Do CPAs Have a Higher Profit than Dentists?

A buddy of mine is a CPA, and his real profit margin is way higher than ours. The difference between them and us is that they know how to legally write off more than we do, put the profit they make in retirement trust accounts, and utilizing actuaries to help them calculate out how much to put in their pension plans. We have to hire CPAs and actuaries to calculate these things for us with a mega cost, and they don't. My CPA and actuary both make way more than I do with less staff and overhead.

Your perceptions are interesting. In reality, I believe CPA "firm" profit margins to be lower than dentists. I think the biggest difference is in the labor, our industries statistics suggest that the benchmark for labor is 35% and as much as 40% is probably quite common. Dental practices float around 25%, maybe as high as 30%.

All of our other "fixed" OH is probably between 30-35%, the rest is for the owner\CPA and if you consider their compensation for CPA services I bet our profit margins aren't much higher than 10% and that's on the high end of the range. Larger firms can achieve higher return rates and that's only because they provide other non-accounting consulting services to larger companies that bring in lawyers like hourly rates of $500 per hour+ with many of these consulting jobs priced as success fees, similar to a broker getting paid 10% on a practice sale. With an efficient and quick practice sale of say $500k, the $50k if calculated on an hourly basis is probably like $1,000+ per hour.

Why is our labor so high? Maybe the best comparison is to look at our "assistants". Lets assume a CPA is akin to the doctor, the CPA is the rainmaker of their "firm", the one that has to get\sell the client and the one responsible for ALL production. Note I said responsible, they don't do ALL the producing, our "assistants" (junior accountants\CPAs) earn MUCH more than the $20/hour that most dental assistants make. The starting salary for a "junior" accountant is probably about $50k+ and it can go as high as $70k, depending on the type of CPA work you do. Even our most basic staff person probably makes an annual salary of $30k per year, whether they're a bookkeeper or an administrative assistant.

Space used to be another large part of our OH, however, with technology today, space OH has been declining with firms allowing more people to perform some of their functions from home. However, that technology comes at a cost and that cost is slowly replacing the space cost.

The thing is, I KNOW what my dental clients make, they DON'T know what I make and what I KNOW is that maybe less then 20% of my clients earn LESS than I do AND more then 80% of my clients work LESS than I do. I have many clients who work 3.5-4.5 days per week ALL year round and earn at least $300k+.

While you MIGHT find a CPA that can work 3.5-4.5 days per week for 9 months of the year, we have busy seasons where we work the equivalent of 7-9 days per week (8 hour days) that covers 3 months AND even if we do make $300k+, I suspect if you calculated our compensation on an hourly basis and compared that to a dentist, you'd see that the majority of dentists make more than a CPA.

There are the exceptions of course.

This first appeared on Dentaltown.

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Creative Dental Compensation Ideas

I was reading a post on Newdocs.com and saw your reply regarding new doctor compensation:

"Good topic. One way new doctors can find out what the compensation is like in their specific area is to seek out the dental specific professionals, like attorneys, CPAs, consultants, etc. who represent dentists and know what's going on.

They can also provide some great insight on how to approach compensation within the agreement, getting it all in W-2 compensation isn't the best way. See if the owner is willing to get creative, it'll be a win win for both of you."What are some of those creative ideas? This sounds interesting.

Steve

Barry summarized it pretty well. If you're an employee non-owner, the owner will usually only cover certain benefits like malpractice, maybe health insurance and maybe up to $1,500 of dues and licenses. Therefore, any other professional expenses that an employee incurs that might be deductible on their individual return are paid with after-tax and after payroll-tax dollars. Even if you can claim them on your individual return, you must be itemizing and they have to exceed 2% of your AGI to even begin to benefit AND you may be hit with AMT.

Therefore, IF you have expenses like business meals and entertainment, business gifts, CE, business travel, business use of the vehicle, cell phone use, and on and on, you're better off asking your employer to pay for those items in lieu of W-2 compensation. As Barry said, not only do you save income taxes and payroll taxes and avoid the whole AMT issue, the employer also saves payroll taxes as well.

So the "creative" part has to do with finding those business related expenses that you're paying with after tax dollars and seeing if your employer will pay them in lieu of your taxable wages.

This first appeared on Dentaltown.

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

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Dental Compensation Scenario

Just looking for some feedback on this arrangement. It's a true arrangement but I'm simplifying it to make things easier. Current associates get a base pay $1000/day plus a percentage of production approximately equal to 40% of what you produce above $2200/day (that $2200 number does come from somewhere but this is the part I'm simplifying). A quick example is if you produced $3000 in day you would be paid $1000 + [(.40)(800)] = $1320.

The practice has two offices and each office has its own pediatric dentist - there is no going between practices.

The first office (A) is very busy, runs 3 columns which consists of a column of restorative and two columns of hygiene. The dentist there sees all the restorative and does all the hygiene (no hygienist). His daily production is the sum of all three columns of which he get 100% credit towards his production. This includes exams, prophys, F-, x-rays. A typical day might consist of 30 patients (10 restorative and 20 hygiene). Making up numbers lets say his average daily production is $5000 per day (which is also the production for the entire practice). Based on the above formula he gets paid on average $2200 per day.

The second office (B) is also very busy, runs 3 columns which consists of a restorative and two columns of hygiene BUT he uses a hygienist who is paid $300 per day. Hygiene at this practice is very busy and he takes a fair bit of his time doing checks. This doctor gets credit for his operative and $40 per hygiene check. The prophy, F- and x-rays get credited to the hygienist who is not paid on production and that money disappears into the practice. A typical day might consist 45 patients (10 restorative and 35 hygiene). The total production on average for this practice is $7000 per day of which the doctor gets credited for $3500 and is thus paid $1520 for the day.

As an aside, where the production from the x-rays and F- goes all depends on who did the prophy. Patient sees the hygienist, the assistant takes x-rays and the prophy and F- are done by hygienist, hygienist gets full credit minus the exam. Same patient comes in and is scheduled in the doctor’s column, same assistant takes x-ray, doctor does prophy, F- and now doctor get full credit for visit including x-rays.

My questions:

1. Is this an unfair system here that the doctor overseeing the busier and more productive practice is getting paid less?

No. The doctors in each practice are getting paid for what they produce, correct? Doctor in practice B has an easier day if they have hygiene doing the prophys. Doctor in practice A is doing their own hygiene, working harder, getting paid more. Makes sense to me. What doesn't make sense is why the doctor in practice B isn't seeing 20 restorative patients per day since they're not doing the hygiene????? Then they'd make more!

2. Is it unreasonable to credit the doctor in the busier practice with x-rays since he is ultimately the one who reads them and assistants take them?

Most practices give credit on x-rays to those that take them. Simply because the doctor in the busier practice isn't busier than the doctor in the other practice and therefore, makes less. This doesn't mean you should start looking for ways to pay them more, you should look for ways to make them MORE productive!

3. Do you have any other ideas for compensation with these two scenarios?

Seems to me what you're doing is fine and fair to each, why change?

I guess what I'm getting at is this system makes it more advantageous for the doctor in practice B, whose practice currently produces more, to fire the hygienist and produce less money overall by seeing all the patients himself. Why would the owners of the practice want that to happen?

Wow? Why on earth would a doctor WANT to fire a hygienist to do their own hygiene in a busy practice? If the practice is that much busier, the doctor in practice B needs to stop getting on the internet and fill their column\chair\rooms with dentistry from all those patients.

Seems to me the reason why the doctor in practice A is only seeing 10 restorative patients per days is because they're too damn busy doing their own hygiene, if they weren't doing hygiene wouldn't they have MORE time to do MORE dentistry? Maybe there aren't enough chairs!

Maybe I’m in left field with this, anyone else seeing this differently?

Just looking for ideas.

Thanks

This post first appeared on Dentaltown.

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

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Increased Compensation Models for Dentist in Office

I have purchased a practice a couple years ago, and the previous owner (who I get along with great and couldn't be happier that he is still around) is now requesting that he increase from 30% production to 40% production. The reasoning is fairly deep, but I'll give somewhat of an explanation.......



He does regret that he sold the practice, and now we want to expand the practice and really put a lot of energy into it. He states that he feels that in order for him to be able to do all of this, he feels that he should have an increase in his pay. Any thoughts would be appreciated.


The overhead for him will NOT be 60%, it will be less. To find out how much less, run the numbers, it's not that tough. I suspect at MOST, as a percent, the additional cost for his production is somewhere between 30-40%, lets say 40%, he gets 35%, that's a total of 75%, so you're still getting 25%. Meet him in the middle and move on.



If in fact the OH for his production IS 60% you have bigger issues then his compensation.


This may generate some lively debate, here it goes. Lets play with some real #'s:



Lets start off with a typical one doctor practice, hygienist does $200k, doctor does $600k, total is $800k with overhead at 60% that's $480k. Of that overhead, generally, somewhere between 25%-30% is FIXED, which means, 30%-35% is variable, or driven by production.



Let’s assume we add another practice on top of this IN THE SAME FACILITY AND we don't have to add space or equipment. You simply schedule the use of the facilities accordingly. So you add another doctor that does $600k and an additional hygienist that does $200k for a total of $800k. The total practice revenue is now $1.6 million. What ADDITIONAL overhead costs have you added? Generally it's just the variable piece between 30%-35%, in my response above I suggested as high as 40% ADDITIONAL overhead by adding another doctor. So on the ADDITIONAL $800k, the ADDITIONAL overhead is $320k, giving you total overhead of $800k (original $480k+add'l $320k=$800k). $800k overhead on a $1.6 million practice is 50% overhead. This is NOT uncommon with multi-doctor practices. IF overhead with one doctor is 60%, you SHOULD see an improvement in overhead percentage when adding an additional doctor or adding additional revenue.

First, that's why I suggested that if the ADDITIONAL overhead being added for the 2nd doc is 60% (not 40% at most) then you’ll have bigger problems.

So, if that additional doctor (with hygienist mind you) is generating $800k AND the additional overhead is $320k that leaves $480k on the table to use towards the doctor's compensation. If you are paying 30% of $600k, that's $180k, you are left with $300k as the profit, not a bad deal. If you bump it to 40% of $600k, that's $240k leaving you with ONLY $240k. Heck, now you're EQUAL in compensation to that doctor. So even if you settle for 35%, you can still earn MORE off that additional doctor than what the other doctor is making.

If you want to play with percentages only, the additional overhead to add the additional doctor might be 40%, you pay them 40% of THEIR revenue (which equates to 30% of the $800k in additional revenue) that leaves 30% of the total additional revenue falling to the bottom line.

Now, I’ve tried to keep it simple, certainly there may be additional payroll taxes IF the doctor is an employee, maybe they negotiated additional professional expenses that YOU agreed to pay (insurance, dues, CE, licenses, etc.) however, those won't come close $240k or $300k.

By the way, the additional overhead items as I see them?

Lab and Supplies - 15%
Assistants, Hygienists and FD - 20% (many times the additional labor cost falls below the typical labor cost as a percentage of overhead)
Other Miscellaneous Expenses - 5%T
otal additional Overhead - 40%S

o even if you believe the additional overhead is 50% and you agree to pay the doctor 40% (of his revenue, or 30% of the total) still that leaves 20% of $800k or $160k. Still making money.

Anyway, that's how I see it and I’ll say it again, you can analyze your specific situation and determine what the additional costs are by having that doctor there and calculate what their contribution is to the bottom line to help you determine what impact an increase from 30% will have.

I believe the impact to your bottom line by this additional doctor, who you're currently paying 30%, is greater than the 10% that some believe.

Good luck.

This post first appeared on DentalTown.

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

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Unique Dental Practice Purchase Offer

Senior Doc opening a new practice 7 miles away from the old office and offers to go 50/50 on the cost of the startup and the net profits at the end of every year + 55/hr (goes up if production gets pumped) + no management responsibility - the senior doc will NOT work at the practice and will continue working in the old office.

What do you say?

1. What if the total cost is $300k, will he LEND you $150k & you can borrow the other $150k from a dental lender & simply pay him interest as you would the dental lender? The senior doc may have to stand in line behind the other lender which they may not like unless you can get the other lender to take the same position on the assets.

2. If you MUST be EQUITY partners, I suggest you work out the specifics as to how you get compensated for your dental services (I guess that's the $55/hour) although I'd suggest at least 35% of collections and for your management services, maybe an annual salary of $50k per year and the remaining profits are split based on equity.

3. The other thing you could to is work it so YOU get paid for your dental & management services and the remaining profits have two tiers, the first being that each EQUITY partner gets a 10-15% return on their INVESTMENT first, then the 2nd tier goes to you as the PROFIT partner.

Just be sure you're clear on the difference between a return on equity (partner profits) vs. being compensated for services.

An example: if the CEO of Disney and I own the same # of shares of stock, we get the same dividend as "owners".

However, because he's the CEO, he gets a trillion in compensation BEFORE those dividends are paid.

Point being, if he's managing (which I'm still confused about since he's not working there), pay him a fair compensation for those services, you get a fair compensation for your services & any remaining "profits" are the dividends. In your case (the dentist generating the revenue) you might want certain levels of compensation based upon certain revenue thresholds.

Good luck.

This post first appeared on DentalTown.

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

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