The Journal of Clinical Orthodontics is about much more than excellent treatment results; it’s also about practice management and the business of orthodontics. With that in mind, JCO editors have gathered some of our best previously published practice-management articles and added a few new ones. This Practice Management Handbook will walk you through the processes of associating, starting a new practice, acquiring a practice, building a new office, and assessing your practice’s performance through a number of key metrics. You will find that this special edition of JCO will serve as a reference guide to practice management for years to come.
According to the 2017 Annual Orthodontic Resident Survey by Bentson Copple & Associates (BCA),* more than 64% of new graduates plan to become associates, 22% plan to purchase all or part of an existing practice, 7% plan to start a new practice from scratch, and a few will go into academia. So let’s start this compilation by reviewing various associateship options, questions regarding associate opportunities, and possible pitfalls. From there, we will cover what it takes to transition into practice ownership, discuss office design and related budgetary considerations, and dive into business-management concepts essential to running an office. The handbook will then cover referral and marketing plans for generating new patients, and finally will tackle employee management. After following the steps in these articles, you will be far better prepared to meet with a banker and jumpstart a financially successful career.
ROBERT S. HAEGER, DDS, MS
JCO Management & Marketing Editor
Glossary
The following definitions should prove helpful in understanding the material in this handbook and improving your own practice management.
Collections: The amount of money deposited in the bank, tabulated monthly, quarterly, and yearly.
Gross production: The sum of any contracts posted plus any one-time charges, such as retainer fees or incidental items.
Net production: The total charges minus any write-offs for such things as insurance, second child in a family, treatment paid in full at the start, or charity. Always keep track of all write-offs so you can better manage your practice for marketing discounts or insurance acceptance.
Exam: New patient seen for the first time. If a patient you saw years ago returns for an evaluation to start treatment, the second evaluation is not an exam.
Start: The first time someone in your practice places a clinical appliance, of any kind and any value, in the patient’s mouth. Phase I is a start, but Phase II in the same patient is not. A replacement retainer for a patient you did not treat is a start, and so is Phase II in a patient you did not treat for Phase I. If you place a lower holding arch, that is a start, but when you place full braces two years later, it is not.
Conversion rate: The traditional way to compute conversion rate is starts divided by exams, expressed as a percentage. The problem with the traditional conversion rate is that it includes all starts and only current-year exams. Because starts can actually come from exams, the observation pool, or prior declines, this number is easy to calculate but difficult to act on. A more actionable metric is a conversion rate calculated only from patients who are ready to start treatment.
Past due: The money patients owe the practice that is outstanding past the date they agreed to pay it. The amount past due is not the entire contract, but only that portion of a monthly payment that has not been paid on time. This is often referred to in terms of 30 days, 60 days, or over 90 days past due. You will want to know both the number of accounts and the total dollar value for each category.
Capacity: How full the practice is in regard to new patient starts. There are many ways to calculate capacity. One is to take the number of additional starts your practice can see in a month, add this to the actual number of starts, and set the sum as the denominator. In this case, the numerator will be the actual number of starts. Another way is to take the number of starts in your best month each year and multiply that by 12. This number becomes the denominator, and your total starts for the year is the numerator, for calculation of the percentage of capacity.
Overhead: The costs to run your practice. Overhead includes such categories as occupancy, clinical supplies, lab bills, marketing, employee compensation, and general business expenses. When you are thinking about selling your practice, keep in mind that many practices have elective expenses that will inflate the overhead and that the new buyer will not incur.
Annual profits: The sum of all money the owner takes from the practice each year. This includes base salary, retirement contributions, and any elective expenses for the practice.
Internal marketing: Marketing dollars directed at existing patients. While everything you do in a practice can be considered internal marketing, this term refers specifically to money spent to encourage referrals from current patients, to entertain them while they are at the practice, and to help ensure that their siblings or parents will also see you for treatment.
External marketing: Dollars spent to attract new patients from the community at large. This includes money spent on entertainment for dentists and their staffs, sponsorships, media coverage, and so forth.
Pro forma: Typically a two-year forecast for your business that includes all revenue and expenses. The banker will require a pro forma when you are seeking a loan.
Business plan: Also required by the banker for a loan. The plan should include a market analysis, marketing plan, pro forma, personal financial statement, acquisition costs, remodeling or new-construction costs, and personal cash flow for living expenses. Most of these items will be discussed in our JCO handbook.
EBITDA: An abbreviation for earnings before interest, taxes, depreciation, and amortization, this is a measure of a company’s operating performance. There are several ways to calculate EBITDA. The first is to take the annual revenue (collections); subtract the overhead; subtract about 25% for the doctor’s salary; and then add back in depreciation, amortization, taxes, and interest payments. The other way is to start with the net income from the practice’s tax return; add back in depreciation, amortization, taxes, and interest payments; and subtract personal and elective expenses of the current doctor. A practice will be sold at some multiple of EBITDA, typically three to five times if an associate is buying in or five to seven times for a corporation.
Contracts receivable: The value of contracts yet to be received in a monthly cycle. In a healthy practice, this number should be six to nine times the monthly collections.