Overhead Calculation - Should Dental Associate's Pay Be Included?

I can understand not including owner DDS compensation in overhead calculations, but it seems to me that paying an associate as an independent contractor should be considered overhead in some fashion. This isn't much different than paying hygienist on production % is it?

You could say that. Isn’t it even closer to paying a dentist for their dental services, like the owner? If the associate wasn't there who would be producing that revenue, the dentist or hygienist? If the associate is doing hygiene then you should include their comp in OH.

If the associate's pay is not accounted for as overhead then this is implying that the owner DDS is receiving the entire production of the associate.

Not true. The associate comp can still be tracked separately from all other OH.

This will allow you to compare your numbers to other practices. If you include the associate comp in your OH, your OH will ALWAYS appear to be higher than other practices.

For example, if I shoot for 25% staff compensation and the associate increases the total office production by 400k yet I pay him 140k, which is not factored into the equation, then the goal is easily achieved when using the total production.

One of the BEST ways to decrease OH as a percent of revenue is to increase revenue.

If the 140k which I pay is added, then the percentage is not easily attained.

That’s because it doesn't belong. If you're going to do that then you may as well add into compensation 30% of your collections as though you were an associate as well. After all, part of what an owner makes is based upon dental services, the other part is based upon being an owner.

Or are you just eliminating the associates 400k from the production totals as well?

Oh no.

Bottom line is that it depends what you're trying to accomplish. If you're trying to compare your OH with every other similar type practice you should not include associate comp in OH.

If you're trying to analyze the profitability of a practice for a transition (sale or purchase) than you need to include "reasonable" dentist compensation as an expense to determine true cash flow as a non-dentist owner, which will help determine value.

This post first appeared on DentalTown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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