A business discussion about risk as it applies to private dental practice ownership. (Part 2)
Before continuing, its probably best to have a read of PART 1 in this series found here:
In this post, I’ll discuss the assessment of risk as it applies to the decision to purchase new equipment and adopt new technology in the dental practice. This is a process many practice owners go through before making the leap and it’s also applicable to decisions outside of dental businesses.
So a few years ago, I made the decision to switch over all my equipment purchasing for current and new practices to Sirona. This followed a long period of negotiation with them as well as them talking to me about the benefits of growing while implementing their equipment and technology. As part of this, Sirona offered to fly me down to Sydney to check out their new facility as well as further explore some tech which I hadn’t yet adopted. Amongst this was CEREC and OPG/CEPH/Conebeam technology within my practices.
The decision to purchase extraoral imaging in my practices could have gone one of three ways:
a) No extraoral imaging. Continue to refer out all OPG/CEPH/CONEBEAMS
b) OPG only across all sites. I think at the time, I had 7 or 8 practices?
c) OPG at most sites, Conebeam/Ceph/OPG machine at the main practice at each of my two hubs (West of Brisbane hub and the Northern Gold Coast hub).
While I’m hesitant to disclose the prices I paid for each bit of tech, I will list example numbers.
OPG only: $30,000 inc installation
Conebeam(CBCT)/Ceph/OPG: $110,000 in installation
Now this is the first bit of advice based on the incorrect way many business owners think about investing. A common thing that I hear being said is “HOW MANY CONEBEAMS WILL I HAVE TO TAKE TO PAY OFF THE $110,000 I SPENT ON THE CONEBEAM BEFORE I START MAKING ANY MONEY????” This is completely the wrong way to look at things. Remember your business runs on cashflow. You don’t have to pay off the equipment to make money from it.
I’m gonna start off with discussing the numbers as this is the biggest decision and if you examine the numbers first, you take the emotion out of it. Emotion in business decisions where risk is involved will invariably lead to issues in my opinion. Firstly lets look at the REPAYMENTS on a MONTHLY basis.
For the OPG, at today’s rates, repayments every month will be approximately $420.
If I decide to get a conebeam instead, the ADDITIONAL REPAYMENT on TOP of the $420 will be $1120 for a total repayment of $1540.
The next thing I did was look at the number of OPGS I needed to take every month to breakeven on the monthly repayment. I found out the average rebate we would get from healthfunds would be around $70. I thought I would use the average rebate as the cost for patients so that they would have no gap and this would remove the cost barrier (we are charging more than the rebate amount in practice but again, I was being conservative or “WORST CASE” in my calculation).
Lets assume I pay dentists 40% commission. They would keep 40% of the $70 fee for each OPG and so the surgery would keep 60% or $42.
So 420/42 = 10 OPGS a MONTH to breakeven. Anything over this is just pure profit (after dentists are paid)!!!! This is a no-brainer for many practices including startups especially if you are only charging the rebate. However, lets look at the worst case as well – $420/per month equals $5040 per year. So if the machine DOES NOT get used AT ALL, I lose $5040 a YEAR! THAT’S IT! That is the worst case scenario.
Now lets look at the decision on whether to get a conebeam. For me, most of my practices in a “hub” are within a 15 min drive of each other so I was considering the conebeam at the main location at each hub and having patients who needed conebeams to be referred there from my other surrounding practices.
So here we ONLY take the difference between the repayment because we assume the OPG volume will pay off the OPG cost part of the machine. SO the difference in repayment if I get a conebeam and Lat Ceph in addition to the OPG is $1120. I assumed I would charge $200 for a conebeam as that’s what patients were paying anyway when we referred them to imaging clinics. So again assuming my surgery got 60% of revenue from these, we would earn $120 per conebeam after paying the dentists. SO $1120/$120 = approx. 10 conebeams a month.
This amount of volume was certainly comfortable for us as I do plenty of wisdom tooth surgery, we do complex endo and now even have a specialist endodontist onboard (it’s a small field of view machine) and on top of that we do implants and also have a specialist periodontist in the group now.
The worst case scenario if we didn’t do a single Conebeam is 12 months times $1120 = $13440. Its completely unrealistic that we do not take a single conebeam over the year as we were already sending away quite a few conebeams and patients were paying that much anyway at external clinics.
It is worth noting also that the cost of the equipment is written off over time through depreciation and you get tax benefits for this. Depreciation is a bonus and is beyond the scope of this discussion. But it tilts the numbers in favour of purchasing the equipment. Also the above numbers, I’ve assumed include GST and depending on how you structure your finance, you may get a lump sum of GST back for your own cashflow and this is another bonus.
My philosophy in business has ALWAYS been to look at the numbers first without involving ANY of the emotions that get thrown at you from product or equipment reps. However after I look at the numbers, if the decision is close, then I start looking at some intangibles. As you can see from the numbers above however, it’s not really a close decision. The OPG is a no-brainer and the conebeam volume was easily achievable.
However I did look at the other negatives and advantages. Firstly if we did start to lose money and not achieve the volumes needed to break even, especially with the conebeams, I could sell the machines (albeit at a slight loss) and recover much of my investment. SO the worst case wasn’t actually so bad.
The advantages would be a quicker diagnosis and the ability to do treatment straight away. Normally if we had an emergency wisdom tooth for example, we would have to send away for an OPG, this would waste time in the appointment and then we would need a second appointment. So the OPG in-fact FACILITIATED increased revenue and minimised lost time. By having the OPG/conebeam in-house we were also providing convenience to our patients. Another big intangible benefit was the marketing benefit of having the technology in-house. Patients would see that our surgery was extremely well equipped with the latest technology for their benefit. I’m quite vocal with this amongst my patients. I also felt my ability to recruit dentists and the better grads would be enhanced if I invested in this technology.
One key lesson that I want to impress upon everyone reading this is that all the intangible “emotional?” benefits I listed above are just that – emotional intangibles which I can’t really quantify or prove. They are just assumptions. They could be full of bias. I could just be seduced by the words of the salesperson and look at this with rose coloured glasses. That is why EVERY SINGLE decision I make HAS TO MAKE SENSE from a NUMBERS PERSPECTIVE FIRST! Looking at things this methodically eliminates or at least reduces the risk of making bad decisions. I encourage everyone to examine the numbers of every decision they make. Also be realistic about those numbers. If in the last year, you have referred only ONE conebeam all year, then is it really possible that you will do the 10 a month needed to break even?
In the next part I will discuss cad/cam technology and the processes that I went through to make the decision to purchase the technology. There will be some numbers but the post will also involve some strategic thinking and problem solving.