Few would argue with the contention that 2008 was a difficult year. Falling property and equity prices coupled with rising costs resulted in a sustained deterioration of our personal net worth as each month passed.
Global market uncertainty, the restriction on credit facilities and a palpable fear of redundancy across all sectors of the economy have resulted in a collective tightening of purse strings and a decline in consumer spending. Change has been rapid.
Now, more than ever before, a more discerning spending public is aware that cash is king. Consumer spending patterns have altered dramatically and value for money is again the order of the day. Lower fee income and increasing costs impact directly on bottom line profitability.
So what is the implication for dental practices? The answer to this question is surprisingly straightforward. Practice profitability depends upon income exceeding costs.
The armchair financier might suggest that the answer for practitioners is simply to charge higher fees. Notwithstanding that there may be some merit to this suggestion, for practices earning the majority of their income from PRSI and GMS patients this will not be possible. Indeed, in the current climate, even for private practices, local competition may preclude the adoption of this approach, unless one is confident that higher fees will be sustained by a public who can distinguish between, and appreciate, a differentiation in levels of patient care and service, and who ultimately are willing to pay a premium for it.
Where increasing fees is not an option, cost reductions offer the only viable alternative. A thorough review of practice costs and allocation of these costs as between those that are variable and fixed is recommended.
Variable costs are those costs that change by reference to the number of patients seen and extend to:
• Dental materials and consumables
• Laboratory fees
• Wages (where paid hourly)
• Office expenses (phone call charges, office stationery, etc).
Fixed costs, on the other hand, do not change depending upon the number of patients seen. Indeed, the nature of most fixed costs is that they will be incurred regardless of whether or not any patients are seen on a particular day. Fixed costs include:
• Practice rental or indeed mortgage repayments where the premises is owned personally
• Wages (where salaried)
• Phone (recurring charges)
• Light and heat (standing charges)
• Equipment loan repayments
• Depreciation of practice assets.
Once all identifiable costs have been allocated between those fixed and variable in nature, practice break-even can be determined.
Effectively, break-even is the point at which practice activity and fee income cover all fixed costs, including those variable costs incurred in reaching that level of activity. Fees earned should always exceed the variable costs associated with the underlying patient treatments. Activity levels in excess of those required by the practice to break even will therefore contribute positively to practice profitability.
Reaching your practice breakeven activity level can be impacted by:
• Increasing patient treatment fees
• Increasing practice productivity
• Minimising variable costs.
In the context of the imposed PRSI and GMS fee scales, prices cannot be increased. As a medium term initiative, any move towards increasing productivity should be made in conjunction with a determination to develop the private practice element of your business. In the current climate, however, immediate term initiatives are called for and minimising variable costs offers the most significant scope to the dental practitioner in preparing for the leaner times ahead and in the interests of sustaining practice profitability.
Expressing costs as a percentage of total practice income can serve to highlight expenditure incurred at higher than expected levels given the type and size of your practice. Having your practice costs benchmarked against those of practices with a similar operating structure and fee mix will help you to identify areas that should be further investigated and addressed.
Material, consumable and laboratory costs should be reviewed. Are these costs competitive or can alternative providers be sourced that would cost you less?
Staff productivity should be reviewed. Where wages are paid by the hour it is incumbent on the dental practitioner to ensure that the time taken for staff to perform office duties is not excessive. The efficient management of the practice appointment book will serve to ensure that staff are only engaged and paid at times when patient treatments are being performed and costs are being recovered.
Efficiency in productivity extends to the practitioner too. Time spent on activities not directly contributing to revenue generation should be minimised. In this regard, certain office related activities (payroll, book-keeping, etc) might be best outsourced.
It is difficult for business owners to take positives from the current operating climate in which they find themselves. However, it is an ill wind that blows no good and successful practitioners will realise that with challenges come opportunities, among them the chance to:
• Negotiate a reduction to rental costs on the renegotiation of leases
• Fix interest rates in a falling rate environment and provide for certainty of cash flow for some time into the future
• Demand increased productivity from staff and either implement a term pay freeze or actively manage wage expectations
• Demand better terms from suppliers at a time when price discounting is widely seen as an acceptable and preferable alternative to losing customers
• Grow patient numbers by actively differentiating on the grounds of patient care and service
• Review practice costs and eliminate resource wastage
• Review and evaluate practice procedures – stock control and ordering policies, supplier payments, cash and debt collection. The cornerstone of an efficient practice is an efficient and well organised administrative function.
It may be excessive to suggest a survival of the fittest scenario; nonetheless, I’d be exercising.