How to balance your staff salaries and maintain a profit
Looking at your staff salaries by hourly pay rates alone will not give you the insight you need to gauge if they’re too high or too low. In order to get an accurate check on this metric, you’ll need to know your staff salaries as a percentage of your collections. You can find this by reviewing your practice’s financial statement; doing this monthly is one of the most important things you can do to monitor and maintain the overall health of your practice.
Where to start
When reviewing a financial statement, the most important metric to look at is net income before doctor cost. Net income is the amount that doctors have left after the cost of doing dental work; it gives a view into how much money remains to service debt, run perks through, pay their salaries, etc. This is also useful because it’s a valuable number to use to compare the practice’s overhead to others.
The next thing to look at is collections, the total dollar amount brought in by the business. This number is useful to compare with previous years to see if the practice is growing or contracting; it also shines a light on where the business is headed.
Finally, we’ll focus on expenses—specifically salaries, the single biggest expense in the practice. Salaries, depending on your specialty, can make up 15–25 percent of a practice. Because no other single expense comes close to that category, it needs to be the most controlled.
Salaries as a percent of collections
Each specialty can be unique when it comes to salaries as a percentage of collections. General dentists and pediatric practices tend to be on the higher end, with a range of 22–24 percent and 20–21 percent, respectively; other specialties will typically go down from there. Oral surgery practices typically have the lowest and should run between 14–15 percent because they use less labor per dollar of income.
Orthodontic practices are also on the low end because they don’t have hygiene costs. According to the Cain Watters & Associates Orthodontic Practice Comparison Report, for the past five years, staff salaries for CWA orthodontic practices have averaged around 17–18 percent of collections annually. (In the How Does Your Dental Practice Compare? Report, readers can view the average previous year percentage for general dentists, pediatric dentists, orthodontists, oral surgeons and periodontists in a variety of practice sizes.) This is total gross salaries and does not include owner perks, staff benefits or payroll taxes.
One way to reduce staff salary expenses is by combining positions; for instance, an office manager can also work as an insurance coordinator or a front office associate can also be the treatment coordinator. For practices on the smaller end, having staff members perform multiple roles is wise. The decision on which roles to separate out should be based on the ability of the individual to maximize his or her time.
Can you afford an additional staff member? One way to tell is by looking at the practice’s overall salary-to-collections percentage today, and then again as a future estimate based on anticipated growth in your practice. Owners can make an educated guess by examining factors like the practice’s previous-year growth percentage, days worked and planned fee increases. If you’re an orthodontist, knowing where your collections will be in a future year can be fairly easy because they’re telegraphed in the adjusted production from the previous year.
For example, if in 2019 you’re on track to collect $800,000 but your net production is $1 million, you can feel confident that you can collect $1 million in 2020. Doing this can help you feel good about building in additional staff, or even giving raises to your current staff. Most CWA practices have seen a consistent increase in their production every year from 2012 to the present. As production increases, doctors can pay more in staff salaries while remaining in the desired range of their percentage of collections.
Urban versus rural
If managed well, doctors in rural areas can achieve lower overall salary-to-collections percentages. Salaries in Southern states will be lower than those staff costs in the East or West coasts. What is important to note is that it actually won’t be a huge differential and should not be an excuse for urban practices to have a higher payroll percentage. Practicing in areas with a higher cost of living may require one to pay more in salaries, but it also allows the practice to demand higher procedure fees, and the two should balance out.
A stronger indicator for overall salary health, other than location, is practice size. CWA clients that collect more than $1.5 million consistently have a lower staff cost as a percentage of collections than those that collect less than $1 million. The reason? Efficiencies are typically gained when people are busy and the doctor is collecting more.
Salary trends by position
Next, let’s look at associate salaries. Our 2017 orthodontics report shows an increase of 4.25 percent for associate doctor daily rates year over year, which is the highest percentage increase of any other position. This is likely a common trend for all specialties. One reason associate salaries are increasing at a more rapid pace is corporate dentistry groups. Why do they pay so much? With no long-term ownership incentive to offer associates, high daily rates are means to attract young clinicians and as a result are driving up associate salaries as a whole.
One staff salary that is decreasing year over year is the lab technician. Technology is causing a shift in the landscape. With technologies such as 3D printing and market leaders such as Invisalign that provide lab work, the need to keep labs in-house is decreasing for some specialties. Additionally, as lab companies compete for business, they become more efficient, resulting in many doctors choosing not to do their lab work in-house.
Consistency is key
If salaries are too high as a percentage of collections, the first thing you need to ask yourself is if you’re overstaffed. Is there a position not utilized effectively, or are employees having too much free time? If this is not the case, one needs to examine hourly rates. This is a difficult task, because if staff members are overpaid, the options are to let them go or keep overpaying. Both are difficult, and neither is ideal.
Strategies for getting your percentage back within the average range include:
- Cross-training for different positions. Depending on the size of the practice, you may have positions that can be combined. If the practice is on the smaller end, it’s essential for employees to take on multiple roles.
Pay hourly versus salary. For most dental office staff, federal wage and hour laws require these types of roles be paid hourly.
Minimize overtime. Make sure employees aren’t “riding the clock” by coming in early, staying late or working through lunch. Set office standards to cut off employee hours at 40 per week.
Reduce unnecessary office hours by improving scheduling. Coordinating vacation time with the doctor is another good way to do this.
Increase use of part-time employees to meet peak production times. Leveraging part-time or temp employees can help reduce fringe benefits and retirement plan costs.
Try alternative incentives rather than increasing hourly rates. By keeping salaries static and leveraging bonuses, you may be able to still offer incentives but avoid getting locked into high hourly rates.
As the largest expense on your balance sheet, it’s more important than ever to keep staff salaries consistent. As the practice grows and procedure fees increase, there will be the opportunity to pay staff members more when they’ve earned it. Allowing staff salaries to get out of line will quickly affect your bottom line. As the owner, if your net income decreases, you will be forced to sacrifice in other areas to make up for the overage in this category. The more areas you’re over the average, the more significantly your net income is going to be reduced.
Cain Watters & Associates LLC is an investment advisor registered with the Securities & Exchange Commission. Information provided does not take into account individual financial circumstances and should not be considered investment advice to the reader. Request form ADV Part 2A for a complete description of CWA’s financial planning and investment advisory services. There is no assurance that other client actual results will be similar to information presented. Estimated future results may not be obtained due to economic, business and personal circumstances.