Episode #575: How to Calculate Your Overhead in 60 Seconds, with Dr. Barrett Straub
May 11, 2023
Episode Resources:
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- Dr. Straub’s social media: @bstraub10
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Links Mentioned in This Episode:
ACT’s Roadmap to Practice Profitability: https://www.actdental.com/free-resources/money-tool
Main Takeaways:
Overhead isn't as complicated as you think.
Understand why you need to know your overhead.
You can't lower overhead without knowing the numbers.
Overhead is a percentage of collections, not production.
Quotes:
“Overhead is going up. Costs are going up. And so, the problem or the challenge with overhead is multifactorial. One is, it’s going higher and it’s harder and harder to keep that profit margin. Number two, we, in dentistry, have made overhead overly complex, way more complex than it has to be. And the outcome of that complexity, I believe, is many dentists, maybe most dentists, don't even track it.” (2:28—2:58) -Dr. Straub
“The complexity is coming from what we call buckets. What bucket does each expenditure go in, whether it’s team compensation, facility, supplies, lab, or operating costs? And us detail-oriented dentists, we get too into the details, and we worry so much about, ‘Am I putting this expense in the right bucket?’ that we just eventually throw up our hands, wait for our accountant to tell us whether we’re doing okay or not, and move on. And that, ultimately, is not the right way to run a business.” (3:11—3:45) -Dr. Straub
“Overhead is a percentage of collections, not production, number one. So, overhead has zero to do with production. Now, you could say that, ‘Well, your collection is a factor of your production.’ Absolutely. But it is a percentage of your collections. And you're right, we’ve been talking a lot about this, this push to produce, produce, produce — we like when dentists produce more. But we want them to produce more when they have the gap set up, and the foundation and their profit margin set up to where they're going to benefit from that.” (4:16—4:48) -Dr. Straub
“There are two reasons to really know your overhead. One is so you know what day of the month you start making money. When you know your overhead, you know when you cross that dollar line in terms of collections, now I get to make some money. And the earlier in the month that is, the happier we are.” (4:50—5:09) -Dr. Straub
“If you don't know your overhead, you're just outrunning the wolf every single month. It’s like me being your cardiologist going, ‘Don't worry what your cholesterol is. We’re just going to get you jogging. And salads.’ No. Bad advice. Come on. And if you're going to transition someday or sell, profitability is huge. I don't care if you sell to a DSO or another private dentist. At the end of the day, the best practices to buy are the profitable ones.” (5:15—5:42) -Kirk
“At the end of the day, most dentists are realizing cashflow matters. Every one of us wants to have profit left over to put in our bank account. And there are many factors, we call them our gaps, but there are many gaps where cash leaves the practice. One is overhead. And we need overhead. We need expenses to run our business. But we want to manage it. We want to limit it. We want to make sure that we’re spending our money wisely and not on things we don't need.” (5:43—6:13) -Dr. Straub
“The other “why” [of why you should care about overhead], one is so that you know what it is and when you start to get paid. But you can't decrease it until you know what it is and set up a budget and plan to decrease it. Otherwise, to your point, you're just guessing like, ‘Oh, what was my overhead last month? Oh, that's high. I don't have a plan for it next month.” (6:14—6:34) -Dr. Straub
“The bigger you are, the more cash you need on hand.” (6:49—6:52) -Kirk
“The reason [overhead is] so complex is we dentists worry so much about how to organize it. And once we learn what the true definition is and how to calculate it in 60 seconds, we’ll realize, it doesn't really matter in the end. So, all overhead is, is all your expenses minus your doctor salary and benefits. Now, what bucket it goes into — so, your overhead is a one, dollar figure. It’s X amount of money. And then, divided by revenue, it’s a percentage. Now, we can break that overhead expense up into team comp, facility, supplies, lab, operating costs — our buckets, as we call them. And that is part of our process in our Money Roadmap in terms of setting a budget and setting up a strategy for decreasing it. But if you don't even know what it is, then who cares what bucket it is. You just want to know, ‘How much money did I spend to run my business?’ You take all doctors, associates, doctor providers out, salary and benefits. That's your overhead.” (7:30—8:34) -Dr. Straub
“If you're going to own a business, you've got to do a little bit of math.” (9:11—9:14) -Kirk
“You need to know [overhead] because you're a business owner. You want to know, ‘When I cross this line, I make money.’ We advise our doctors to have a monthly salary that they want to take, and then they know, ‘If I cross overhead, I get paid. When I cross that next line of my salary, now I'm in the bonus. Now, I have extra cash flow to invest, to bonus my team, to make all of our lives a little bit better, put money away for a rainy day. So, know these numbers, knowing these gaps, knowing when we’ve crossed into break-even just to stay afloat, then break-even so I get paid, and now, what we all hope for is that there's money going in the bank even after all that.” (10:05—10:53) -Dr. Straub
“Your business will eat every dollar — every dollar — if you don't prevent that. If you leave money in the checking account and just say, ‘Oh, we've got plenty in there,’ if you don't know your overhead, the business will eat it.” (10:56—11:11) -Kirk
“You can't lower your overhead unless you set a budget. So, a budget is planning. And our Money Roadmap is going to walk you through a bunch of questions like, ‘Facility and equipment is X percent. We want to lower it. Here are eight, nine, or ten questions or things to think about as you try to predict what your next 12 months overhead in that facility and equipment bucket.’ So, we need to know it so we can plan accordingly, and we need to know it so we can set a budget and lower it. And those are the two big keys.” (11:13—11:49) -Dr. Straub
“You can't cut to grow. A lot of dentists think, ‘Lower the overhead. Well, I've got to lower wages. I've got to buy cheap paper. I've got to go and get the cheapest supplies and C-Fold towels that are at the bottom. You can't think like that. It’s a function of your overall profitability. And so, knowing what influences those, because if you're in the game of caring about people, you're going to need to be able to pay benefits and good wages long term, so you have to understand how they go up and down.” (11:53—12:24) -Kirk
“Overhead is only one function of profitability. So, we can lower overhead. And what we mean about lowering overhead is get rid of the waste. Get rid of the stuff you're paying for that you don't even know. Supply budget is one of the easiest ones in that we can set a budget, and when we hit that number, we stop ordering. Not all overhead — there's fixed, there are variables. Our Money Roadmap gets into that. And you can cut so much on overhead. Once you're lean and mean, now we've got to increase our profit margin. We've got to increase the collections, our revenue, the top end, the top line. So, both of them go into that true profitability margin.” (12:25—13:12) -Dr. Straub
“For every $1 million you collect — think about this — you take your overhead from 71% to 61%, that's a net profit gain of $100,000. I would even argue you're going to work fewer days. That's for another podcast.” (14:11—14:27) -Kirk
“The way to keep your team well-compensated is to watch your overhead. Because if you're spending too much money in the other categories, then you can't pay your team as much as you want to, as much as you could, as much as they deserve. So, a lot of times, when we reluctantly don't want to go down the overhead management route because dentists feel like it means we've got to cut staff, or we have to limit — actually, it’s quite the opposite. The way to pay them more, incentivize them, is to control all your other costs so that when that added profitability does hit the bottom line, you can use some of it to incentivize your team.” (14:49—15:27) -Dr. Straub
“If your team compensation is 33%, it’s not that you're overpaying people. You could. It could be. But what that screams to me is your practice doesn't collect enough to be able to service that payroll level. So, in a private practice or less PPO-driven that has great systems in place, watches their costs, you might have the same payroll as another practice. But your percentage is 33, and the other doctor who is paying the same amount out is at 25% or 24%.” (15:35—16:11) -Kirk
“Your overhead percentages can indicate that your collections aren't where they need to be. So, they can be diagnostic as well.” The moral of the story is, track it, and then figure out how to improve it.” (16:13—16:28) -Dr. Straub
Snippets:
0:00 Introduction.
1:30 The challenge with overhead.
3:57 Why should I care about my overhead?
6:58 Why is overhead so confusing?
9:50 Why you need to know your overhead and how to lower it.
16:28 How to calculate your overhead in 60 seconds.
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Dr. Barrett Straub Bio:
Dr. Barrett Straub practices general and sedation dentistry in Port Washington, Wisconsin. He has worked hard to develop his practice into a top-performing, fee-for-service practice that focuses on improving the lives of patients through dentistry.
A graduate of Marquette Dental School, Dr. Straub’s advanced training and CE includes work at the Spear Institute, LVI, DOCS, and as a member of the Milwaukee Study Club. He is a past member of the Wisconsin Dental Association Board of Trustees and was awarded the Marquette Dental School 2017 Young Alumnus of the Year. As a former ACT coaching client that experienced first-hand the transformation that coaching can provide, he is passionate about helping other dentists create the practice they’ve always wanted.
Dr. Straub loves to hunt, golf, and spend winter on the ice, curling. He is married to Katie, with two daughters, Abby and Elizabeth.
