Dental Practice Accounting 201: Fixed Costs, Variable Costs, and Breakevens

Welcome back, associates. We are in fuel cell number three. Be explosively successful as a new practice owner. And we've already talked about, Talked about accounting 101, in which we go over a profit and loss statement, how you can categorize expenses and how you can compare over time, how you can set some goals in there as well. We're going to get into a little bit more of a.

I'll say, an added extension of that, which is defining your breakevens. And you use your profit and loss statements to give you a lot of that detail you need in order to calculate your break even in your practice. So this is such an important topic because I don't want you to go to work and your practice every day just to go and go through the motions. We want you to be thinking about a purpose to why you're doing what you're doing and calculating. Here's what I need to collect in my practice in order to meet these goals I have for myself today and my goals for the future. So, so understanding your cost structure is one of the most important elements. When you're calculating what is your break even now, there will be people who will tell you you need to know your break even. You may have a practice management consultant come in and call it your bam and say, here's what your break even or your bam needs to be. What I want you to do is to have excellent context to creating a meaningful break breakeven number. So let's start off by talking about your cost structure. In any business, your costs are really broken up between your fixed and your variable costs. And let's define breakeven first as we get into these more important concepts. Number one is your breakeven is the point at which cost and income are equal and there is neither a profit or a loss. And that's per the Webster dictionary. Number two, let's get into what your cost structures are. Number one, your variable costs and number two, your fixed costs. Your variable costs are those expenses which change in proportion with your production expense, your practice. Some of these examples for dentists include supplies and labs. Those are the two main sort of pure variable costs. You have certain administrative costs, like perhaps collection costs, which is your merchant a lot. That's what we call your merchant processing costs, which is the more credit cards that are swiped, the higher you pay your merchant processor, perhaps some office supplies. But by and large, your two main variable costs, those that fluctuate up when you do more production and down when you do less production, are your supplies and your labs. Now on the other side of that coin are your fixed costs. And your fixed costs are those costs that whether you make a dollar in collections or a million dollar in collections, you're going to pay pretty much the same amount. For example, your rent or your facility costs, those by and large stay the same from month to month. Your debt service. Now debt technically is not considered overhead, but if we're talking about your outflow, your debt is definitely a fixed cost. No question about that. Pretty much to the penny. Unless perhaps you have a variable interest rate, which typically you don't. On dental practice loans, you're going to pay the same amount regardless of your production, and that's called a fixed costs. Certain administrative expenses are fixed costs. For example, your computer expenses, perhaps some consulting or legal and accounting expenses, phone and Internet, those are fixed costs. Now occasionally you do have some hybrid costs and marketing is sort of a hybrid cost. And that can fluctuate up or down depending on what you're trying to accomplish with your collections, though it isn't necessarily tied to to your collection. So that's a unique one. And.

Your labor could be. If we really think in the bigger context, every cost is variable. Because if you're running a two op practice and then suddenly or over the years you go to a seven op practice, well, you're going to need more labor. If you go from $30,000 a month in collections to $200,000 a month in collections, even your labor becomes variable and your facility costs become variable. Look at it say over 12 month period or a 2 year period. Generally your labor stays the same and your facility costs stay the same. The only during that sort of shorter period, the only thing that's variable are your labs and supplies. Let's look at this in graphical format, your cost structure and break even levels. Let's start with your fixed costs and we're going to include debt in your fixed costs. This is the amount that is to the dollar the same no matter what happens to your collections. Therefore, it's a straight line in this graph where on the Y axis we show your expense, the amount going out. So in our graph here, it's somewhere around $45,000 all the way across on the X axis. And the X axis is the amount of your collections. So if you collect $100,000, it's still the same as if you collected $20,000. Hopefully you're following me on that. If not, rewind, listen one more time on that. So you understand the y and the x axis here. The Y axis again is the costs Your outflows and the x axis is your collections or your inflows. And just checking on one thing there. Yep, that's exactly right. Now, in addition to your fixed costs, let's add those things we just spoke about, your variable costs. Variable costs are.

Are going to be your labs and supplies, as we mentioned, and depending on the type of dentistry you're doing, and depending on if, if you have a CAD cam in your practice, that will change the amount of your variable costs. If your labs are only 3 or 4% because you're using your CAD cam a lot, then you're saving probably 6, 7, 8% on your lab costs. Your supply costs may go up a little bit for blocks and burrs and that type of equipment if you're doing in house lab work. But let's say it's 15% total for your labs and supplies. So as your collections go up, what happens to your cost structure? Now when you factor in the variable costs, it goes up as well. And so that's why you see the sort of orange line there that increases by 15% of your collections and that's added on to your fixed cost cost structure. Now that's if we get rid of sort of those mezzanine costs or those costs that are hybrid like marketing, let's just call marketing a fixed cost in here. And all of your costs other than labs and supplies are on the gray line. So this is the universe of all of your costs in your practice and your debt. So if you're collecting, let's say $100,000 a month, your fixed costs, or right around maybe $45,000, but your total costs, when you add on your variable costs are going to be somewhere around low 60,000. So I'm hoping that makes sense for you because now we're going to get into the fun stuff. We got your cost structure. But if all you were trying to do was keep your practice doors open and not take home money for living and supporting your, your family and your lifestyle, then you're probably good. Maybe you want to do dentistry for the love of dentistry. You don't need a dollar personally. Now for most of you, pretty much all you, that ain't going to be the case. So let's plan now for covering what are those other personal expenses as well. So now you need to take money out of the practice in addition to covering your costs in the practice. And this is your net pay, meaning the amount that's deposited in your personal account from your corporate account through payroll, assuming you're an S corporation. As most of you should be single practice, single doctor practices, your net pay and it could be your draws if it comes out of the practice as a draw, your W2 and your draws. We have a whole other module in our tax section about how you take money out of the corporation. But if you take your money out of corporation, you're always as well going to pay taxes. In fact, as an S corporation, you're going to pay taxes whether you pull the money out of your corporation or keep it in there. Because S corporations are what are called flow through entities. And you're taxed on the profits whether you pull those profits out or not. See our tax module on that? So now you see this red line. And the red line is of course above the orange line because it indicates that that's the amount of collections you need in order to meet your fixed cost, your variable costs and your take home for living expenses and taxes. Interesting note. Notice that the spread between the yellow, which is your total total practice costs and the red, which is your practice costs plus your personal needs and taxes, starts to create a wider gap. That's because the more money you make, the more collections you earn. As you go to the right on the x axis, the more collections you earn, the more profit you have, the higher taxes you have. Because your tax scale is a progressive tax scale. And so instead of paying say 30% of your income on taxes, now you're paying 40% of your income or 35% of your income on taxes. And that's why you start to need more.

To cover your taxes. And that spread is created there between the yellow line and the orange line. Again, we have a really good module talking about the tax structure in our country and the way it's going to be applied to you as a business owner or as a dental practice owner. Now we're not done here because even though your practice is operating, that's great. You're keeping your doors open, you're covering your fixed costs, you're covering your variable costs. Awesome. You're even funding your lifestyle right now and you're paying the taxes. What more do you need? Well, you need to pay for your future self and that is your savings. And so we have one more line here for your savings. You should be setting aside that amount based on your planning, with your financial planner, with your CFO advisor, if you're working with us, that amount per month, that's going to help you achieve that goal around financial independence or retirement, however you want to call that. And so now if you can hit that number, you're meeting all of not only your obligations, but also you're being prudent and disciplined with your money and you're saving for your future. Now let's draw a line through our graph showing our collections. As your collections go up, they intersect with each of these lines. So your overhead costs, well, if somebody says, what's your overhead percentage? Well, the average overhead percentage for a dental practice might be 60%. But the truth is your overhead is 100% of your collections until you get to your meeting your fixed cost structure. After that, your overhead becomes 15%, in this case, your labs and supply ratio, 15% after that and your profit becomes 85%. That's why getting that extra dollar every month as you meet all of your fixed cost obligations. Once you pierce that point, that's when you become profitable. That's when you're able to take home more and save for your future. That extra patient in the day, that extra few hours that you're open. We have a module on case acceptance and how to get your collections up and how valuable it is once you pierce that fixed cost point. Really important concept. Understand that as a business owner, particularly a business owner that has the type of business with high fixed costs. Some businesses have low fixed costs and high variable costs. Your high fixed costs, lower variable costs. So you've got, it's critical that you get through that fixed cost before you sort of get out of the clouds and you can see, wow, this is a great view from up here. I'm actually making some money. Now, let me define the three break even points on this graph. Number one is what I call your practice break even. As I mentioned earlier, this is just keeping your doors open, covering your fixed and your variable cost. But you're not taking home anything. And that's not why you work so hard and went to school and took on $500,000 of student debt, etc. It's not just for that, even if you love dentistry, but that's one definition of break even is what I call your practice break even. The next break even is now your collections intersect with the line where you're also paying for yourself and your taxes. And I call that your living budget break even. The reason why I call that your living budget break even is because now you're paying yourself and you're enjoying life at some level. However, the real break even and if you work with practice cfo, what we want you to aggressively target is your financial independence break even because that's why we exist, is to help our Doctors become financially independent, not just exist, not just run a dental practice, which is awesome that you do, but it's to really meet your life goals and become financially independent. And that's the break even that matters. Now we have a resource and this is probably one of our, I think more valuable resources. I think they're all value, but this is a great one which is helping you calculate what your breakeven is in your practice. Now remember, we're in fuel cell 3. Be explosively successful as a new practice owner. So I'm assuming that you own a practice and if you own a practice, you have your fixed costs, you have, you've got your variable costs, you've got your personal living needs, you've got taxes and ideally, ideally you're going to be saving for yourself in the future. I get that sometimes in year one or two you're just trying to stay afloat and deal with a lot of the issues of a new business. But as soon as you can, we got to start funding your future self and getting the benefits of compounded growth that only come with giving time to your investments and, and your savings. Now this module is going to be in our fuel cell number three. I'm sorry, this resource in fuel cell number three, you can go there, download it. It's an Excel spreadsheet, so you have to have Excel downloaded on your computer. Most of you, I'm sure do.

And then from there there are gray cells as you can see, and you just fill out those gray cells. I have a YouTube video where I take about 20 minutes walking you through how to fill these out, where you're defining what are your personal living expenses, what are your savings for your future, what's your overhead, what are your taxes? And you're going to have to consult possibly with your tax advisor or of course, if you're working with us, we're already doing this for you. But if not, you got to consult with your tax advisor and, and your third party administrator and your 401k if you have that to know what your 401k contributions are going to be. But it's a great way for you to define, wow, here's in context, my actual break even in my practice. And it will give you such a greater sense of purpose and context for you going into your practice every day. This module may require watching it a second time to understand these nuances in this language of accounting and understanding your business. And as a business owner, I can't tell you how important it is that you learn to speak this language of numbers and understand your financial statements and define your goals in a real, meaningful way.