The numbers aren’t adding up anymore: Chris Barrow discusses why dental practice owners are seeing diminishing cash flow and profitability.
Get ready for quite a few three-, four- and even six-letter acronyms.
Average daily yield (ADY) is the total gross productivity of each fee-earner in your business; how much they generate in sales revenue every day.
ADY can be made up of:
- The actual or nominal value of UDAs/UOAs
- The actual or nominal value of plan patient fees
- The actual invoiced value of fee per item treatment delivered or sold on the day.
For the last 25+ years, I have demonstrated to my clients that, if an associate was being paid 50% after lab fees, and if their operating cost per surgery per day (OCPSPD) was at the UK benchmark of £450, then there was an minimum viable production (MVP) per day to simply achieve breakeven from the associate’s production.
That productivity was around £800 per day – can I remind you that’s to breakeven. Only above that do you, the owner, start to make any profit.
The 80/15/5 rule
Over 20 years of analysing practice accounts, I developed the 80/15/5 rule:
- 80% of associates were generating £800 per day or less – meaning breakeven or a loss
- 15% of associates were generating £800 – £1,000 per day – meaning a small profit
- 5% of associates were generating £1,000 plus a day – meaning a decent to healthy profit.
Hence associates often ducking for cover when they saw me arrive on the premises – although I have always held the owners responsible for not keeping count accurately and not collaborating with their associates to improve productivity (and, ultimately, everybody’s take home).
A side note – yes, we have to recalculate accurately for differing associate percentages, OCPSPD and production – in order to gain a precise analysis for each client – this article lives in a world of commonly observed generalities.
Increasing costs
How would you feel if I told you that the new MVP for the second half of 2024 is £1,500 per day – almost double from two years ago? In addition, few, if any, associates are hitting those numbers.
Over the last two years, I have watched as:
- OCPSPD has climbed as the economy and inflation have heated up, as staff wages have risen and overheads have increased
- In the last few months, the labs and suppliers that influence our variable costs have started to pass their increased costs on to you – their customer
- Clinical labour shortages have pushed associate earnings expectations upwards
- Many owners have avoided the updated analysis of which fee-earners are profitable, preferring their heads in the sand.
The challenge is that the 80/15/5 rule on production hasn’t changed, even if prices at the practice have increased.
Associates develop a cadence of production which magically eases during the busy months, accelerates during the quieter or holiday months and miraculously generates a similar pay cheque every month.
The bottom line
So, the bottom line is as follows:
- Benchmark OCPSPD has risen in two years from £450 to £650 per day
- Material costs have risen from a benchmark of 5% of sales (mixed practice) to 7% of sales in the same period
- Lab costs are rising, although it’s too early for me to start quoting benchmarks
- Prices haven’t gone up as much as they need to in the private sector (God help the NHS provider)
- Associate remuneration is creeping up
- Associate productivity remains the same.
Can you see the problem?
I’m still getting calls from worried owners and financial managers who are seeing cash flow and profitability diminishing.
It’s a serious problem that needs analysis and action.
You need to be sitting down with your accountant, business coach or internal financial manager and carefully conducting the analysis that I mentioned in my ‘financial crisis’ FMC webinar series earlier this year.
I was worried in Q1 of 2024, but I’m even more worried now. But I also know that the problem is solvable.
- Step 1 – recognise that you have a problem
- Step 2 – decide to do something about it
- Step 3 – get help.
Catch up on previous Dental Business Coach columns:
- Focus and simplify – the key to business ownership
- The Instagram associate – asset or liability?
- Are you happy tired or sad tired? It makes a difference
- Heading into Q2: what’s the name of the game?
- Does your dental team have fun?
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