Is your dental practice profitable?

chris barrow dental business coach explains how to tell if you're happy tired or sad tired

The numbers aren’t adding up anymore: Chris Barrow discusses why dental practice owners are seeing diminishing cash flow and profitability.

Get ready for quite a few three-, four- and even six-letter acronyms.

Average daily yield (ADY) is the total gross productivity of each fee-earner in your business; how much they generate in sales revenue every day.

ADY can be made up of:

The actual or nominal value of UDAs/UOAs
The actual or nominal value of plan patient fees
The actual invoiced value of fee per item treatment delivered or sold on the day.

For the last 25+ years, I have demonstrated to my clients that, if an associate was being paid 50% after lab fees, and if their operating cost per surgery per day (OCPSPD) was at the UK benchmark of £450, then there was an minimum viable production (MVP) per day to simply achieve breakeven from the associate’s production.

That productivity was around £800 per day – can I remind you that’s to breakeven. Only above that do you, the owner, start to make any profit.

The 80/15/5 rule

Over 20 years of analysing practice accounts, I developed the 80/15/5 rule:

80% of associates were generating £800 per day or less – meaning breakeven or a loss
15% of associates were generating £800 – £1,000 per day – meaning a small profit
5% of associates were generating £1,000 plus a day – meaning a decent to healthy profit.

Hence associates often ducking for cover when they saw me arrive on the premises – although I have always held the owners responsible for not keeping count accurately and not collaborating with their associates to improve productivity (and, ultimately, everybody’s take home).

A side note – yes, we have to recalculate accurately for differing associate percentages, OCPSPD and production – in order to gain a precise analysis for each client – this article lives in a world of commonly observed generalities.

Increasing costs

How would you feel if I told you that the new MVP for the second half of 2024 is £1,500 per day – almost double from two years ago? In addition, few, if any, associates are hitting those numbers.

Over the last two years, I have watched as:

OCPSPD has climbed as the economy and inflation have heated up, as staff wages have risen and overheads have increased
In the last few months, the labs and suppliers that influence our variable costs have started to pass their increased costs on to you – their customer
Clinical labour shortages have pushed associate earnings expectations upwards
Many owners have avoided the updated analysis of which fee-earners are profitable, preferring their heads in the sand.

The challenge is that the 80/15/5 rule on production hasn’t changed, even if prices at the practice have increased.

Associates develop a cadence of production which magically eases during the busy months, accelerates during the quieter or holiday months and miraculously generates a similar pay cheque every month.

The bottom line

So, the bottom line is as follows:

Benchmark OCPSPD has risen in two years from £450 to £650 per day
Material costs have risen from a benchmark of 5% of sales (mixed practice) to 7% of sales in the same period
Lab costs are rising, although it’s too early for me to start quoting benchmarks
Prices haven’t gone up as much as they need to in the private sector (God help the NHS provider)
Associate remuneration is creeping up
Associate productivity remains the same.

Can you see the problem?

I’m still getting calls from worried owners and financial managers who are seeing cash flow and profitability diminishing.

It’s a serious problem that needs analysis and action.

You need to be sitting down with your accountant, business coach or internal financial manager and carefully conducting the analysis that I mentioned in my ‘financial crisis’ FMC webinar series earlier this year.

I was worried in Q1 of 2024, but I’m even more worried now. But I also know that the problem is solvable.

Step 1 – recognise that you have a problem
Step 2 – decide to do something about it
Step 3 – get help.

Catch up on previous Dental Business Coach columns:

Follow Dentistry.co.uk on Instagram to keep up with all the latest dental news and trends.