What if You are Colculating Your Overhead Wrong?!
(Psst...You Probably Are!)
Have you ever wondered why you hear such a wide range of overhead percentages get tossed around in conversations? Or why you just can’t ever get your overhead down to the common folklore of national benchmarks? You would think that measuring % overhead would be pretty straight forward.
Truth is, there are several methods - but each serves a different purpose.
To keep things simple and use the P&L that your QuickBooks or accountant give you, then you probably base your overhead on collections. But you find it impossible to hit those benchmarks you read about in the trade magazines and surveys. (Don’t get me started on why I think a P&L is worthless for managing your practice in the first place! I discussed that at AADOM last year. Here is a link to that presentation, ‘Dental Cash Flow For Dummies!’ http://tinyurl.com/CashFlowStreamcast.)
If you want to compare yourself to national benchmarks, surveys or other practices, I submit that you should really base overhead on production. But then, which production?!? Let me explain…
In my 40 years as a Dental CPA I always reminded clients that production creates overhead while collections pay the overhead. Here is why the distinction is important:
Suppose you have 2 practices each collecting $1M. One is FFS and produces $1M to collect $1M. The other is a PPO practice where they have to produce $1.5M to collect that same $1M. The FFS practice shows dental supplies as 6%, while the PPO practice shows 9% - and is going crazy trying to get it
FFS PPO
Production at UCR Fees $1M $1.5M
Production at Net PPO Fees $1M
COLLECTIONS $1M $1M
Dental Supplies $60,000 $90,000
% of Collections 6% 9%
% of UCR Gross Fees 6% 6%
Note:
- 6% is the historical benchmark from years ago when all practices were FFS. Back then production and collections were about the same. But this 6% figure is only valid based on UCR Gross Fees!
- Common sense says that the practice producing $1.5M at UCR fees has to use more supplies (and everything else) compared to the FFS practice!
- You can’t even compare two PPO practices because each may have a different mix of PPOs. That is why consultants and survey results now discuss broad ‘ranges’ of overhead, like ‘6-9%’ – but what good does that do? To compare apples-to-apples, you must compute overhead as a percentage of gross UCR production.
So, to keep things simple – at least for your internal use – feel free to base overhead on Collections. BUT be sure to use 9% as your budget figure and not national benchmarks, like 6%. Since DentaMetrix already knows the net PPO fees AND the true gross UCR fees, the financial flash report discussed in the link above gives you the overhead based on gross AND net!
I welcome your comments. Or come discuss further in my presentation at AADOM to ‘Unlock the Secrets in Your Numbers!’
Raymond F. “Rick” Willeford, MBA, CPA, CFP was one of the first Dental CPAs 40 years ago. But he is also an Electrical Engineer from Georgia Tech and founder of DentaMetrix, LLC, which develops dental data extraction and dashboard software. Rick has always been interested in increasing a practice’s top line revenues, and he has a unique combination of knowledge in cutting edge technologies, along with deep experience and understanding of the business side of dentistry.