by ROGER P. LEVIN, DDS
Finding the right reinvestment strategy for your practice
How much profit should be reinvested into your orthodontic practice? Should the amount be a certain percentage of profit or just a fixed sum? Should you reinvest every year or every few years? Unfortunately, there are no cut-and-dried answers to these questions. Each orthodontic practice is unique and has a varying business model. Reinvestment is affected by many variables, such as the orthodontist’s age, practice vision, competition, technology needs, the age of current equipment, geography, and patient demographics.
As a quick example, a practice owned by a 29-year-old orthodontist producing $550,000 per year (with a goal of achieving more than $1 million in annual production) will reinvest differently than a practice owned by a 52-year-old orthodontist producing $750,000 per year (with a goal of 6% annual growth).
Both of these orthodontists have different visions and goals. The younger one may want to invest heavily in technology and referral-based marketing to spur growth. The second orthodontist would probably be content to maintain the practice’s current equipment and technology while keeping (or slightly tweaking) the practice’s current marketing program. The unique characteristics of every practice will help determine that practice’s reinvestment strategy.
To begin the process of designing a reinvestment strategy for your unique situation, you should ask yourself three questions:
1) What is the current state of your practice?
2) Where do you want to take your practice?
3) How are you going to get there?
What is the Current State of Your Practice?
You need to take a hard look at your practices. I recommend using key performance indicators (KPIs) to measure practice performance. Examples of the most critical KPIs include:
? production to collection ratio;
? number of new patients;
? average production per new patient;
? average production per patient;
? no-show and cancellation percentages;
? observation patients;
? accounts receivable;
? revenue per employee; and
? net profit.
Every practice has 12 to 15 KPIs that determine its success. By examining KPIs on a regular basis, you can know immediately whether you are experiencing problems reaching your practice’s goals.
Using KPIs, you can ask questions and create solutions for the business side of your practices. Without this type of regular statistical evaluation, it can be difficult to understand practice performance. When KPIs are not being met, you should make significant adjustments as early as possible to get your practice back on track to achieving its goals.
An accurate financial assessment is critical to determining your practice’s reinvestment strategy. According to the American Dental Association’s 2002 Survey of Dental Practices,1 overhead costs represent 55.6% of specialty-practice revenues. I recommend that orthodontic practices should be in the 49% to 50% range for overhead. This does not include your income and benefits. Obviously, the less overhead a practice has, the more capital will be available to reinvest in equipment, technology, and marketing.
A practice budget should break down not only the total expenses incurred over a month, quarter or year, but it should also categorize these expenses into set overhead categories, such as staff compensation, lab costs, and orthodontic supplies. This systematic approach to budgeting allows you to set specific goals to help control total overhead and overhead in each category, while maintaining the quality of care and customer service that your practice delivers. Achieving a strong return on invested capital is the result of solid systems that generate maximum efficiency while allowing the team to provide optimal care.
In addition to analyzing your practice’s financial performance, you should look at your practice through the eyes of your patients. How attractive is the exterior of your practice, including grounds, landscaping, parking lot, and signage? Take a walk around your building—front, sides, and back—to ensure that your facility presents a pleasing appearance to patients.
Your practice’s interior should make patients feel welcome. How attractive is your reception area? When was the last time it was redecorated? Is your wallpaper out of style? Is the paint faded or yellowed? Is the carpeting starting to wear? Is the furniture scratched and dented? I recommend that orthodontists should reinvest in updating their practice dÉcor at least every 5 years.
Other questions to ask regarding infrastructure: How old is your current facility? Is your patient base growing? Does your building have enough capacity to meet your patients’ needs? Does it allow you to work efficiently? Is your location in a growing, stable, or declining area? What competitive pressures are you facing? Do you expect them to increase, remain constant, or decrease?
Self-knowledge is critical to self-improvement, and the same is true for practice improvement. Before you decide to reinvest, you need to have an accurate assessment of your practice. Once you decide where you are, that can help you plan where you are going.
Where Do You Want to Take Your Practice?
Vision is one of the reasons you became an orthodontist. It is a source of professional motivation and guides your practice’s long-term growth. A vision statement describes where the practice is going in the next 3 to 5 years. Achieving your practice’s vision requires the development of a series of shorter-term goals designed to gradually move the practice closer to the ultimate vision.
Effective leaders share the practice vision with the orthodontic team. Explaining the vision helps the staff become active participants in building the practice and achieving all goals. Nothing contributes to the development of a high-powered team more than a powerful vision that is constantly reinforced by a true leader. As management guru and author Warren Bennis has said, “Leadership is the capacity to translate vision into reality.”
Your practice vision will drive your reinvestment strategies. For example, if your goal is to become a high-tech orthodontic practice, you would need to invest in the latest equipment and technology (such as computers in every treatment room, digital imaging, and e-mail communications). To upgrade technology would require a significant investment as well as a plan to finance the project.
How Are You Going to Get There?
After you analyze the current state of your practice and then create a vision statement, the next step is to find a way to make your vision a reality. Goal-setting provides a road map to your ultimate practice vision. To be considered a goal, an objective must:
? be written in clear, specific language;
? have a deadline; and
? be measurable.
Goal-setting is a powerful business technique based on strategic planning. However, a vision without goals is merely an idea. The goals act as the time line, benchmark, and directional process to achieve the vision.
Orthodontists who set goals are clearly focused on where they want the practice to go and when they want to get there. They want to make their practice vision a reality.
Different goals will require different reinvestment strategies. Here are several key reasons for practice reinvestment.
New Facility or Expansion
Before deciding to expand or build a new facility, you should analyze your practice’s performance during the past 3 years. Have practice production and new-patient starts been trending consistently upward? Is the current upswing an anomaly? Any major construction would require extensive planning on your part. How will the expansion or the new facility be financed? How will the project benefit the practice in the long term? Before deciding on any major project, you should consult with your accountants and other financial experts.
According to the recent Reinvesting in the Business poll conducted by the National Federation of Independent Business,2 nearly one third (32%) of surveyed small business owners said they used “rate of return” as the basis for reinvestment decisions. However, one fourth of those surveyed said they relied on “gut feel.” Many dental professionals make impulsive decisions regarding investing in the practice.
For example, you may attend a regional or national trade show and become enamored of a new technological product. The product is ordered, arrives at your practice, and then is used sparingly. For whatever reason, you are no longer enthused about the product. Without proper training on how the new equipment supports your practice’s goals, your team will often ignore the new product until it eventually winds up in the storeroom.
Evaluate technology purchases carefully. How long is the technology expected to last? What are the trends regarding the technology? If it is a substantial investment like digital radiography, how long will it take the practice to pay for the investment? By the time you make your last payment, will the technology be obsolete?
Not every reinvestment plan should focus solely on tangible assets such as buildings and equipment. It may be that the highest returns on capital can be found when you decide to invest in marketing your practices.
One of the best ways to increase production is through a strong referral-based marketing program. I recommend that a minimum of 6% of practice revenues (for a one- to two-orthodontist practice) be spent on referral-based marketing, including hiring a professional relations coordinator (PRC).
The PRC will work with referring practices and administer the referral-based marketing program, which consists of 15 to 30 strategies to generate referrals from current and new referral partners.
Referral-based marketing is based on relationships. Maintaining a minimum number of ongoing contacts with referring dentists is critical to marketing your practice. These contacts can come in the form of social meetings, educational mailings, practice-sponsored events, educational programs with referring dentists, and a host of other strategies.
The key to success in referral-based marketing is consistency. Successful referral-based marketing requires that you implement 15 to 30 simultaneous, continuous marketing strategies. Starting and ending marketing programs erratically dilutes their effectiveness over the long term.
You need to reinvest in your practices to ensure long-term success. Reinvestment strategies must be based on your vision and your practice’s performance. Practices that are strategic, set goals, and reinvest properly will be the ones that will have the most success in the future. Your decision-making process should focus on your willingness to look ahead 3 to 5 years. By understanding the strengths, weaknesses, opportunities, and threats to your practice, you can take the necessary steps to position your practice for continuous growth. Excellent management systems, strong referral-based marketing, and an infusion of new equipment and technologies will be a benchmark of successful orthodontic practices. z
Roger P. Levin, DDS, is founder and CEO of Levin Group, a dental practice-management consulting firm that is dedicated to improving the lives of dentists through a diverse portfolio of lifetime services and solutions. Since the company’s inception in 1985, Levin has worked to bring the business world to dentistry. A popular lecturer, he addresses thousands of dentists and staff worldwide each year in 100-plus seminars and at the dental industry’s most prestigious meetings. He can be reached at [email protected].
1. 2002 Survey of Dental Practice: Income from the Private Practice of Dentistry. Chicago, Ill: American Dental Association; April 2004.
2. National Small Business Poll: Reinvesting in the Business. Washington, DC: National Federation of Independent Business; 2003:3(3).