Profit Margin as the Measuring Stick
Measuring Sticks
If you are like most dentists (or business owners for that matter), you probably use two easy ways to track your financial success.
1) Your daily production/collection goal. This number is a great way to motivate your team to fill the schedule, but is only one part of the financial success of the practice. Just because you collected $20,000 yesterday does not mean that you are a profitable practice.
2) The current bank balance. It can be reassuring to see your bank balance increasing or stressful to see it below your comfort level, but the bank balance is only a point in time and does not reflect costs that have been incurred and/or not paid like payrolls and lab bills.
While it’s smart to have a clear picture in mind as to how much money your practice should bring in each year and an average balance you would like to see in your accounts, those numbers are not nearly as meaningful as your profit. Profit is what allows you to take a wage and distributions out of your practice. Without profit, you are just working for free.
Why Profit Margin?
The issue with measuring only collections and cash and not profitability is that you could be spending more than you make. If that’s the case, you’re putting your practice in a precarious financial position without even realizing it. Your profit margin ratio compares profit to sales and is expressed as a percentage. If your practice collected $200,000 last month and had total costs of $160,000, your profit margin would be 20% ( ($200,000 - $160,000) / $200,000 = 20%). This is money you have left to pay your taxes, loan payments and owner distributions.
Three Types of Profit Margin
1) Gross Profit Margin compares revenue to variable costs. Variable costs are any costs incurred during patient treatment like staffing and dental supply costs. Gross profit margin tells you how much profit your dental services create before paying fixed costs like rent and malpractice insurance.
2) Operating Profit Margin is the most valuable metric of practice profitability. It factors in the fixed costs and gives you a clear picture of how much profit of you make on each dollar you collect.
3) Net Profit Margin is the nerdy accounting ratio that includes non-operating costs like interest and depreciation that are related more to tax filings than the financial health of your practice.
Profit Margin Goals
The average dental practice has a Operating Profit Margin (OPM) of 30%. While each practice has different circumstances affecting the profit margins, this figure should give you a benchmark.
If your OPM is below your goal, there are two ways to increase it:
Increase collections while keeping costs stable. This can be done with better case presentation, dropping PPO contracts and increasing your fees.
Cut your costs. Your primary costs are team payroll along with dental supply and lab costs so look for ways to create a more efficient team and work with your suppliers to ensure you are getting the best products at the lowest costs.
If you have specific questions on your Profit Margins and how your margins stack up against the best, please reach out to us.