Posted 12-20-16

Measuring Performance—Year-End Practice Review
by Robert J. Gray, Founding Member, Academy of Dental CPAs

Practice owners should always be checking their key performance indicators, but it is especially important at the year's end when it is time to create your goals and plan for 2017. The metrics for evaluating the performance of your practice should be based on the overall vision and goals the doctor has established, but should include a variety of items specific to your practice.

One of the most critical measurements of performance for any practice is what I call "Entrepreneurial Profit." To calculate that, take your net taxable income and add back all of the interest, tax depreciation, and amortization. That is the practice "EBITDA", and is the starting point. To that, add all doctor compensation and discretionary expenses, such as travel, continuing education, or other expenses not essential to delivering clinical dentistry. This number will portray our "Entrepreneurial Profit," and is an important measurement because taxable profit changes dramatically over time, even when the practice stays the same. A new piece of equipment, an expensive CE course, or other purchase can skew the taxable profit shown on a P&L.

Entrepreneurial Profit is unaffected by those transactions and becomes the steady measurement of the true performance of the practice over time. Entrepreneurial Profit can also be defined as "the amount of money the practice made available for the owner to pay the dentists for their clinical service, pay down debt, purchase equipment, or spend money on discretionary business related expenses."

Make sure your profit and loss statement is set up to show you that number for easy access.

New patients are the lifeblood of any practice. Many practices track that number, but fail to calculate "Net" New Patients. That is the number of new patients, minus the loss of existing patients. Net New Patients is absolutely critical in geographic areas where there are many transient patients and it is also an important indicator for any practice to measure growth.

Once you know your Net New Patients, you can more accurately predict how many total new patients you will need in the coming year to achieve the new goal, and be able to budget your marketing expense accordingly.

Your marketing expense should always be focused on achieving a specific patient goal, not just a percentage of collections, or some other metric.

In any general dental practice, the hygiene department should be the source of significant net income, yet the number of doctors who have no idea if theirs is even profitable always surprises me. Compare your hygiene wages to hygiene collections (excluding any exam fees) to be sure that collections are at least three times wages, or higher, depending on your overhead.

Most doctors track the basic number for total production and collections. If you track the total production per day, you now have a tool you can use to look at the highs and lows, and use those as teaching opportunities to uncover the failures on the bottom days, and the success at the top. The typical doctor could increase the total production of the practice by over $50,000 if they would bring just the days in the bottom 10% up to average.

For doctors who are interested in a much deeper dive into the practice numbers, there are many software applications available, such as Dental Practice Pro and Dentametrix. These programs automatically mine the data from your practice management software and give you a complete dashboard of customizable reports that are easily accessible, even on your mobile phone.

So, as you plan for 2017, use your metrics to create a roadmap that will help you work smarter, not harder.

In addition to his love for Napa Cabernet and high-horsepower cars, Bob Gray is an instructor for both the Dental Business Institute and the Schein Career Development Program, and is passionate about helping dentists be better CFOs.