I received quite a few questions after my last post regarding a high earning associate who discovered practice ownership may not be for them.
The most common questions revolved around the numbers associated with ownership and what was required to breakeven. People are really keen to gain an understanding of what is required from a numbers perspective to break even on a dental practice startup.
Firstly, I think a good number for breaking even on a cashflow basis for a general suburban dental practice which has spent around $400,000 on their fitout and equipment is around $500,000 of turnover. That’s roughly $10,000 week and $2000 per day. Or 10 appointments a day with an average of $200 per appointment patient spend.
When I talk about a cashflow breakeven, I’m not talking about profit or EBIT. Without getting too technical, profit, in business circles, generally does not look at repayments to loans. The breakeven on an EBIT or profit basis will be lower, probably around $420k-$450k. We will use the cashflow figure in this discussion.
If you bill $500,000 from your startup and you are the only dentist working there, you will earn a wage of $200,000 (40% commission – industry standard) and that’s it. You won’t be earning any business profits. In this scenario, from a purely numbers basis (forgetting autonomy, and the other warm and fuzzy emotional things), you would have been better off working for someone because you would have earnt the same if you billed the same, without the headache of ownership.
In Southeast Qld, the average practice startup bills around $300,000 in its first year. The number is certainly not more than $350,000. This number would be even lower in Sydney and Melbourne. Personally I think this is atrociously low and is a reflection of two things – poor location selection (particularly dentists wanting to work where they live) and poor marketing. But it’s the average.
Anyway let’s examine this average. If you bill $300,000, your 40% is $120,000. However, on a cashflow basis, your business will probably have $380,000 of outgoing cash (expenses). Therefore, you will have earnt your $120,000 commission, but you will have needed to put $80,000 back into the BUSINESS to meet its cashflow requirements and thus, you end up with a meagre $40,000. Hardly enough to live off, let alone compensate you for the large sacrifices/risks required in practice ownership.
This is the reality of the numbers involved. Last year I had to turn down helping many clients who had made massive errors in location selection. These included someone in NSW that had turned over $180,000 in their first year. Another in NSW who had turned over 15k a month for their first 4 months. Another in QLD who had done under $40,000 of turnover TOTAL in 3 months. These stories, unfortunately, are becoming more and more common.
Now going back to the example of the average practice startup, turning over $300,000 and returning the owner only $40,000 – there are other things to consider. Obviously you have your own business. So you have autonomy. That’s a positive. A big negative however, and one that doesn’t get talked about nearly enough, is the opportunity cost. Working for someone else and billing $500,000 a year (very easily doable for a dentist with 3 years of experience), you would have earnt $180,000 or so (after labs). Certainly even if you worked part time and only billed the $300,000, 40% is still $120,000. This is a huge opportunity cost. If your surgery doesn’t grow because of tough competition or poor marketing/location selection, then you will be losing hundreds of thousands of dollars of potential income for many years.
Being a dentist, we are blessed with a very high earning potential, but when it comes to business ownership, this is a double edged sword. In other industries/professions, the differential earning between an owner/employer and an employee can be massive. However in dentistry, this isn’t the case at all. As mentioned in my last post, there are many busy associates earning much much more than many newer practice owners. From a personal perspective, I don’t actually work in most of my practices. This means that I can only use the profits AFTER I pay my dentists to offset my business expenses. For this reason, I’ve had to be extremely judicious in my location selection and relentless in my marketing to ensure the success of my practices.
Food for thought. I am in no way trying to discourage people from ownership – hell, my entire consulting business exists to help people into ownership. However, I really want people to see the reality of what is involved. Particularly the finances. It’s not a good feeling listening to someone who I can’t help because they have made critical mistakes earlier in the process, go through their practice’s billings, upset because of the money they are haemorrhaging. As I stated previously, the trouble with our industry and with some young dentists is they make comparisons to successful owners who have either established themselves many moons ago when things in dentistry were a lot easier or to owners that have lived the struggle already. The problem this creates is they get a false or skewed sense of reality.
For the sake of balance, my next post in this series will be about the numbers associated with ownership when things go really well. The profits can be very good if your surgery grows! Stay tuned for that one.