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868: Metric Mondays: Understanding Overhead Percentage: The Silent Profit Killer – Dr. Barrett Straub

Something is quietly killing your profit — and it’s not what you think! In this episode of Metric Mondays, Kirk Behrendt brings back Dr. Barrett Straub, ACT’s CEO, to break down one of the most misunderstood numbers in dentistry. They explain the myths of overhead percentage, what a healthy overhead percentage looks like, and ways for you to lower it if it’s too high. To better understand where your money is going, listen to Episode 868 of The Best Practices Show!

 

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Episode Resources:

Main Takeaways:

  • Understand what it costs to run your business.
  • Healthy practices have overhead between 55% and 65%.
  • Your expenses should not grow at the rate of your revenue.
  • When your overhead is too high, that means there is less money.
  • Is your overhead too high due to overspending or a tight profit margin?
  • If you're unhappy with your overhead, don't get emotional. Get educated.

Quotes:

“I've been doing this for 30 years. Overhead is not overhead. Remember back when people were like, ‘What's your overhead?’ ‘My overhead is 62.’ ‘My overhead is 72.’ Now, you can't even use that because you have to know the story in order to be able to use that number.” (1:50—2:09) -Kirk

“As a dentist myself, overhead is emotional. We all have these stories we tell ourselves about what overhead is, what it should be, what that percentage is. We often feel bad about ourselves when this percentage is higher than what we read in a magazine article or what we heard on a podcast. So, one of the things to start to understand overhead and not have those emotional feelings is to understand why it is and what it is.” (2:13—2:39) -Dr. Straub

“Overhead percentage is the proportion of your revenue that's consumed by your operating expenses that does not include doctor or dentist compensation. Basically, we have a bunch of revenue that we brought in. What percentage of that goes away in the form of all the costs — whether that's employee salaries, printer, toner, credit card fees — all of the normal and regular business expenses that we need to run our business, not including doctor expenses? That is how we define and in the dental world how overhead is defined.” (3:08—3:53) -Dr. Straub

“Overhead is, what is the cost to run the business before a provider gets paid? So, everyone is asking, ‘Well, what should it be?’ There's no magic benchmark, but a starting point is this. You bring in revenue. And obviously, there's 100% of revenue and 60% of that goes away in overhead. If you have 60% overhead, you're in a good position. Obviously, high 50s is better. But as we creep up in the 60s, as we'll lay the case for, your profitability gets highly pressured. So, 60% overhead. Now, your remaining is 40%. Thirty percent of that is likely going to go towards provider compensation. Why? Because that's what it takes to pay dentists a competitive marketable rate. Those of you that are associates, or have associates, or are thinking about associates, think about how you pay them. We're usually talking about a percentage of collections and a percentage of production. It's got to be a higher percentage. Or a percentage of collections minus lab fees. It's roughly 30%. And there are a bunch of different ways. But roughly, doctors and providers, you should expect to pay — and if you're a single owner-doctor, think of that as your salary — 30% of revenue. Now, we want 10% left over because the owner, the entrepreneur who has risked, deserves some ROI. So, from a starting point, we have revenue, 60% goes away in overhead, 30% goes towards the doctor or doctors, and there's 10% left over for the owner/entrepreneur.” (4:41—6:15) -Dr. Straub

“If, after paying yourself a marketable competitive wage, there's not money left over, you could make the case, or others will, that you don't have a profitable business. Because if you went away and said, ‘I'm not going to practice dentistry, but I’ll still own my business, and I'm going to hire someone to do it,’ you're going to pay that person roughly 30% of collections, and there's going to be nothing left over for you as the owner.” (7:41—8:07) -Dr. Straub

“Let's think about that model of 60% overhead, 30% goes to the doctor, 10% left over. Well, what happens when your overhead creeps up to 65%? Your ROI now as an owner-doctor is 5%. What happens when it's now 72% and you're still paying yourself 30%? Now, your true profitability is actually negative. You're actually losing, from a cashflow statement, money. So, when our overhead grows as a percentage, what it means is that there's less money. There's less money to pay ourselves. There's less money to pay our associates. There's less money to take home as ROI. There's less money to invest back in our practices or less profitability. So, you're going to get to the point, some of us, that are like, ‘I want to lower my overhead percentage.’ Okay. There are two ways to do it. Now, historically, the message is always spend less. We get really emotional, and we get defensive, and we dig in, and we start getting angry with our team about we're buying too good of pens, and we should buy the cheaper printer paper, and we're going to go to a worse lab, and we're going to penny-pinch. And I'm even going to say, sometimes you need to do that. But let's first figure out if we need to and why our overhead is high.” (10:48—12:08) -Dr. Straub

“You can lower your overhead percentage two ways. One, spend less. So, let's go through that. Let's say you’ve been spending like a sailor, and we need to reign it in. Okay. You're literally going to take that P&L every month. You're going to analyze your expenses. You're going to go line by line and say, do I need that? Do I need that? What even is that? What is this line item that I don't even know what it is? You're going to go through your P&L, you're going to go through your credit card, and you're going to throw out the expenses you don't need. You could possibly negotiate better deals with your suppliers. You're going to improve your scheduling. An unknown way to improve your overhead is to do more with the eight hours you already have. So, I'm going to be there for eight hours. I'm going to pay my people X because they're going to be there eight hours. The lights are going to be on for eight hours. Can I extract more profit from those same hours, same expense? You've already spent it. So, we want to spend less. But we also want to optimize our output by our business, which is doing more profitable dentistry. So, there are ways to spend less, and it's basically to roll up your sleeves and get after it.” (12:09—13:33) -Dr. Straub

“Don't get emotional, just get knowledge. Understand that, ‘I collect $1.2 million, and my overhead dollar value of that is $600,000. I'm at 50%.’ So, literally do that simple math, and then say, ‘Okay, what makes up that 50%?’ And it's going to be higher than that. What makes up $700,000 of that $1.2 million that is going out the door? It's lab, and it's supplies, and it's team comp. Then, you look at all those items and make sure it's what you thought it was.” (15:42—16:15) -Dr. Straub

“This is the one that no one else is talking about in dentistry, and this is the one that most people actually should pay more attention to. So, if you're listening and you're like, ‘My overhead is 75%,’ your natural human instinct is to say, ‘I'm spending too much.' And you might be partially right. But I'll bet nine out of ten times the reason your overhead is high is because your profit margin is too small.” (16:21—16:47) -Dr. Straub

“This is the pearl for today's Metric Monday. If you take nothing home, this is it. Perk your ears up. Listen. Absorb this. We need to recognize that we spend our overhead to produce our gross production. All those items on our P&L — all the gloves, all the masks, all that stuff — we need to spend it so that we can produce whatever our true gross production is. But we calculate that percentage against what is collected or true revenue . . . We spend our overhead, we spend our expenses, so that we can produce our dentistry. But our overhead percentage is calculated against our revenue. So, those of you that have been following our financial gaps model, there are two gaps between what we're talking about. We have the effort gap, which is gross production minus net production. Then, we have the collections gap. Meaning, of your net production, how much of that do you collect? So, there's space between our gross production, our true, one master fee, output of our practice, and the amount of money that hits our bank account. The bigger the difference, the bigger the gap, the more space between those two numbers, I don't care how frugal you are, your overhead percentage will be high and out of whack.” (16:52—18:21) -Dr. Straub

“Let's say you don't produce any more and you collect more. I go from $1 million to $1.2 million, but I'm not producing any more. I'm collecting more. You can see your overhead percentage goes down without adding any days, without cutting any more pens, without reducing costs. It's just being smarter about your business.” (19:16—19:35) -Kirk

“There are two lines in your practice. One of them is how your expenses are going. Then, it's how your collections are going. They should never be parallel. They should be diverging. Meaning, your expenses cannot grow at the rate of your revenue. They actually have to be growing at a lower percentage point than your revenue. Those create diverging lines, which increases your profit margin, and that is when you really start to understand your overhead.” (19:41—20:10) -Kirk

“There are two quick questions that you can go ask yourself tomorrow in your dental office to determine if it's a profit margin issue. Most will find that it is. If your overhead is north of 70%, I want you to do one thing. I want you to go and look at what your overhead dollar figure is. How much have you spent either monthly, yearly, or quarterly? And you know that that's a percentage of your revenue. Now, I want you to take that same dollar figure and say, what if we collected 100% of my net production? What would that percentage be? So, let's say you're collecting only 95% of your net production. Now, you take that same spend and you divide it against that higher dollar value. You're going to watch your potential overhead go down several percentage points.” (20:14—21:06) -Dr. Straub

“If you're a PPO provider and you have lots of write-offs, I want you to say, what's my overhead spend? It's a dollar value. You're going to divide against your true gross production. In doing this with our clients, which we do all the time, I have seen 75% overheads with that calculation go down to like 44%. So, why that's important is to say, in that case, you're at a 75% overhead. You divide against your gross production. All of a sudden, that number is 45%. Is that practice spending too much? I'm going to say no. They're only spending 45% of their output. That's actually not bad. Their challenge is that their profit margin is so thin that it's going to be out of whack until they improve their profit margin. They almost can't spend less because then they can't produce. So, those are two questions to ask that will help you determine, am I spending too much, or is it a profit margin issue? That will help determine how and what strategy you use to decrease that percentage.” (21:11—22:13) -Dr. Straub

Snippets:

0:00 Introduction.

1:42 Overhead percentage, explained.

3:55 Why doctor compensation isn't included in overhead.

6:16 Why you need to worry about overhead.

8:11 Overhead expenses, simplified.

10:32 How to lower your overhead percentage: Spend less.

16:19 How to lower your overhead percentage: Increase your profit margin.

20:10 Last thoughts.

Dr. Barrett Straub Bio:

Dr. Barrett Straub practices general and sedation dentistry in Port Washington, Wisconsin. He has worked hard to develop his practice into a top-performing, fee-for-service practice that focuses on improving the lives of patients through dentistry.

A graduate of Marquette Dental School, Dr. Straub’s advanced training and CE includes work at the Spear Institute, LVI, DOCS, and as a member of the Milwaukee Study Club. He is a past member of the Wisconsin Dental Association Board of Trustees and was awarded the Marquette Dental School 2017 Young Alumnus of the Year. As a former ACT coaching client that experienced first-hand the transformation that coaching can provide, he is passionate about helping other dentists create the practice they’ve always wanted.

Dr. Straub loves to hunt, golf, and spend winter on the ice, curling. He is married to Katie, with two daughters, Abby and Elizabeth.
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