When undertaking taxation planning and forecasting for all our dental clients towards the end of the financial year in April and May 2024, it was clear that not only had interest rates risen, but costs had generally increased across the board for all practices. Most occupancy costs have increased, typically leases that are linked to CPI or have standard ratchet clauses embedded in them. The costs of labour have increased substantially across all sectors, the simple maxim of supply and demand dictating this. The price of energy has risen, as have the costs of consumables.
How has this affected the profitability of practices?
The profitability of most of the practices that we act for has been stable over the past 24 months. Stable as a physical number, i.e. if the profit of a practice was $100,000 in 2022, it has remained at $100,000 through to 2024.
The key reason being, that practices have increased their prices to patients to compensate for the increased costs of running the practice. So, as costs have increased, the practices have in turn, increased their charges to patients and maintained a similar profit level, albeit now from a higher revenue base. This means that whilst revenue is growing, profitability is decreasing as a percentage of revenue.
The other hidden cost that isn’t reflected in these trends is that notwithstanding the stabilising of profitability, the living costs for the practice principal have increased by at least CPI over this period, meaning that the take home practice profit for the average practitioner has reduced significantly. This trend isn’t isolated to the dental industry, and of course all of us need to eat, drink, pay school fees, pay a mortgage, pay our power bills and so forth. The buying power of our take home $ has reduced.
LEAN MANAGENMENT AND COST CUTTING
A plethora of management schools and lecturers offer cute acronyms for cost cutting in a business environment, Jack Welch, of General Electric fame, was always reviewing the bottom 5 – 10% of performance in the business with a focus on a 12-month churn cycle. For the small business operator, a goal of 5 – 10% efficiency across the board is a worthwhile exploration of your profit and loss statement. This can also be partially assisted by your practice staff / manager. The process is actually quite simple, review a list of all suppliers and have the team contact them all and ask for cost efficiencies. Of course, many of the suppliers may respond saying that there is nothing that they can do. Think about the alternatives, ask the supplier if they could look at reducing costs or even delivery charges if you started buying more (at the expense of an alternative supplier).
The group purchasing power of co-operative groups has always been a path to cheaper pricing for the purchaser. Look to ADA initiatives in this space as well.
Lean management looks less at direct cost savings, rather focussing on automation and waste management. How extravagantly are materials and consumables being used within the practice, how tight are stock controls and ordering, are stocktaking controls robust and enforced? The terms “AI” and “automation” are bandied around a lot, but in many practices many things are still done manually or even by the practice manager when they could be done by a non-fee earning member of staff. Is this an ideal use of the practice manager’s time? Often, I meet with new clients and find out that the principal spends up to a day a week on paperwork and administration. This is an entire day that you could be working clinically and earning fees. The cost of a book-keeping assistant would be likely less than 15% of what you could clinically earn over this day of administration.
PERSONAL LEAN MANAGEMENT AND COST CUTTING
Without measurement there can be no performance.
It is all well and good to look at the costs of operating your practice, but you would be remiss not to also look at home and personal expenditure when considering the overall cashflow position of the family. Sensible budgeting is always a prudent thing to do in a higher interest rate environment. Furthermore, as noted above, without measurement there can be no performance. Have you actually tracked your household and private expenditure, physically recorded the family costs over a 6 month period? Some families get a shock about certain lifestyle costs, and then re-evaluate some things.
It’s often true that yesterday’s extravagance becomes today’s essential.
AN ALTERNATE VIEW
When talking to the practice owners in April and May this year, the various cost and revenue numbers were obvious. One surprising number though, was the advertising and marketing spend of most practices. This number (generally) hadn’t moved at all in the previous three years, so, by conclusion, a lot of practices were having concerns about profitability and costs, but their advertising and marketing spend had not increased.
Cost cutting is always prudent in an inflationary economy, however it is more “fun” to grow revenues and patient lists than it is to cut costs.
If there was opportunity to spend additional funds on growth of the practice and acquisition of new patients, this may be an alternate and more “positive” solution for your practice.
Many people use the festive period to plan for the next 12 months and look ahead to the future. Cost cutting alone can’t drive practice success.
About the author
Heath Stewart, CA, B.Com, M.Tax, CTA, Dip.FS (FP)
Chartered Accountant and Director