How is practice success determined? This is not an easily answered question. It is virtually impossible to point to one positive practice statistic and say, "There, that proves it—my practice is successful!"
Yet in today’s fast-paced world, everyone wants a quick fix. We are programmed to want cut-and-dried solutions and easy answers for everything. Unfortunately, there is no simple equation to measure practice success.
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A TALE OF THREE PRACTICES
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Sometimes it is tempting to view overhead as the barometer of practice success. For example, 60 percent generally is regarded as an ideal overhead percentage for a general practice. That being said, does attaining the ideal overhead ensure success? To answer this question, I will consider and compare three practice situations.
General practice A.
General practice A has an annual production of $250,000 and overhead of 60 percent. If having the ideal overhead is all that matters, this practice is successful. However, at $250,000, production can be considered decidedly below average; in 2005, a general practitioner’s gross production per practice averaged $713,520, with a median of $580,000.1 As a consequence, the financial performance of the practice is well below potential. Therefore, the dentist will work many years longer than necessary to reach financial independence. The practice’s ability to invest in staff, technology or continuing education also is limited. By all definitions, this practice is unsuccessful even though the overhead percentage may be on target.
Clearly, overhead is not the true indicator of success, yet magic numbers also are sought elsewhere. Many view production as the only figure that truly matters. High production means a great deal of revenue is coming into the practice; surely, that is a good indicator of success.
General practice B.
To address that issue, let us examine general practice B, which has an annual production of $1.1 million and an overhead of 88 percent. Although the production of this practice is extremely high, the overhead is equally high. Should this practice be defined as successful? At a cocktail party, a $1.1 million practice sounds wonderful. However, appearances can be deceiving. Although the gross revenue measurement may be impressive, the reality of everyday profit creates the same scenario for this dentist as it does for the one in general practice A. With both having an approximate net profit of $100,000, there is little difference between practices A and B at the end of the day. Both dentists are trying to figure how to make ends meet.
General practice C.
Now consider general practice C, with an annual production of $800,000 and a 68 percent overhead. Although this practice has an overhead slightly higher than recommended, the overall picture is much better than that for either practice A or practice B. It is a good bet that the dentist in practice C is substantially better off. If practice C is managed and operated properly, the dentist will have a fairly low-stress environment with substantially higher profit. The dentist in practice C likely is in a good position to build financial independence and security for the future.
The moral of the tale.
When comparing these three practices, keep in mind that the percentage of overhead is not the only factor to consider. It is only a ratio and always needs to be viewed in context. Despite the excellent overhead of 60 percent, practice A with $250,000 in production cannot be deemed as financially successful as practice C with $800,000 in production and a 68 percent overhead. The same philosophy must be applied when assessing all areas of the practice to evaluate opportunities for improvement.
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KEY PERFORMANCE INDICATORS
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We often tend to look at only one aspect of the practice’s performance indicators. Dentists need the total picture to determine the success of their practices and plan for the future effectively. It is unwise to rely on a single number or statistic. For this reason, I have been a long-time advocate of key performance indicators (KPIs) to determine the health of a dental practice.
The following KPIs are among the most crucial for dental practices:
- – production;
- – profit;
- – adjusted production;
- – collections;
- – production/collections ratio;
- – number of new patients;
- – total of accounts receivable;
- – average production per patient;
- – average production per new patient.
Only through consistent tracking of critical KPIs can the practice truly determine its situation.
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CONCLUSION
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No single number or statistic determines practice success. A practice that relies on one statistic to determine the state of the practice will not achieve an accurate assessment. In today’s increasingly competitive field of dentistry, dentists must consistently analyze and monitor practice KPIs. Dentists who are keenly aware of practice performance are able to effectively adjust strategies to meet the demands of our ever-changing economic and technological realities and achieve both professional and personal success.
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A TALE OF THREE...
KEY PERFORMANCE INDICATORS
