Six overhead expense benchmarks to live by in your dental practice
Updated: 5 hours ago
What are Dental Expense Benchmarks?
Every practice has variations in their expenses such as paying rent or paying mortgage, if they have associates, and how many employees they have. But there is a clever way to group together specific expense accounts from your Profit & Loss report into six bite-size categories and measure those categories against national averages of dental practice expenses using a percentage of income. You can also read my brief introduction post on How to Calculate Dental Office Overhead if you simply just want to calculate your total overhead and not break it down into categories yet.
The dental overhead expense categories and percentages of income are as follows:
Personnel Costs 24-28% of Income
Facility Costs 10% of Income
Clinical Costs 12-14% of Income
Other Business Costs 11% of Income
Discretionary Costs 2% of Income
Owner's Compensation, Other Doctors & Profit 35-40% of Income
I started doing dental benchmarks before I graduated college, during an internship in a dental CPA firm. I then experienced other Dental CPA firms and their benchmark methods through my career. But now, out on my own, my dental bookkeeping firm has close to 200 practices and I created an online dental benchmark software that does benchmarks automatically while connected to our client's QuickBooks Online account. Keep in mind, you may see some dental experts do these benchmarks slightly differently, but I have spent 10+ years perfecting this formula on the bookkeeping side and it will give you incredible insight into your spending if done correctly.
Calculating Percent of Income:
I thought I should quickly explain how to calculate the percentage of income for those of you who really hate number crunching. If you use QuickBooks then you can click a box in your Profit & Loss report options to add a column with the percentage of income. It will say something like "% of income". But here is the formula:
Expense / Income = % of Income
The expense divided by total collections equals your percentage of income for that expense.
Example: Dental supplies $30,000 / Total Collection Income $600,000 = .05 or 5% of income (.05 x100 = 5%)
Consistency is king in dental benchmarks:
Before I break down the dental overhead categories and clarify the expenses that go in each one, I need to emphasize that there is no such thing as a perfect formula. However, if you keep the groups of expenses consistent with the ones below, you'll be able to easily compare apples to apples with the industry averages I've provided.
The 6 Dental Overhead Expense Benchmark Categories:
Personnel Costs 24-28%
What it is:
This category will include the major expenses related to your staff. You don't need to separate every tiny thing like uniforms and continuing education, but you can if you want to. It normally won't make a big difference though and it may not be worth your time sorting through the small expenses to include them here because the gross pay is the major factor. Keep an eye on the bigger picture for now.
A huge mistake I see practices make when trying to compare their personnel costs to industry averages would be to include associates and other doctors in the mix. I know many dentists disagree with taking them out, but trust me on this, if you want to compare apples to apples, don't include your doctors in the personnel costs. I'll tell you where to put those costs later. The only exception to this rule is if you have an associate doing hygiene regularly.
Gross Pay - Office/Admin 8%
Gross Pay - Hygiene 10%
Gross Pay - Dental Assistant 8%
Employer Payroll Taxes for staff listed above 2-3%
Pension Matching Contributions for staff listed above
Health Insurance for staff listed above
Answering Services (this is part of office/admin staff)
Collections Services if used regularly (part of office/admin staff)
Facility Costs 10%
What it is:
Facility costs are going to be a combination of your expenses that may or may not be included in your monthly lease payment. It will also have your equipment related costs and interest for the practice and equipment loans.
The principal portion of your loan payments do not get included in your overhead expenses or facility costs. Only the interest portion of your loan payment should be recorded in your overhead expenses on your Profit and Loss report and it gets grouped into this Facility category.
If you own your building under a separate entity, you should be paying yourself rent. If you're paying the mortgage to that building entity through the practice, make that your rent for now (both principal and interest), but speak to your CPA to discuss the IRS regulations about a lease agreement and rent payments with your building entity.
Depreciation is included, but don't add it if you just purchased a CEREC and took section 179 for the full amount because it'll flood your benchmark and you can't see how you're doing otherwise. Better yet, replace the tax depreciation amount with book depreciation. Your CPA can get that for you.
Practice Rent/lease 5%
Repairs & Maintenance (both equipment and building)
Loan Interest (no principal)
Clinical Costs 12-14%
What it is:
Clinical Costs are for all clinical related expenses like dental supplies and laboratory fees. Some practices will have many expense accounts related to supplies and lab costs, and others will only have two expense accounts for this category.
Watch out for large equipment purchases or equipment loan payments that may have been accidentally included in dental supplies. This will creep up your supply benchmark and you'll keep scratching your head in confusion.
Other Business Costs 11%
What it is:
Other business costs will be your business expenses that most businesses have, such as merchant fees, office supplies and advertising and it'll be the place you put expenses if they don't fit into the other categories.
Sometimes office equipment will be placed in computer support or office supplies. Keep the big equipment purchases out of the expense accounts and on the balance sheet as assets unless told otherwise by your CPA. Then the depreciation from the equipment will be expensed and included in your facility costs benchmarks.
Advertising & Promotion 3-5%
Office Supplies 3%
Data & Software Processing
Licenses and Permits
Credit Card Interest
Payroll Service Fees
Telephone, Internet & Cable
Discretionary Costs 2%
What it is:
Discretionary Costs are the expenses you put on the books that are really at your discretion with how much you want to spend and it's not exactly part of running the practice. This will be things like an auto lease and business gifts. If you need to cut practice costs short-term, Discretionary costs would be the first place to look.
Discretionary costs category includes items that many will think are part of running the practice and put them in other business costs. These will inflate your other costs and it's important to get these in their own category so you can monitor them to keep them under the 2% industry average because it's easy to over-do discretionary costs.
Owner's Compensation & Profit 35-40%
What it is:
Owner's compensation and profit is all of the doctor's earnings and benefits for owner and non-owners. The profit (or net income) of the practice is included with owner's compensation. Add your "other income" here too, like interest earned. As I said earlier, doctors and associates don't get included in the personnel category because Owner's Compensation & Profit is where you'll put associate compensation as well.
This category includes all doctors and their benefits.
Don't include draws or distributions in this category because draws activity are already included in the profit of the practice amount of this category. In other words, as tempting as it is to put draws in your expenses, draws belong on your Balance Sheet under equity, not your Profit & Loss report.
Officer Gross Pay
Officer Payroll Taxes
Officer Health Insurance
Officer Disability Insurance
Officer Life Insurance
Officer Portion of Pension Matching
Family of Owner Gross Pay
Family of Owner Payroll Taxes
Family of Owner Health Insurance
Associates Gross Pay
Associates Payroll Taxes
Associates Health Insurance
Associates Company Pension Matching
Profit or Net Income (automatically calculated at bottom of your Profit & Loss)
Checking Your Math:
When adding your expense accounts to these categories, there is a way to check everything is correct. Add up the percent of income of all 6 categories and they should equal 100% of income. If they don't then either your Chart of Accounts wasn't set up correctly for your Profit & Loss report or you forgot to add expenses to your categories.
If you would like an easy to use guide with step-by-step instructions for how to benchmark your Practice Overhead in our template, then download our free E-Book "Discover how your practice compares to others". Sign up using the form below, and get notified when it will be available and free to download in August 2020. The guide comes with a benchmark template in google sheets and a printable PDF template.
Overhead benchmarks are a valuable tool for any dental practice if you know how to use it to find your weaknesses then measure your progress as you make improvements.
By: Sona Wegner, MBA, Founder