Watching Your Percentages: The Income Statement
By: Paul E. McLerran, D.D.S., CCIM
Dentists are busy people and most of them do not like to spend a great deal of time analyzing numbers, pouring over income/expense statements, or perusing balance sheets. We suggest that the dentist become familiar with the normal range as a percentage of gross for expenses within the dental practice. In this way, the dentist can quickly notice if something is out of line and move to correct the problem.
In installing accounting software, the doctor should consult with the CPA as to the expense categories to create. However, we want the categories to reflect true operational costs and not expenses taken for tax purposes. Therefore, you should create categories that can be merged later by the accountant for your tax return, but still allow you to see the true operational cost of the practice.
An example might be the writing off of the purchase of small equipment in the dental supplies category. A $1,500 curing light will jump that category to a higher percentage than expected, so create a category called “Small Equipment” and place these items there. Your accountant can merge this later if he wants to expense these items in that manner.
The following is a discussion of typical expense categories:
1. Dental Facility: We like to see the cost of occupancy at less than seven percent. This is a fixed cost where the percentage of gross may vary widely because of varying gross income on a monthly basis.
2. Dental Staff Salaries: The target percentage for staff salaries is 17% to 20% excluding hygiene salaries. This expense item can also vary depending upon the type of practice and the efficiency of staff. Dental practices that have a lower volume of patients but which perform high dollar dentistry may have a low percentage.
3. Dental Hygiene Salaries: We expect this expense item to be less than eight percent of the gross income. This will vary based upon the type of practice. Some practices have strong soft tissue management programs that may produce 40% of the entire practice gross. In cases like this, the hygiene salaries and bonuses may be well over ten percent of the total gross.
4. Employee Benefits: This expense item is used for many things. Some accountants will include continuing education, medical reimbursement, child care, staff lunches, staff parties, travel, and a variety of other creative categories. Generally this expense item will not tell us much about the health of the practice since there is inconsistency as to the items placed within.
5. Dental Lab Fees: We see most general dental practices falling within a range of 4% to 8%. Some prosthodontic practices or general practices performing a great deal of crown and bridge will be well over 10%. If your expense history shows a consistently high percentage, then an analysis of your lab fees may be in order. In addition, this is an area where staff fraud can take place. Watch this percentage!
6. Office Supplies: This expenses category is often used as a catch all and many items may be place here that do not belong. We urge the creation of other categories or subcategories to eliminate the placing of expenses that do not belong in this category, since this item is one that can be targeted for staff fraud. It is very useful to watch this percentage for sudden changes.
7. Dental Clinical Supplies: This category may also vary depending on the type of practice. But, once you have established a history, it is very useful to watch this percentage for fraud prevention and for budgeting purposes.
8. Promotion and Advertising: Some practices do not market externally. Some do not have the need since their location may be the drawing card for the practice. (In fact, one might be willing to spend more on the cost of occupancy to get the superior location and forgo the need for external advertising). However, most practices must advertise to maintain a good patient flow. We suggest a minimum of 2% and up to 5%.
9. Legal and Accounting: Legal expenses are usually minimal in dental practices unless there is some malpractice action (Or the doctor is writing off the cost of a divorce). Accounting fees will vary depending upon the extent of the involvement of the accountant. Some practices use a bookkeeper and the CPA prepares the return. Other practices have the accounting firm work with them extensively on a monthly basis. With the advent of easy to use accounting software we believe most offices can handle their monthly expenses and only need the accountant to occasionally reconcile and prepare the tax return. This line item is often used to write off the cost of non-practice related legal, accounting, or investment advice.
10. Insurance: This expense can vary greatly for a number of reasons. Many dental offices do not offer health coverage for their employees. In many cases, the doctor will write off his personal disability or health coverage through the practice. (Please note that, if you deduct the cost of the coverage, any future benefits paid to you will be taxable!). True operational insurance costs consist of malpractice insurance, overhead insurance, and the cost of the business owners policy (if you rent the premises.). We suggest separate insurance categories for casualty and health.
11. Miscellaneous: The more complete your expense categories the less will go into a miscellaneous category. Common expenses that are place here include postage, janitorial, security, uniforms, yard service, collection service, and gifts. We suggest creating an expenses category for each of these. Allow the accountant to merge them for the purposes of your tax return. In any case, the total amount should not exceed 1% of the practice gross.
DENTAL EXPENSE WORKSHEET
Operating expenses in a healthy general dental practice should fall within certain ranges. These ranges can vary due to the type of practice. For example, a practice heavily involved in crown and bridge will have much higher lab costs. The following percentages of gross income are average ideal ranges. Your experience may differ but should not be a great deal higher.
Facility.………………………………………………………………………………. < 7%
Staff Salaries.…………………………………………………………………….17 to 20%
Hygiene Salaries……………………….…………………………………………... to 8%
Payroll Taxes……..…………………………………………………………………..< 3%
Employee Benefits……………………………………………………………………... 1%
Lab Fees………………………………………………………………………… 4 to 10%
Office supplies…………………………………………………………………….. 1 to 3%
Clinical Supplies…………………………………………………………………... 4 to 8%
Advertising/Promotion/marketing…..…………………………………………… 1 to 5 %
Repair/Maintenance…………………………………………………………………. < 1%
Miscellaneous……………………………………………………………………... 1 to 2%
Legal and Accounting……………………………………………….. $1,000 to $8,000.00
Dues, Subscriptions, and Fees………..…………………………… Varies $500 to $3,000
Utilities (gas and electric)…..…………………… about $0.16 per square foot per month
© 2007 Paul E. McLerran D.D.S., CCIM
McLerran & Associates
