DentalCare Logo

Understanding Overhead and What It Means to Your Practice

Course Number: 701

Building an Overhead Model

In an ideal world, dental practices would build an overhead model before they ever opened and every year thereafter. Big businesses spend a great deal of time planning the annual expenses for the upcoming year. Budgets are submitted, reviewed, and often reduced and submitted again. These companies have individuals or departments that focus on building the overhead model for the coming year and analyzing all possible expenses in a theoretical exercise. Planning for dental practice overhead in this way would be wonderful, but rarely happens.

One way to approach overhead analysis and keep it simple is to evaluate all the expenses of the previous year by category. Categories include areas such as labor, benefits, insurance, taxes, supplies, materials, equipment, subscriptions, dues, continuing education, rent, gas and electric, water, and trash disposal. These categories make it easy to think about annual expense planning.

As you can see in the sample presented in Figure 1 most practices receive profit and loss (P&L) statements regularly from their accountants, and always an end of year final (P&L) statement. The categories in these statements represent broad overhead categories, and the simplest approach is for a practice to simply look at what each category represented in terms of expense in the previous year and then analyze and guesstimate whether it will be more, the same, or less in the coming year. By using this method, it can take as little as an hour to come up with the projected overhead numbers by category for the coming year.

ce701 - Images - Figure 1

Figure 1. Sample Profit & Loss Statement

Using a more detailed variation of this exercise, a practice could analyze every expense of the previous year. This exercise not only allows practices to project expenses for the coming year, but it also reveals wasteful, unnecessary, or undesirable expenses and allows a practice to make changes to reduce and control overhead. Rarely is this exercise performed where immediate savings do not take place and certain expenses recognized as no longer necessary. In one case, a practice found hundreds of dollars in annual subscriptions for services that they no longer used. In another case, a significant insurance payment was being made for two automobiles that the practice no longer had. These may seem obvious; however, this type of oversight happens all the time.