The Practicon Viewpoint by Ann Page Griffin

HOW MUCH WILL BE ENOUGH?

During the years I have consulted with dental practices, many practitioners have told me that they sometimes lie awake at night wondering just how much money their practice must produce (and collect) in any given year to pay all the bills. How much is enough to compensate staff fairly, draw a salary that covers their family’s needs, service debt, and end the year with a profit?

Often, a dentist will simply guess about stretching next year’s goal, by perhaps 8% to 10% over the current year, without knowing the amount of production (collections) actually required to cover everything. So the question is: How do we calculate the annual Break Even Point (BEP) for a dental practice, the minimum amount of money needed to cover everything listed above? To begin with, we need to know the Fixed Costs, Variable Costs, and, of course, Net Collections (gross collections less refunds and write-offs).

Fixed costs (FC) include overhead (staff wages, payroll taxes, benefits, occupancy and administrative costs, taxes, insurances, C.E., etc.), the dentist’s compensation, and debt service. Variable Costs, such as laboratory fees and clinical supplies, change according to patient load. With this information, we can calculate the Percentage of Net Collections Devoted to Variable Costs (VC%), typically 8% to 12% for pediatric and orthodontic practices and 15% to 20% in general and prosthodontic practices.

Once we have this information, we can calculate the Break Even Point:

BEP = FC / (1.0 – VC%)

So, for example, if annual Fixed Costs are $725,000 and the Variable Costs Percentage is 16%:

BEP = $725,000 / (1.0 - 0.16) = $725,000 / 0.84 = $863,095

The collection goal for this practice would thus be $863,095.

The BEP calculation, based on actual numbers rather than a “guesstimate,” will allow you to divide the collection goal by the number of days to be worked to determine a figure for average daily collections. That number, in turn, allows calculation of the daily production goal based on the average collection percentage rate.

The annual budget can also be written once the BEP is determined. But remember: if the BEP is based on production rather than on collections, it must be adjusted if the collection rate for the practice is less than 100%.