Impact of Drop In Collections On Profit
For example, assume you (once upon a time…) could increase your collections 12% due to fee increase, better management, etc. Assume your overhead for variable expenses (supplies and lab fees) runs about 15% of collections. That means the net collection increase after additional lab and supplies is about 10%.
Further, assume your profit margin before the increase was 30%. Adding the net 10% to that gives you a new profit margin of 40%—or a 25% profit increase vs. a 12% increase in gross collections! That was great when collections were rising. Unfortunately, it works the same way in reverse: a 12% drop in collections turns into a 25% drop in profit! That could ruin your day, so what can you do?
Survival Tips From the Front Lines
Based upon our own experience and feedback from our clients, here are some tips to share.
• Proactively acknowledge today’s economic realities. Many patients in economic pain may be too proud to say anything about that. You need to “put the skunk on the table” and broach the issue yourself. To avoid embarrassing the patient, you might say, “We know a lot of folks are going through tough times right now. So we went out and found some healthcare financing sources (like CareCredit and others) who will give our patients interest-free financing for 12 months. Let us know if you would like to look into that.” Don’t wait to offer that kind of resource as a “last alternative,” when the patient is walking out the door.
• Or you may want to offer some (gulp!) in-house financing. As long as you can get a large enough down payment to cover your direct expenses, like a lab fee, then you are only losing your time and potential profit if the patient does not pay the balance. These days, you may have plenty of time to spare, so you may as well take a chance to get some production vs. an empty chair.
• Essentially, get back to basics. Remember the things you used to do when you were scared and hungry and starting a new practice. You went to the Rotary Club lunches, you became visible in the community, you called patients at night after big procedures. You were open on Fridays—because nobody else was. Paul Woody (email@example.com) is a CPA/CVA who was around when Oklahoma suffered the disastrous effects of the oil crash in the early 80s. He still practices with his partner/son, Grant, in the firm Woody & Associates, CPAs, PLLC, which is our ADCPA member firm in Oklahoma City, Oklahoma. Here are some of his suggestions that got his clients through the crisis back then:
• Do a better job on case presentation and informing the patient of their choices. In the appropriate cases, add some sense of urgency to get treatment done before things deteriorate further.
• Empower the entire dental team to get on board in the marketing/communication effort. It cannot be the doctor alone. Everyone needs to help during perceived troubled times.
• Be nice—as incredible as this comment is, it is amazing how many patients may leave a practice because either the front desk person or the hygienist was not nice to them. You need to be nice to all of your patients in good and bad times—but in particular during these difficult times.
• Clean up the cluttered reception area and the office in general. Sometimes, a cluttered look can bring on negative vibes from the patient, so market your dental office by refreshing the magazines and this may be a good time to start putting fresh flowers in the reception area several times during the week.
On the Home Front:
As someone pointed out, if one end of a boat has a hole in it, the whole boat is in trouble! Another component of weathering difficult financial times involves your own personal spending. It is time to sit back and reflect on what really is important in your personal life and make some tough decisions.
Put together a 2009 personal budget plan. If a budget is not for you, consider a spending plan with certain guidelines that would attempt to keep you solid. Some of these personal guidelines are listed as follows:
- Housing expense – 19% to 30%
- Food – 6% to 14%
- Clothing – 4% to 5%
- Transportation – 7% to 11%
- Entertainment/Recreation – 5% to 6% Medical – 1% to 4%
- Insurance – 3% to 4%
- Gifts & Charities – 4% to 6%
- Debt – 3% to 4% Other – 3% to 4%
- Tax – 45% to 12% (federal and state)
- (totals = 100%)
Work with your family on things that you can eliminate which will increase your “personal equity.” For instance, if you have a habit of eating out four times a week, what would your financial picture look like if you cut that by 50% down to two evenings a week? Look at your other expenditures with the same careful eye with the knowledge that this time, too, will also pass and you can return to your previous lifestyle, but it may take a period of time such as a year to 18 months to recover.
What other items can you adjust or even eliminate? If you have a history of taking 2–3 vacations a year, what would happen if you only went on one vacation? For many of you with children, Spring Break is always an adventure with many departing on expensive trips to ski slopes or beaches. Is there a way this year you could stay on the home front or drive 150 miles and do something different that could cost thousands less, or simply stay at home?
You may need to batten down the hatches for a long journey. I hope some of these thoughts can help you weather whatever comes your way in the pending turbulent times.
Raymond F. “Rick” Willeford, MBA, CPA/CFP is the Financial and Tax Planning columnist for Dental Economics. Rick is the president of Willeford Haile, CPA, PC and WillefordCPA Wealth Advisors, LLC, a Registered Investment Advisory firm. He has specialized in designing financial planning, tax, and transition strategies for dentists since 1975. His firm provides accounting and tax services for about 150 dentists each month in 23 states—from Atlanta to Albuquerque to Alaska. Rick is the founding president of the Academy of Dental CPAs, an association of 26 firms that provide specialized services to 6,000 dentists nationwide. He teaches financial management at the Medical College of Georgia and the University of North Carolina Dental Schools. He can be reached at firstname.lastname@example.org.