In dentistry, labor costs usually represent the highest percentage of practice overhead. The industry average is around 27 percent and may or may not include benefits like retirement contributions, healthcare premiums, bonuses, and other benefits. I’ve seen practices where labor costs exceed 30 and even 40 percent of overhead expenses, and while I understand how it can happen, my question to dentists is why continue letting it go on. There are many ways to compensate staff for a job well done and run a profitable dental practice. Here are some of the strategies I’ve seen work in other practices.
- Be Careful Not to Overhire
Dentists should be looking at their optimal staff size relative to collections and avoid overhiring. A rule of thumb is one staff person for every $170,000 in collections for GPs and one staff person for every $200,000 in collections for specialists. If there are too many staff members on the payroll, look at some of the options below for ideas.
- Utilize Part-Time Employees
Part-time employees who work 20 hours or less each week can help to leverage doctors’ time and alleviate extra costs associated with full-time pay. This is a great strategy to use during peak production times like summer, and then be able to scale back when business is slower.
- Cross-Train Employees
Many dental practices have been able to avoid hiring extra staff by cross-training existing employees. For example, cross training employees to set up and break down treatment rooms, sterilize equipment, answer the phone, schedule appointments, and collect payment. This is also a useful strategy for managing vacation requests and sick time. Be mindful of your state’s laws on dental assisting.
- Add Other Incentives
Bonuses can be effective at not just controlling labor costs but also encouraging staff to help the practice succeed. What many dentists have done is tie bonuses to meeting performance benchmarks like production Paying even a partial commission is one way to keep costs in line while also rewarding exceptional performance. Some dentists find that paying associates or hygienists a full commission based on production works well, while others use a base salary plus commission.
- Outsource Administrative Duties
One easy but often overlooked solution to cutting labor costs is to outsource who does the bookkeeping, payroll, and receivables. Some practices do this already, and I will say that they tend to experience higher productivity and lower labor costs when their people aren’t spending time doing these tasks. Another benefit of outsourcing bookkeeping, payroll, and receivables is that the third party vendor probably knows more about these functions than in-house staff and can keep documents and processes better organized.
These are in addition to moving away from paying salary to paying hourly instead. Very few practices employ any staff who are still salary, but if you’re one of them, consider making the switch. You can save thousands of dollars per year simply by paying your employees when they’re at work, or when you’re at work.
Other ways to lower labor costs that I’ve seen work well include:
- Reducing clinical staff on days when the practice is open but patients aren’t being seen
- Increasing paid time off and fringe benefits instead of wage increases
- Raising fees and increasing production so labor costs fall in line with higher collections
- Eliminating overtime
Allowing yourself to think creatively about staffing your dental practice and compensating your team will open up a range of possibilities that give you a lot more flexibility than a standard staffing model. Work with your employees to find processes and incentives that are manageable and continue to keep them feeling valued, and your dental CPA can advise you on the financial impact of a new system.
How do you manage labor costs in your dental practice? Tell us in the comments. If you have questions about dental practice management, acquisitions, operations, or financials, email me at tlott@dentalcpas.com.
ABOUT TIM LOTT
Tim provides consulting services to dental professionals and practices. He provides expertise in start-ups, mergers, transitions, tax and retirement planning, financing assistance and budgeting. Some of the specific areas of consulting are associate, partner, and shareholder arrangements; practice management, practice purchase, sales, buy-ins, and buy-outs and related tax issues.