Can you afford to sign on with a new insurance plan? Are you paying too much for your materials? Should you raise your private fees? These are the kinds of questions that can keep us awake at night. Fortunately, we don’t have to go just on our gut feeling, and we can apply some business principles to our decisions on fees, profitability, and overhead.
In 2017, I wrote an article that introduced the DE audience to the concept of gross profit margin. Add the costs of your materials and labor (in this case, just your dental assistant) and you’ll get your cost of goods sold (COGS). This is what it costs you to make a thing. Subtract COGS from your fee/revenue for that thing and you’ll have your gross profit. It’s critical to remember that you don’t get to put gross profit in the bank; you still have to pay the rent, the salaries of the rest of your team, and 100 other things. When you subtract all of that from gross profit, you’ll have net profit.
Gross profit is an interesting number. It allows us to see the dollars that flow into our practices after we pay for the direct materials and direct labor required to produce it. This number becomes even more interesting when we turn it into gross profit margin, which is the percentage of gross profit generated instead of the raw dollars generated. The formula is simple: (fee-COGS) / fee x 100.
As I show in the above referenced article, the gross profit margin for a private fee crown is 86% in my practice. That means 86% of the revenue that comes to me for that crown is available for my net profit and to pay the rest of my overhead. By looking at gross profit as a percentage I can more easily compare my other services and gauge their profitability. I can better understand the financial hit I take when I accept a lower paying PPO fee. I can see how raising a fee or decreasing the cost of my materials or labor will affect the cash flowing into the practice. It’s a useful tool for making a multitude of financial decisions.
If this topic interests you, I highly recommend watching the show The Profit with Marcus Lemonis. Unlike other business makeover shows, Lemonis actually invests in struggling businesses. The show is also less focused on reality TV drama and more on educating the audience about sound business principles. In every single episode Lemonis asks the same question, “What’s your margin?” He’s using gross profit margin as a critical piece of information, whether he’s investing in a used car dealership or a floral delivery service. It’s a universal management concept and it’s high time for dentists to start thinking about it in our businesses.
Cheers,
Chris
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