Is Practice Overhead Evil?

I used to hate paying my income taxes. When I was starting out in business, I dreaded writing that check every year – especially because every year the amount on the check kept getting bigger.

But then I came to realize that the main reason I was paying more each year was because I was becoming more financially successful each year. So much of life depends on how we choose to look at things.

One year I made a choice to look at the number on the check not as a loss but as an indicator of how well I was doing. I choose to see this number as an opportunity to do my part as a citizen by sharing some of the blessings I had and contributing to the nation. I started putting smiley faces on the checks.

It's the same idea with overhead in the dental practice. I'm often asked – and there has been recent discussion here in the comments – about what is the ideal overhead ratio to shoot for. But if you're only looking at overhead in isolation you're not seeing the big picture. In fact, I don't even like the term “overhead” because it makes us think in a limited way. Your facility, equipment, team and supplies should all be viewed in terms of investment.

But let's get back to the ratio question. Is an overhead ratio of 50 percent better than a ratio of 60 percent? Often it is. But what if the 50 percent is based on revenues of $550,000, leaving you with $275,000? And what if you make some improvements that increase your overhead to 60 percent but those improvements also increase your productivity to $800,000? Now you're left with an additional $45,000 after paying the bills.

So in that scenario, is it worth it to raise your overhead to get the additional net income? Again, often it is. But if meeting the demands of this higher level of production becomes a burden and means longer hours and diminished enjoyment of your time in the practice, then no.

The point is that overhead ratios are just one component in a more complex equation. This doesn't mean that you should spend freely and not concern yourself with rising expenses. It's just that you need to look at overhead (or rather, investments) in the right way, within the context of things like passion and enjoyment, revenue generation and return on investment.

Some great practices I know re-invest upwards of 65 percent of their revenues. But they are in complete control of each expense line item, they have a firm grasp on the return they are getting for each investment, and they are thoroughly enjoying their profession. The lesson here is, as long as you're getting your money's worth you shouldn't obsess. You might even want to put smiley faces on the checks you write.