How to Calculate Your Overhead in 60 Seconds

Episode #575 with Kirk Behrendt & Dr. Barrett Straub

If you're going to own a business, you've got to do some math! Overhead is one of the most important numbers that dentists should know, yet it’s the most neglected. To prove how uncomplicated it truly is, Kirk Behrendt brings back Dr. Barrett Straub, ACT’s CEO, to help you calculate your overhead in under 60 seconds. With ACT’s Roadmap to Practice Profitability, you can start thinking better and making the changes you need to improve your overhead. To learn where to access this free resource and start using it today, listen to Episode 575 of The Best Practices Show!

Episode Resources:

• Dr. Straub’s email: barrett@actdental.com 
• Dr. Straub’s Facebook: https://www.facebook.com/barrett.d.straub
• 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.

Learn how to track, control, and lower your overhead.

Give yourself grace. Make small changes and improvements.

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 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. 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 it 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 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 cash flow 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” [for caring about overhead], one is so that you know what it is and when you start to get paid. 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 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. 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 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, knowing these numbers, knowing these gaps, knowing when we’ve crossed into break-even just to stay afloat, then break-even so I get paid, 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 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 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. 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.” (14:11—14:25) -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, 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

“[Finding your overhead is] super easy, 60 seconds. You're going to pull your P&L. Now, again, back to the “man up, woman up”. You're a business owner. You all have QuickBooks. You’ve got to be able to print a P&L . . . You can [call your accountant], and they’ll get you it. But as business owners, we should be able to print a P&L any day, any hour, any time we want. So, if you can't do that, talk to your accountant and say, ‘Hey, I want your services, but I want to be able to pull financials whenever I want. Let's figure out how to do that.’ QuickBooks is super easy to use. So, you print your P&L. That's number one. You have it in front of you. You go to the bottom of the P&L. It’s going to say something called Expense Total. It’s a big dollar figure. Write that down. Now, you go above that, and you find out one of your categories or buckets is going to be called Doctor Salary and Benefits. There's going to be a total. You're going to write down that number. You're going to subtract that from your total expenses. That's your overhead. That's it.” (16:30—17:37) -Dr. Straub

“That's part of the complexity, is that there's no standard way for a P&L. So, all a P&L is, is in QuickBooks, you get to organize all these line items of expenditures. And you get to organize them and dictate which category they go in. We have a seven-bucket model where there are seven buckets where all of your expenditures should fit in. The reason we like that is because it’s designed after how a dentist thinks. ‘Okay. I bring in money, and it goes out in one of these seven ways. And then, what's left over is my salary and benefits.’ We’ve seen a lot of P&Ls from lots of our clients, and there's no standardized way in the accounting world to do it. So, some will have three buckets, and some will have 342. And ultimately, we’ve got to talk to our accountant and say, ‘Hey, we’ve got to organize this a little different so I can understand it. Because all of these different categories make no sense to me.’” (17:46—18:41) -Dr. Straub

“In life, you go through these cycles. You go through ups and downs. You might be having the greatest quarter ever. Things are amazing. And then, the snow hits. Or you get hurt. You have to have a lower overhead so that you can deal with the weather, or life circumstances, or you have to go to two funerals in a month, or whatever. You've got to be able to have that breathing room. And knowing your overhead in 60 seconds, or following this, will make you sleep better.” (20:22—20:53) -Kirk

“One cautionary tale for overhead. I think another reason we dentists don't like to track it is, unfortunately, we like to compare ourselves to others. We dentists do that a lot. I mean, human nature. And what I'm going to say, track your overhead, and then take a deep breath. It’s okay. You can improve it. You can work on it. You're not a bad businessperson. You're not a bad dentist. Give yourself a little grace and get a little bit better every day. That's all we’re going to advise on how to improve your overhead.” (20:55—21:25) -Dr. Straub

“When we control our overhead, when we get that percentage as low as we can, reasonably, without stifling growth — we don't want you using a bad lab. We don't want you using bad materials. Never — then, any additional production/collections, we reap the increased profit margin based on that. So, let's say we have 72% overhead. We have a 28% margin before we even start to get paid. That's before taxes and before loan payments and all that. Well, if we go and just produce more, produce more, produce more, that goes with us. So, now, we’re producing more. We’re paying even more tax on a pass-through entity, and we’re getting less of that 28%. So, we’re saying, ‘Hey, why don't we control the overhead a little bit, even if it’s a few percentage points?’ Now, when you go produce more, which is always good, you're going to take more of that profit margin.” (23:00—23:55) -Dr. Straub

“We have a seven-bucket model. Number one is team comp. Historically, it’s always been 25%. We understand that's getting harder and harder to meet, and we’ve got to get creative. We have facility and equipment. That's going to be your rent, your utilities, your facility, your property, janitorial services, all of that, eight percent. Supplies, five percent. That includes drugs. Your lab, eight percent. That’s lab, that's implant, that's ortho, that's CAD/CAM. And then, operating costs, nine percent. This is the one that can get out of hand. This is the one where you kind of throw everything that doesn't fit a different category.” (23:59—24:40) -Dr. Straub

“[Operating costs can be] like office supplies, business office equipment, legal fees, accounting fees, collection costs — I'm reading right off the Roadmap — bank charges, all of these things. Computer expenses. They're typically expenses that are necessary but not related to the dental piece all the time.” (24:40—24:58) -Kirk

“The low-hanging fruit on improving your overhead is, one, set a supply budget. When you hit that number, stop spending — except for emergencies. And then, operating expenses, I can guarantee there's some money going out on a monthly auto-charge to your credit card that you don't even know about.” (25:00—25:18) -Dr. Straub

“If you're not collecting 100% of your net production, your overhead percentages will be worse than they should be. So, if we’re only collecting 95% of our net production, then that's five percent that doesn't get factored into these overheads.” (25:52—26:08) -Dr. Straub

“People look at team compensation as an expense, and they get angry. Back in the day when they would write checks, we would joke that the dentist’s pen would bend when they were signing checks. Think better. Our job here at ACT Dental is to help your thinking. That shouldn't be an expense — that's an investment. You're investing in human beings. You've got to invest in the business.” (26:50—27:10) -Kirk

“If you've listened this far into the podcast, which we’re hoping you have, you're probably a little angry, a little frustrated right now. We’re here to tell you, there is a way out. It’s actually wildly predictable. If you sat down and actually did the math once a month — I'm going to recommend that you get a coach. But even if you didn't have a coach, you could say, ‘Okay. This is not good. I need to fix this.’ Nothing stands in your way. You can literally fix this one bucket at a time.” (28:21—28:47) -Kirk

“Once you start tracking numbers, the decisions that you need to make become very clear and a lot easier to make. Knowledge is power.” (28:49—28:58) -Dr. Straub

“Don't overthink it. Don't beat yourself up. Just start tracking numbers and make small, incremental improvements every month and every year. And the long-range benefits or outcomes from doing that little bit of behavioral change will pay off dividends for decades.” (31:10—31:25) -Dr. Straub

Snippets:

0:00 Introduction.

1:30 The challenge with overhead.

3:57 Why you should care about overhead.

6:58 Why overhead can be 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.

20:55 The best advice for thinking about overhead.

22:47 The seven-bucket model.

29:02 About ACT’s Roadmap to Practice Profitability.

30:59 Last thoughts.

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.