In previous blog posts we have spoken about the importance of teamwork and creating better relations with your patients, both key elements to a successful practice. But equally important is strong financial management. Every day we see successful businesses fall into financial crisis because of poor decision making. It is these poor decisions we naturally want to avoid when trying to run a practice.
Before considering any financial decisions to be made it must first be made clear what the structure of your business is (sole trader, partnership or limited liability company). Each structure has its own pros and cons, what is important is to choose the structure which is most suited to your aims and objectives. If you are unsure of how your business should be structured it would be worthwhile to get professional advice from an accountant or Lawyer. NASDAL (National Association of Specialist dental accountants and lawyers) are another great source of advice.
So let’s run through the options.
A sole trader is the simplest format a practice can run, with income tax being payable on any excess of revenue over costs. However, personal assets are at risk as there is no separation of the individual and the business.
Partnerships can work along similar lines, with profits and risks shared across partners in pre-determined proportions. A variation on this is an expense sharing partnership where a new member buys into a partnership in order to participate in profit sharing.
A limited liability partnership will separate the business from the individuals in legal terms and, as its name suggests, limit the legal liability of each partner. A limited liability company will similarly separate individuals from the legal entity of the business, and liability will be limited to the value of shares owned. There are additional statutory and industry requirements on limited companies (e.g. filings to Companies House and the General Dental Council, annual corporation tax submissions); an awareness of these is important when deciding on the best structure.
A key element to sound financial management is a thorough understanding of the sources of revenue and costs. From this information we can analyse the work taken place and review its profitability for better decision making.
For example, private work such as implants will likely yield more revenue than NHS work. Another consideration will be to decide whether you want to refer work on or perform it all ‘in house’; you may receive a fee for referrals, but would the cost of providing the full treatment yourself be more than offset by the revenue from it?
Once you understand the balance of work that you are doing, the nature of the costs and revenues, then you can decide how best to resource that work, for example you should seek to resource the lower value work with lower cost resource. In short, most of these decisions will come down to making best use of limited resources, and in many instances that limited resource is time (specifically the time of the staff in the practice).
Marginal cost against marginal revenue
When making financial decisions we must consider both cost and revenue and how cost is influencing revenue. For example, a full time hygienist sees 60 patients a week (30 mins/visit), and the revenue generated is £105/hour (approx. £3,150 pw or £163,800 pa). The cost of the hygienist is £70,000 pa. To hire a second hygienist would therefore cost a further £70,000 to the practice (i.e. £70k of marginal cost); if there was the need for 27 or more hygiene patients per week it would generate in excess of £70k of marginal revenue, and therefore be profitable for the business. Naturally if recall rates improve too (national average is around 67%) then revenues will increase further still.
Payback Periods
For many practices not all tasks can be carried out ‘in house’, due to lacking the required equipment. Because of this lack of equipment it is necessary to outsource the work, which reduces the profit you are making from each job. In some circumstances it may be more profitable to purchase the necessary equipment, knowing you are making a larger profit by doing so and slowly paying off the equipment you have purchased. The time period to which it takes to pay off your purchase is known as the payback period.
For example, your practice does not currently have the equipment for producing crowns in-house, and instead you refer this work on. Without a CadCam machine, you make around £380/crown, which can often require multiple visits from the patient. A CadCam machine, the capital cost of which is around £70k, can generate around £670/crown, due to the fact that it is an all-ceramic restoration. Therefore, a volume of around 240 crowns would see the outlay on the CEREC machine repaid. There is an additional advantage too for the patient as they can have the whole procedure complete in one visit.
A more general observation is that financial considerations aren’t the only part of the decision making process and there may not be a ‘one size fits all’ answer. In the example above, some practices may be willing or able to accommodate a payback period of four years and others not. In either case, however, understanding the payback period is essential if you are to make an informed decision, and one that is right for your practice.
KPI’s
On an ongoing basis it is important to be updated regularly on a practice’s financial performance, and this will mean understanding some basic financial information. At the very least a monthly view of revenue (by type of treatment and cost (by type of expenditure), profit and cash flow. Key Performance Indicators (KPIs) can be a very helpful tool in defining strengths and weaknesses in a practice’s performance.
These indicators may look at measures such as number of patients, recall rates, revenue per visit, proportion of private and NHS patients, profit per service, treatment conversion rates etc.. You may also want to include other measures discussed in your team building sessions (e.g. percentage of time spent training/development). Many financial systems can provide this information automatically, or at the very least, with the need for minimal manual intervention. The most important challenge though with the information is to use it properly.
When analysing a practice’s KPIs it is important to do so with the right mindset; not to be fearful of uncovering bad news and be prepared to makes changes and difficult decisions to improve poor performing areas. Never was the old adage “what gets measured gets done” more accurate; by measuring and managing the performance of different areas of your practice, you can significantly increase productivity.
Equally important is understanding the context of the information, and whether, perhaps one month’s results are a temporary irregularity or indicative of a longer term trend. (For example, the number of patient visits may drop in August if many are away on holiday, but does the figure return to normal in September?). Again there is often no definitive right or wrong answer, but rather using the information to help you to manage your practice. No, you’re not expected to have the expertise of an accountant, but it will be in your interest to either employ one or for you to undertake a degree of financial management.
Understanding the basic financial elements of your practice is critical. With the information we have provided we hope you feel more confident in tackling your fear of finances.
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