomes too complicated, the dentist and team reach a plateau or ceiling of performance that is often difficult to break through.

In dental practices, team members are specialized in clinical or administrative duties. Because staff members are kept very busy contributing to the day-to-day operation of the practice and the delivery of top-quality patient care, the dentist does not have a full-time designated management team to implement his or her ideas, That is why getting everyone on the same page with clear goals is so critical.

Achieving Financial Independence
Many dentists are living reasonably well today but do not understand that retirement can be a very expensive activity. After all, when dentists retire, they do not want to live a diminished lifestyle devoid of comfort and travel, nor are they going to sell their home in order to increase their income, even though it may be an integral part of a net worth statement. The larger the practice profitability, the more a dentist can funnel into retirement savings and take advantage of compound interest at an earlier age.

The more a dentist has to invest early in his or her career, the faster he or she will achieve financial independence with the benefit of compound interest.

Levin Group has many clients who are in a financially independent position between the ages of 45 and 55. The key for most of these individuals was the ability to increase practice profitability early in their careers and to adhere to a disciplined financial and investment plan.

Summary
Profit is no longer about merely accumulating wealth -- it is about designing practice systems properly in order to realistically achieve the profitability goal. The benefit to dentists is not only an extremely well-run practice, but also the ability to reinvest in the practice and achieve financial independence at a reasonable age.