If you saw last week’s post, then you saw in the beginning of the post that I casually spouted off some examples of ways to reduce non-employee specific costs.
My goal then was to emphasize the difficulty of “fixing” poorly managed staff costs. However, this week, I want to get into a little more detail about dental supplies and labs. Why? Because the big secret to these expenses is that they are totally variable. “Variable” can mean “fixable.”
So how much should an office be paying for their supply and lab costs? How do you know if it needs fixing?
Great question? You get a Brian Hanks virtual thumbs up. (The equivalent of a Paul Hollywood handshake.)
Collectively, the two should make up about 11-12% of office revenue; individually, it’s about a 50/50 split.
However, keep in mind how production mix relates to this number.
Implant supplies are going to cost more than the supplies for bread and butter procedures. Orthodontic offices are going to spend more on supply costs. Pediatric offices are going to essentially have zero lab expenses.
So if you’re looking at a practice that is performing basic procedures don’t dismiss any internal warning lights in your mind if the supplies are higher than that 11-12%. Let the supply costs be your canary in the coal mine.
Way back when, miners would take a caged canary down into the mines. This canary was their warning sign if there were dangerous, unscented gasses, like methane, that the miners themselves couldn’t detect. They’d glance at the canary and if it was still alive, they knew they were fine. If the canary wasn’t alive…well, you get the idea.
Fortunately, dental supply and lab expenses are not living organisms so no need to sacrifice an innocent bird. However, they can help you detect if this is a well-managed office. After all, well-managed costs most often mean a well-managed practice.
Now, if your canary isn’t breathing anymore, what can you do? Research before making any decisions.
Find the answers to questions like the following: Are costs high because nobody is price shopping? Is it consistent throughout the years or was one year an outlier? Did the doctor buy a boat and write it off as a business expense?
Once you’ve found the answers, then you can create your plan of action. You may realize that you want to use a different supplier or you may prefer another lab. Maybe there’s a way for you to reduce the expenses without sacrificing quality or providing subpar services.
As I said, these expenses are variable, which means the possible solutions are variable as well.
Variable also means that what is spent one month, may not be what is spent the next.
It’s a little like shopping at Costco (for a relatively small family). You buy a massive amount of toilet paper, you grab a large bag of meat to freeze and you choose the gallon size bottle of olive oil. That toilet paper is going to last you a few months, at least.
Those supplies are going to last you long enough until your next Costco-like order. Now, it is a concern if the office is dropping large amounts at Costco…I mean Henry Schein… every month.
Ideally, you’re looking at an office with well-managed costs since this is often the biggest indicator of a well-managed practice. However, if you are looking at an office that does have high overhead and it’s partially due to high supply/lab costs, don’t pass on it yet if it’s checking many of your other boxes. There’s still hope. Just watch that canary!
Read More:
What is the Most Important Quality to Look at When Buying a Dental Practice?
How STAFF COSTS Affect Dental Practice Value
Should You Buy the Building As Well As the Practice?
