Why Profitability Matters

Dental Practice Profitability

It would see there has been a shift from growth to profitability in the Paragon Program. 

Ken: Not at all. We have been talking about practice success for the last 37 years. When we first started Paragon, our focus was on organizational success and analytics. For the last 20 years, we have talked about the 7% Solution – which means that a practice should grow by 7% per year, every year. When you do that, your practice will naturally double every 10 years.

It should be expected that if a practice doubled, and then doubled, and then doubled, over a 30-year period, that practice should become more profitable.

And then what happened? 

Ken: Well, some practices became more profitable and some practices didn’t.

Can you explain more?

Ken: First of all, every practice should collect 100% net to net. That means your net production and net collection numbers should be exactly the same. Since some practices didn’t bother to track the net production numbers, they never actually knew what their net collection numbers should be. At the very least, this can be problematic.

Second, as long as a practice is keeping its adjustments under control, the profits should follow. Unfortunately, some practices allowed their adjustments to get way out of control and it impacted their profitability in a huge way.

Third, dental inflation – wages, supplies, lab, etc. – have gone up by approximately 18% since The Shutdown. This had a huge impact on dental profitability if they didn’t have a corresponding increase in dental fees.

Fourth, most dentists have never really focused on their profitability.  They focused on growth and assumed the profitability would follow. It doesn’t follow unless you focus on it.

Can you help us understand what profitability means in a dental practice?

Ken: Sure, some P&L’s are actually very misleading. They define profits as anything that is leftover after all the expenses have been paid. Since the accountant says this is the profit, a lot of dentists assume it is the profit. We would argue that it is really not the profit – in a practice management sense of “profitability.”

You have to pay all the regular expenses. Theses should be the expenses that are ordinary, necessary and reasonable throughout a practice.

Then you would have to set aside the amount of money you would pay another dentist if he or she was working in the practice in place of the owner. Incidentally, if you have an S-Corp, this is neither salary nor distributions. These tend to be mathematical calculations for tax purposes.

As a management consultant, I keep reminding dentist owners that they need to know what they made as a dentist. A good friend of mine calls this “handpiece money.” Realistically, it is somewhere between 30-35% of the net production of the dentist. Then, whatever is left over is the true profits of the practice.

Recently, because there has been so much interest in the purchase of dental practices by corporate dentistry, there have been calculations of EBITDA. This stands for earnings before interest, taxes, depreciation and amortization. We just call it true profitability.

Has this been a hard concept for some dentist owners to grasp? 

Ken: Maybe. Perhaps we haven’t done a great job explaining true profitability over the years. Also, we probably didn’t do a good job of explaining

“profitability matters.”

This means your profitability will matter in the purchase of a practice. More importantly, it should matter to you as a dentist owner because you deserve to get more than just “handpiece money.”

Some dentists treat their practice as if the only money they will make is “handpiece money” with some tax benefits thrown in. The fact is that you are building equity; you are in control of your life, and most importantly, you should be building profit.

This explains the emphasis. Anything else? 

Ken: Actually, the more you understand true profitability, the more that you should be looking for the crossover point. The crossover point occurs when you actually make more money in profitability than you make from “handpiece money” from sitting at the chair.

Some dentists will have a 40-year career. They spend the first 35 years building up the practice, but then the last five years, they make more income in their practice by way of EBITDA than they made in their 35 years as a dentist.

Only when you understand the crossover point will you begin to focus on your profitability. When you do, the practice will take off. Your income will take off. Your future will take off.

Will this be a short-term emphasis in the Paragon Program?

Ken: Not hardly. We will continue to emphasize and focus on organizational success, growth and profitability.

Any other thoughts?

Ken: Go for it!