Should Dentist Upgrade Equipment Now, or Wait?

I recently did some cosmetic upgrades to my office, but my adec unties and J-chairs are functional, but 20+ years old. I have an older CEREC red unit and am considering an upgrade to the blue. I don't want to get stuck with super high interest rates if the economy tanks, so am considering the upgrading things now.

Well based upon our most recent experience wouldn't you agree that when the economy "tanked" the rates went down? Maybe it depends on what you mean by "tank".

My dilemma is whether to wait until things become so worn out that I have to replace them, or do I finance the upgrades now and tack on to my current loan, which I will have paid off in 3 years.

How long will the "upgrades" last and what's the cost of an upgrade compared to replacing?

I'm in a 3-chair office now, but have the opportunity in the next year or so to move to a larger 4-chair office, so was planning on waiting on upgrades until I can make that move. I just don't want to get stuck with 10+% loans down the road.

I certainly don't see those rates in 1, 2 or 3 years.

I was curious to see how long you guys are financing practice/equipment loans. Is 10 years standard on a $500k note or do most go longer.

These are two different loans. 10 years is a reasonable term on a practice loan (to buy a practice) and generally gets paid off in 5-7 years anyway. 5 year terms should be fine for equipment loans.

One thing to consider, depending on the amount you're going to spend, is to refi the existing 3 yr loan and adding on the equipment costs and go with a 5 year loan. If you continue to do well and have sufficient cash flow you might still pay everything off in 3 years anyway.

This first appeared on Dentaltown.
 
Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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2010 Dental Overhead Benchmark - Our Observations - What has Changed?

We’ve started the process of compiling our dental practice benchmark statistics based upon 2010 data and the initial results compared to five years ago are a little surprising to us. Since 2005 the US economy has gone through a downturn, a recession by most standards, and we were curious to see how that may have impacted the benchmark statistics for dental practices. We know that over the past five years there’s even more technology that practitioners are buying and using (i.e. new dental equipment and computers.) We’ve summarized some of our preliminary findings and provided commentary as to why we believe these changes have occurred. You can take the dental overhead benchmark survey here.

1. Revenue:

So far the mix of dentistry to hygiene production has increased in favor of the doctor, which means 76% of production is dentistry while 24% is hygiene. Five years ago it was 75%-25%. The surprising statistic though is the adjustments or write-offs. Five years ago the “average” practice was writing off 13% of their gross production and it’s increased to 17%. The main reason for our surprise is that during these last five years we’ve seen an increase in practices attempting to reduce or eliminate their PPO participation. That said, certainly the recession may have “forced” some of those practices back into PPO participation and we’re also seeing practices providing more incentives or discounts for cash paying patients.

2. Labor:

This area provided another eye opener. As a percentage of gross production (same denominator we’ve always used in our surveys), total labor expense (wages, payroll taxes, benefits including their education and training) dropped from 26.7% down to 22.7%. Assistants, hygienists and front desk combined showed a decrease while administrative showed an increase, possibly due to the treatment plan coordinator position and other types of positions. Both payroll taxes and benefits have also shown decreases. Another reason is that with the additional “higher end” procedures like Invisalign, implants and full mouth cases, the dentistry production per hour may be higher with the same or lower labor rates. We also know many practices stopped raises at some point over the past three years if not for all three years because of the recessionary trend.

3. Facility Expenses:

Total facility expense actually increased from 4.8% to 6.4%. Rent jumped by nearly 1% and the other costs like repairs, security and utilities all increased as well. We can only surmise that many had their rent agreements already in place as of 2008 and 2009 when the recession hit and we know landlords had no obligation to re-negotiate leases therefore, rent increases continued while procedure fees and revenues either revenues either flattened or declined (revenues). Generally utility costs have been going up following a trend by utility providers to raise their rates.

4. Lab and Dental Supply expenses:

Both lab and dental supplies have dropped by nearly 1% to 5.4%. Five years ago lab was 6.3% and supplies were 6.1%. we suspect lab has decreased in part due to the use of Cerec type machines since we’ve heard time and time again that labs had been increasing their prices. Dental supplies are harder to explain so we won’t even try.

5. Other Costs:

In total they went from 12.7% five years ago to 8.8% for 2010, nearly a 4% point drop. While a few categories increased like collections expenses (CareCredit) and advertising and promotion (practices simply doing more advertising) most of the other categories have dropped. Some of the categories that dropped are insurance, office supplies and postage (more electronic mail), professional services (more owners doing their own bookkeeping and payroll processing), telephone (more cell phones, less answering services, better technology and more competition).

Overall, total overhead went from 55.6% five years ago to 48.8% in 2010 based on gross production. That’s a rather significant decrease that was unexpected.

As we mentioned above, the dentistry to hygiene production ratio increased from 3.2:1 to 3.3:1 and even the hygiene production to their wages increased from 2.6:1 to 3.2:1. Hygiene wages have either held flat or come down in most areas of the country due to the economy and the cost of their procedures have gone up over the last five years. Many practices have used consultants to increase their hygiene department production and to boost assisted hygiene.

While many practices have been hurting over the past couple of years, they have done an excellent job on controlling their overhead. These practices have added higher end procedures and increased profitability within their practices. That’s a great sign for the industry and one of the main reasons we’re seeing more activity from the larger dental corporations buying up practices.

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

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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11 Reasons Why a Dental CPA is Preferable to a General Accountant for a Dentist

Here are 11 reasons why using a dental CPA is preferable to an accountant who isn't dental specific. We'd love to hear your suggestions for other reasons as well.

11. Your accountant doesn’t know the difference between a prophy and a root canal.

10. Your accountant doesn’t know how participation in insurance plans affects the percentage of adjustments to gross productions.

9. Your accountant doesn’t know what reasonable associate compensation models are.

8. Your accountant doesn’t know if your accounts receivable balance is ‘normal’.

7. Your accountant doesn’t know what your overhead percentages should be based on your specialty.

6. Your accountant doesn’t know how much your hygiene department productions should be relevant to their compensation.

5. Your accountant doesn’t know what portion of your practice should be dentist production versus hygiene production.

4. Your accountant doesn’t regularly present to dental association, study clubs and schools on such topics as, How to Buy a Dental Practice, Life after Graduation, Overhead Benchmarks, etc…

3. Your accountant has never heard of Dentaltown.

2. You don’t understand why vendors are saying that new Cerec is practically ‘free’ after ‘tax deductions’.

1. You are seeing twice as many patients as last year, but your cash flow is tight.

These are 11 reasons you should contact the Dental CPAs for a complimentary consultation about your practice performance.


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

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New Dentist Has Questions about Section 179

I am planning to start my first Dental Office this year. Everyone tells me it’s especially best to start this year, 2011, because of additional advantages due to the changes in the 179 Tax law.

I have tried reading up on it and honestly the verbiage is a little too confusing.

Can you "please " just break into simple words for simple folk like me.

I read somewhere that how much you can deduct also depends on how much you make this year.

So, if I open my Office in November / December and my income isn’t that great, is it still going to be beneficial?

Any help is appreciated.

It's painful to have a client come to us a year or two after they started to see that they took too much 179 in their initial years either wasting other deductions, or not being able to use them due to the entity they selected or wasting them at lower brackets like 10-15-25% when they would have been more valuable at 25-28-31-33+ in future years or ALL of the above.

If I start my practice in November / December, my income from the new practice is not going to be much.

Not only will your income not be much, you'll have the ability to absorb a bunch of losses IF it makes sense in your case.

If I am an independent contractor and have my checks towards the entity I create, can that be accounted towards my income for the year?

Yes it can; however, is that a wise decision? Probably not. You can achieve the same "tax" benefits with the proper structuring of your new entity.

This first appeared on Dentaltown.

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

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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Dental Practice Valuation Issues – What a Seller Can Do

During my many buyer representation engagements I tend to see some common issues when it comes to practice valuations that sellers could have avoided to help maintain their practice values. Here are some of those areas.

1. Clean Record Keeping:

Remember, buyers and their advisors will be picking over your information, it’s like inviting someone into your home, and you want it to be clean. Your practice books and records should be the same way, clean, easy to read, and at your finger tips. For example, your Quickbooks file should match the tax return numbers and if not to the dollar, pretty darn close and easy to match up.

2. Complete and Accurate Practice Management (PM) Reporting:

Make sure your PM software is current and accurate. You should be recording production, adjustments and collections by provider. Clean up your accounts receivables WELL before you plan on selling.

3. Don’t Coast:

This is one of the worst things a seller can do prior to selling their practice. It decreases dentistry production and therefore, decreases practice revenue which buyers AND bankers do NOT like.

4. Don’t Reduce Your Hygiene Hours:

Let me correct myself, THIS is the worst thing you can do. Not only are you reducing your practice revenue, you’re potentially losing patients as well.

5. Update Office Appearance and Equipment:

Again, just like a house, an outdated décor with old equipment will generally create less excitement with a buyer and less excitement means a reduced offer. Create excitement with your buyers with current décor, updated equipment and a fresh appearance.

6. Overpaid Staff:

Be aware of your staff compensation and make an effort to make sure it stays within “market” for your area. There’s nothing wrong with showing appreciation to your staff with discretionary bonuses, fancy trips, paying for CE travel, etc., however, make sure they’re aware that these are not customary fringes so they don’t come to expect it from their new boss.

7. Inflated Overhead:

Well before you sell, I’m talking 2-3 years ahead of time, begin to evaluate your practice overhead expenses and make sure you’re ONLY spending on things you NEED. I’m not talking about skimping on updated equipment; I’m talking about wasting money on unnecessary supplies, small toys, unnecessary services, etc. Become a good CFO! Profits will drive value most of the time and wasted overhead eats into your profit and will usually drive down the value of the practice.

8. Office Policies and Systems:

Well before you sell, make sure you have excellent operating systems and policies. If you’re not collecting a patient’s portion of the fee at the time of visit, make that change now. If you don’t take credit cards, start taking them. If you’re not running daily, weekly and monthly management reports, start doing so.

9. Track Your Referrals:

At least one year prior to a sale, begin tracking the procedures you refer out every day and be prepared to provide your broker with some really good, accurate information for the prospective buyers.

10. Don’t Change or Eliminate any PPOs Prior to a Sale:

This can backfire if you begin to see fewer patients even if the revenue stays about the same. In most cases when a practice decides to eliminate PPOs, there’s a transition period where you’ll have holes in the schedule. Those PPO patients that opt NOT to come back for their scheduled recare appointment or follow-up work will in turn cause revenues to be lower for a period of time.

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

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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