Are you properly managing your practice’s overhead costs? Are you noticing that you are having to work harder for the same take home pay? You are not alone. The costs of running a practice continue to increase. For most medical and dental practice owners, overhead costs play a crucial role in profitability and growth. After all, keeping costs low gives you the ability to set competitive prices (if you’re a fee for service practice), maximize your net profit margins, and improve creditworthiness when it’s time for expansion projects.
In this article, we’ll outline everything you need to know about managing your overhead costs, including common expenses you might encounter, how to lower your overhead, and a few monitoring best practices.
Common Overhead Costs
Overhead costs are expenses required to run your practice. Some of these will be fixed and some will be variable. Variable costs change with your revenue levels. For example, the supplies hygienists use for regular cleanings would be considered a variable cost, while money paid to rent your office is considered a fixed expense. Most expenses are variable in nature (the more you work, the more those expenses go up), but once you reach a certain production level, a lot of your expenses become fixed or predictable on a regular basis (i.e. utilities, salaries, supplies, administrative expenses, and insurance).
Although the overhead costs that are considered reasonable will vary by practice, there are some general rules of thumb that most practice owners follow.
Staff Wages
First, around 30% of your costs will be allocated to staff wages. This includes admin staff, nurses, hygienists, front office help, billing specialists, and office managers. However, doctor and dentist salaries are specifically excluded from this benchmark. Wages will be your largest expense, especially when factoring in benefits like health insurance and retirement matches. The SBA suggests that the average employee costs 1.25 to 1.4 times their annual salary.
Professional Costs
Then, between 10% to 15% of your revenue should be allocated to professional costs, like lab fees and supplies. Next, miscellaneous expenses, such as malpractice policies, marketing expenses, and IT costs, should fit into 10% to 15% of your revenue.
Facilities
Finally, around 7.5% of your gross revenue will be allocated to your facilities, which includes rent, utilities, property taxes, and insurance. This number can vary depending on your location. The greater visibility your practice has, the more this will increase.
Strategies for Reducing Overhead
Reducing your overhead costs gives you the ability to increase your profit margins and the overall financial health of your practice. There’s no one-size-fits-all approach when it comes to unlocking the right overhead reduction strategies. Nevertheless, here are some ways medical and dental practice owners are able to lower overhead costs:
Negotiate with Vendors
Vendor negotiation is an important component of reducing overhead costs. Negotiating contracts with your insurance carrier or supply distributor gives you the ability to lock in more favorable pricing. Maybe you are able to lower your delivery fee from $200 per month to $100 per month or find that switching insurance providers result in an upfront 20% discount. Whatever the case, lowering your overhead costs requires you to evaluate your existing contracts and find ways to save money.
Optimize Resource Use
Resource use is another area that can help you minimize your overhead. For example, you might uncover that investing in an appointment scheduling software and an outsourced customer service team eliminates the need to have three front office employees. Instead, you might only need two, saving on salaries and wages. Leveraging the right resources in your practice opens the door to new growth opportunities while minimizing your overhead.
Streamline Operations
Streamlining operations gives you the ability to remove unnecessary and inefficient processes. For example, you might elect to use virtual check-ins instead of requiring patients to check in before their appointment. This small change could result in seeing one additional patient per day, increasing your revenue without incurring more overhead.
Discontinue or Change Benefits
Another strategy for controlling costs is to regularly review your benefits. Does it make sense to pay for an employee perk program that no one uses? How about staying with the same insurance provider when they consistently increase your premiums? Reviewing your contracts allows you to uncover inefficient resource allocations to lower your overhead.
Monitoring and Controlling Costs
Each practice will have different processes and procedures for monitoring and controlling costs. For one, you might invest in a comprehensive software program that tracks expenses on your behalf. When expenses exceed your budgeted amount or pre-determined threshold, you are alerted.
Moreover, working with an accountant can also give you transparency into your overhead to make more informed decisions. Maybe your accountant discovers that one of your service offerings isn’t performing well or that you can improve your profit margins by bringing on another staff member and opening more appointment slots. Sometimes, the expertise of an accountant is the best tool for managing your overhead.
Summary
A majority of your overhead costs will be fixed and uncontrollable. This can make it difficult to lower your overhead percentage. However, with the right resources and tools, you can infuse efficiency, growth, and effective cost controls into your practice.
It’s also important to remember that you can’t cut your way to growth. Instead, grow your topline. Can you add more patient visits per day? Can you add a new service to increase revenue? Look outside of cutting expenses to find ways that benefit your practice in the long run while simultaneously implementing effective overhead management.
If you have questions about understanding and managing overhead costs in your practice, please contact us.
