Financial reports are confusing, and as a dentist, you don't have much time to figure them out. You need a way to quickly see how your dental practice is doing when you get your Profit & Loss report from your bookkeeper.
What if you could compare your dental practice expenses to those of other practices? That would make it easy to know where you stand without trying to understand accounting. It's called "dental overhead benchmarking," and there is a simple version of our Percentology® dental overhead benchmark method that you can do rather quickly.
In this post, you will learn how to calculate your total dental practice overhead percentage to compare it against the industry average of 60-65%.
Overview: How to calculate dental office overhead
Put your Profit & Loss report in front of you and take the following three steps to calculate your dental office overhead:
Cross out all expense accounts related to owners and doctors/associates.
Add up the remaining expense accounts together.
Divide the amount from step two against your total income, and then multiply by 100 for the percentage.
First, get your practice Profit & Loss report:
To complete the three steps listed above, you must first access your Profit and loss report. If you ask your dental bookkeeper for a report, make sure you ask for it to be dated for whole months, not partial months.
Step One: Cross out expenses related to all dentists
The most important part of finding the correct overhead percentage of income (and often done wrong) would be to exclude the compensation and related expenses of the dentists, including the owner, the owner's family, and the associates.
Put your Profit & Loss report in front of you, and put a line through the following expense accounts:
Gross Pay - Owner / Partners
Gross Pay - Associates
Gross Pay - Family members of owner
Employer Payroll Taxes - Owner / Partners
Employer Payroll Taxes - Associates
Employer Payroll Taxes - Family members of owner
Contractors - Doctors/Associates
Health Insurance - Owner / Partners
Health Insurance - Associates
Health Insurance - Family members of owner
Disability Insurance - Owner / Partners
Life Insurance - Owner / Partners
Pension Matching - Owner / Partners
Pension Matching - Associates
Note: If you don't have some of these expenses separate on your Profit & Loss report, you will need to find the costs of these expenses and pull them out of the expense accounts they are in. However, to consistently stay on top of your overhead averages, I recommend creating separate expense accounts for the items above in your Dental Chart of Accounts.
Step Two: Add together the remaining expense accounts
Add up all of the remaining expense accounts (excluding the dentists' expenses from step one) on your Profit & Loss report.
This can be more easily done by just adding together the 'Total Expenses' and 'Total Other Expenses' summed at the bottom of your Profit & Loss report. Then, subtract from the total expenses all of the dentists' expenses you crossed out in step one above.
Step Three: Calculate Percent of Income
Divide the total overhead expenses you got from step two by your total collection income (after patient refunds) stated at the top of your Profit & Loss report.
The dental industry's average overhead percentage of income is between 60-65%.
What's Next:
Now that you know your total dental practice overhead, you can continue to benchmark against the dental industry average as you improve your practice. I recommend benchmarking your overhead every month.
The idea is that you want your overhead to stay the same or go down as your collection income increases. If you're increasing your collections, but your percent of practice overhead is going up, then you're working harder while making less profit. That's not good.
Regardless of how you're doing, practice reviewing the numbers and understanding why those numbers happen by connecting the numbers to your physical operations. Once you understand the connections, you get better at predicting the outcomes of business decisions you make.
Advanced Overhead Benchmarking:
Once you feel comfortable with calculating overhead month-to-month, you can take it a step further and narrow down your percentage into dental-specific overhead categories to compare against other practices. Then, you can benchmark those categories and target specific weaknesses.
Dental practice overhead benchmark categories:
Personnel (Team) 24-28%
Clinical 12-14%
Facility + Equipment 10%
General Business 11%
Discretionary 0-2%
Owners, Doctors, Other Income, & Profit 35-40%
Download our free Dental Overhead Benchmark Template:
Discover how your practice spending compares against other practices without paying the high cost of a Dental CPA. Just drop your numbers right from your Profit & Loss report into the spreadsheet.
