Keeping records of the business transactions in order for your accountant to prepare these accounts can be a chore and the resultant accounts, for many of you, are a total mystery.
You may receive very little explanation of their meaning and how the figure represent the reward of your work, how much the business is worth, and how the earning capacity of your business compares to other practices. With a little more understanding and the assistance of a specialist dental accountant, the accounts can become a tool to understand the financial performance and recognise where improvements in your practice could be made.
There are a number of measures where Key Performance Indicators (KPI’s) can quicklyand easily highlight where the practice can become more efficient and identify development areas which, once addressed, can lead to improved profits.
The initial KPI’s will be based on the accounts and through having bench marking information on materials, laboratory fees, wages and most other expenses. These can assist in understanding how your practice is performing in comparison with other practices and identify areas which, once addressed, can lead to improved profits.
Some of the typical KPI’s to look for are:-
1. Surgery occupancy rate – chair utilisation
This KPI indicates the percentage of total time available in the surgery that each dentist has spent treating patients. It also takes into account the FTA’s, and these should be monitored for therapists and hygienists as well. Your practice software will suggest you should be aiming for 95% chair utilisation time per month. If upon analysing the data it becomes evident that this target is not being reached, further scrutiny maybe required to ascertain the reason, for example, are you over staffed, is recall systems not working effectively, encouraging the reception staff to book the diary more efficiently may reduce FTAs by confirming appointments.
Keeping up with technology is key. You may consider investing in online booking which means that patients can book their recalls online 24/7 and new patients can book registration appointment. It has a real time view of spaces which can be filled without speaking to a receptionist. This together with text messages and email reminders, can be sent to patients to fill remaining appointment slots and maximise the dental chair time. The average chair utilisation is 82%, whereas the top 5% practices is 95%. The gap of around 13% can be around £25k per chair per year.
2. Income per hour
You will have a gut feel for who earns what at your practice, however this indicator provides you with a clearer picture. Measure the total income that each dentist has earned during the month. You may also wish to calculate it for the whole practice, including plan fees, private fees, NHS income in line with the Items of Service performed during the calendar month. Subtract the laboratory bills and divide by the total number of clinical hours available to calculate the income earned per hour.
The practice software report will show how much each principal and associates are earning for the practice per hour. You may want to give associates targets and ask them to earn a minimum amount per hour, it will help if you sit down and analyse the figures with the associate. This usually is the catalyst to inspire associates to continue to work ethically and more productively. Having analysed the figures with the Associates, you may have asked them to earn a minimum of £100 per hour, £157k after a period of time their earnings will have increased from around £85 per hour, £134k per year to over £100 per hour, £120-£190k.
3. LABORATORY FEES RATIO
This ratio measures the percentage of income spent on laboratory costs and can be useful to scrutinise individual performance as well as the practice as a whole. If it is high, question if your treatment prices take these higher rates into accounts. These typically range between 7-10% of turnover, however it may be higher depending on the type of practice.
4. MATERIAL COSTS RATIO
This measures the percentage of income spent on material costs. If it is high, is the practice overstocking? Is there unnecessary waste? Do you need to implement a more robust stock management system? As with laboratory fees, material costs in the region of 7-10% of turnover would be considered typical.
5. STAFF COSTS RATIO
By measuring your monthly staffing cost against the practice, a high ratio can highlight when staff costs are higher than they could be and help you to flag potential excess staffing.
However, each practice will have its own level of staffing and the variation on practice manager salaries can impact on this ratio quite dramatically. Consequently, this can vary significantly between practices, however, staffing costs often represent 20 to 28% of income.
It is equally essential to have positive and professional support staff. A welcoming receptionist creates an excellent first impression for patients and can only enhance the reputation of the practice. It is very easy to underestimate how important these staff members are in developing a practice and strengthening your relationship with patients.
6. ASSOCIATE CONTRIBUTION
This is a very useful indicator to help practice principals fully understand what financial contribution each associate is making towards general practice overheads and profitability.This KPI measures the total income less lab fees and associate fee, less a proportion (in accordance with hours worked) of some of the higher costs. Such as staff costs, materials and premises. Dependent on size of practice, type of practice and number of associates, this percentage can be similar to the staff percentage level.
It is important to sit down with associates and give them proper guidance about how to be efficient, whilst still doing good dentistry, and they should see their production and contribution to the practice increase.
Keeping a close eye on these KPI’s will help you make informed decisions to improve your practice and most importantly your net profit.
Also, KPI’s that would be useful to have are conversion rates, fail to attend hours, take up rate of treatment plans, waiting time and marketing costs per new patients.
The accounts, KPI’s and detailed knowledge of your dental business is not only paramount to running a successful business, it allows you to be in control of where you want the business to be when you decide to either allow an associate to buy into the practice or for your eventual exit strategy. There are many factors that can influence the sale price of a practice.
The most valuable asset (not including heritable property), when selling a practice is goodwill. This is the value attributed to the income and profit stream that the practice generates. The main question raised by a potential investor is how safe and reliable is this goodwill value. Dental goodwill is normally valued in relation to other similar dental practices and the sustainable profits. The profit is the main determining factor as it is this that will be needed to fund and repay any borrowing to purchase the practice over a 10 year period or more. The valuation and price paid are not necessarily the same, as it will depend on demand from investors wanting to purchase the practice.
The profits for a dental practice is closely linked to its patient list. Although cost efficiencies and sales per patient have an impact, patient numbers are critical. Sustainability of profits has to be considered as are the retention and prospect of growing the patient base. This leads to the question about your patients and how loyal they are.
Typically, every practice is different, every dentist is different as are the patients. There is a suggestion that NHS patients are as loyal to the NHS brand as they are to the contractors. These patients are likely to continue to go to the same practice after a change in ownership because it is still NHS and few patients tend to be lost.
Goodwill in private practices is arguably less strong as some patients may leave the practice once their dentist has gone. However, there is another factor which can influence private patients and that is inertia, where people are less likely to change if positive action is required. For this reason, practices with a patient plan are likely to have a stronger goodwill than those without. The strength of goodwill will be greater as the percentage of patients on a plan increases.