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Issue #2 - 9.12.06
The Profitable Associate – Determining Return on Investment
Some dentists believe that an associate is a loss leader — a necessary evil in the growth of any dental practice. They may even assert that generating a profit from an associate is next to impossible. Fortunately, nothing can be further from the truth. In fact, earning a 30 to 35 percent profit margin on the revenue generated by an associate is entirely achievable. However, before one hires an associate, one should perform a cost-benefit analysis to determine the likelihood of profitability, as well as to gauge the non-monetary benefits, such as improved quality of life, which may be equally important. The following steps will help you analyze the economic sense of hiring an associate, and will help you set realistic expectations about the return on investment you are likely to attain.
Step 1: Determine Production Goals: Your associate’s skills and experience will affect anticipated production goals. Additionally, your fee schedule, as well as the services provided, will influence overall possible production. To estimate annual production, choose a daily production goal, and multiply by the number of days per year that your associate will work. (Depending on your practice’s services, geographical region, and fee schedule, typical daily production in the beginning may range from $950 to $1,750 per day.)
Next, determine your practice’s overall collection production ratio. For example, if your projected gross production is $800,000 and you historically collect 95% of your gross production, the anticipated revenue would then be $760,000. Next, multiply your collection production ratio by the associate’s estimated annual production goal to establish the anticipated revenue from your associate.
Step 2: Assign Direct Expenses to the Associate: Allocate all direct expenses to the associate to get a better handle on the investment you are making. For example, if your associate will require a new dental assistant, list the dental assistant’s salary and fringe benefits as a viable expense. Additionally, figure the cost of administrative staff that may be added due to increased associate office hours. Next, estimate the associate’s dental supply costs by multiplying your own overhead ratio for dental supplies and multiplying it by the associate’s anticipated revenue. Next, estimate the associate’s lab expense. For a quick calculation of lab expense, multiply the associate’s anticipated revenue by 8 percent. As an alternative, if you can project the number of lab related procedures your associate can produce annually, multiply that number by your average unit lab cost. If you will be purchasing additional equipment or adding an operatory for your associate, include these costs as well. Finally, write down the associate’s annual compensation and any fringe benefits that may be provided. Annual compensation should be within the regional compensation averages for your area.
Step 3: Apply the Formula and Get the Answer: To forecast the likely profit margin on an associate, apply the formula using your specific numbers. While the profitability of an associate is measured in pure financial terms, the advantages of hiring an associate often include benefits that defy measurement. If your calculations indicate that profit margins are less than the 30 to 35 percent goal, be sure to gauge the intangible value of increased family time, improved quality of life, or better access to care for your patients. Remember that the addition of an associate can provide not only economic sense, but also common sense, when it comes to your personal and professional goals.
Associate Profit Analysis Summary |
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| (Assume 95% Collection /Production Ratio on Daily Production Goal of $1000) |
Daily Collection | $ 950 |
| # Days Worked Per Year | X 196 | |
| Projected Annual Revenue |
$ 186,200 | |
| (Assume 34% Collections) | Associate Compensation | $ 63,608 |
| Associate Payroll Taxes | $ 4,843 | |
| (8% Lab Expenses) | Associate Lab Expense | $ 14,896 |
| (6% Dental Supplies) | Associate Supplies | $ 11,172 |
| Assistant Salary (inc P/R tax) | $ 21,620 | |
| Uniforms | $ 200 | |
| CDE Allowance | $ + 1,100 | |
| TOTAL EXPENSES | $ 117,439 | |
| Projected Annual Revenue | $ 186,200 | |
| Less TOTAL EXPENSES | – 117,439 | |
| Associate Profit | $ 68,761 | |
| PROFIT MARGIN | 37% | |
| ($68,761 PROFIT / $186,200 ANNUAL REVENUE) | ||
Next Steps After the Math
Contracts
Once you’ve assured yourself that the economics make sense for your associate, proper planning is key. The first step is to discuss all the terms and conditions of your associate’s potential employment and then have an employment contract prepared. Make sure you have an attorney who has dental experience and/or a consulting firm who can recommend the nuances that an associate contract should contain. For example, should a restrictive covenant be in force from the first day of employment or should it be graduated over time? Should your associate be prohibited from soliciting your patients as well as your staff? Should you place restrictions on the lab selection? If your associate leaves after a few months, on their own volition, after investing thousands of dollars in marketing, should you be reimbursed?
These are just a few of the key questions that need to be addressed in your associate employment agreement. “Off the shelf” documents will not do justice to these key areas, only properly prepared contracts will.
Consultant Assistance
Finally, we found it very helpful for you to engage a consultant to assist in preparing your practice for the associate. Marketing your new associate is a key ingredient to success and it starts with proper communication. Staff verbal skills are needed to properly introduce the new associate as well as get an existing patient to accept the new doctor. Additionally, to make sure that the associate meets his/her production goals, utilizing scheduling templates insure that the associate will meet target goals.
Most importantly, if this associate is a candidate for your long term transition plans, make sure that you properly think about your exit strategy so that once you begin interviewing candidates you spell out your vision for a successful relationship.Dr. Thomas L. Snyder, is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With over 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can also be reached directly at 1-800-988-5674.
If you would like additional help regarding implementing an associate into your practice Email Dr. Snyder at Drsnyder@thedentistsnetwork.net.
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