AUTHOR: The Dental CFO
August 07, 2023
As a dental practice owner, recognizing the specific costs of operation is a critical part of keeping the business running.
To provide the best care for your patients, it’s necessary to be well-staffed and have sufficient supplies, adequate facilities, and up-to-date equipment. But to be profitable, you must keep a watchful eye on your overhead expenses.
While some overhead costs are unavoidable, when you understand what you are paying — and where those costs come from — you can make better decisions about managing your practice.
What’s Included in Dental Office Overhead Expenses?
For dental practices, overhead expenses, also called operating expenses, include fixed and variable costs directly related to operating your business and not directly related to practice revenue.
A fixed expense is one that stays the same month after month. These are expenses that do not change if your dental practice is open or not.
Examples include office rent and equipment purchases. Whether you see one patient a day or 20, you’re still required to pay your facility costs and purchase equipment.
These expenses are those you cannot reduce, at least not without significant effort such as refinancing a loan. When considering cost-savings measures, fixed expenses are not the focus.
Variable costs fluctuate depending on your practice’s activity. Expenses for supplies like toothpaste, floss, and paper bibs, as well as lab costs, will depend on your patient volume. Is your patient load consistent and predictable or do you have more variability?
When you look at a dental office budget or your profit and loss statement, you’ll notice many types of expenses fall into this category.
Also, the more specialized your dental practice is, the more likely you are to have related costs to that specialization. For example, your lab costs, again, can change if you start using more crowns or dentures.
You may not have a lot of control over variable costs — you can’t just eliminate most of them. The Dental CFO can help you understand and manage these expenses more effectively.
Dental Office Cost Breakdown
Overhead costs generally fall into the following categories:
- Personnel: Wages and salaries paid to dental and back-office staff
- Facility costs: Rent, mortgage, utilities, facility maintenance and cleaning, and leasehold or building improvements
- Clinical costs: Medical supplies, PPE, equipment, dental technology, and medical waste disposal
- Business administration: Insurance, professional services, payroll, office supplies, business technology, vendor payments, local taxes and licenses, marketing, and outreach
- Discretionary costs: Business travel, company car, continuing education, and professional organizations
- Owner’s compensation: How you will pay yourself
When creating a budget, log fixed expenses. Make sure to understand and track your variable expenses, as well as the business expense categories. Or you can hire a professional instead of doing all of this leg work yourself.
Why Categorizing Overhead Expenses Is Important
Dental office overhead costs should be monitored and will appear on any monthly income statement created by an accountant. When that statement is created, the accountant will track and organize them into specific categories.
This is important for multiple reasons, especially because it can help to provide insight into what your expenses are and, as such, how to plan around those expenses and reduce them whenever possible.
Understanding your different overhead costs also helps you gain an accurate picture of your profit margin. Being able to see what these costs are in relation to profit is a good way to know the value and overall health of your business.
A secondary benefit of categorizing overhead expenses is that it allows you to make better decisions for tax planning. It allows for your accountant to be able to recognize ways to reduce taxes using those costs — more on that later.
The best way to do this is to hire a Certified Public Accountant (CPA) who has industry experience and specialization in working with dentists. A dental CPA can help you understand each one of your expenses and categorize them in an effective manner.
Tracking Dental Office Overhead in an Income Statement
Every dental office has costs of operation, or the costs of keeping your doors open to serve patients. What many practice owners do not realize is that they have some control over many of those costs. To save money, you need to understand where it is going.
A first step, then, is to look at your dental practice as a business. While the clinical side of care is very important to your success, managing the business side is also necessary.
A crucial part of running your business is to track and organize expenses in an income statement, which helps break down your practice’s numbers regardless of the impact they may have on taxes. The essential components of an income statement include:
- Cost of Services
- Gross Profit
- Income Taxes
- Net Income
Revenue is the total intake for your practice for the period examined on the income statement, such as a month, quarter, or year.
Cost of services for a dental practice would encompass costs specific to generating revenue. The cost of services amount is subtracted from revenue to compute your gross profit.
Expenses not directly related to revenue generation are reported next, then income taxes, which are accounted for separately.
With expenses, taxes, and other items accounted for, the final line is the net income or loss for the period. Your dental CPA can help compute key dental practice overhead percentages with these numbers to determine overall profitability.
Expenses are often summarized on the income statement for brevity and simplicity for an external user, typically a bank, investor, or merger prospect. We recommend breaking down and categorizing expenses in greater detail to help determine where your overhead costs are going.
In this case, it’s crucial to work with a dental CPA. A dental CPA is both familiar with dental office accounting and is well-versed in dental practice management and how those expenses relate to daily operations.
How to Reduce Your Dental Office Overhead Expenses
If money coming into your practice is lower than you’d like, it might be time to look at reducing overhead expenses.
One way is to examine overhead from a revenue standpoint instead of simply cutting costs. Overhead will have less of an impact if your dental practice is generating more revenue by increasing your UCR (Usual, Customary, and Reasonable) fees.
Highly successful dental practice owners look at overhead expenses as investments. They understand that the purpose of expenses is to make the practice profitable, however, not all expenses are created equal.
For example, the largest expense in most practices is payroll. While you may pay two different employees the same compensation, it’s unlikely that they each provide the exact same benefit to your practice.
In fact, it’s possible that one or more employees are worth much more than they are being paid. However, it’s also possible that one or more employees are actually costing you money (profit).
In the same way, cheaper supplies or lab costs may not provide the quality needed to help your practice perform at the level of patient care you desire.
Therefore, every expense should be examined in light of the return it is providing. The cheapest alternative is certainly not always the best alternative. Cutting costs is not the goal. Spending money wisely on expenses that most improve your bottom line is the key.
Reducing Expenses With Tax Write-Offs
Tax write-offs for dentists are one of the most valuable tools available for reducing overhead expenses, and your dental practice CPA can help ensure you get the best deductions possible.
That said, some tax write-offs must be treated differently than simply deducting them from your practice revenue. Deducting some common operating expenses may require you to take additional steps to qualify, and some deductions provide more tax advantages than others.
Also, it’s important to know that tax laws change often. What you can deduct may change from one year to the next, or the amount you can deduct may change. That’s another important reason to have a professional available who understands your practice to help you with the decision-making process.
This list of common tax deductions for dentists isn’t exhaustive, but can make a significant impact during tax season.
Salaries and Wages
Payroll is typically the largest expense dental practices have, but it also offers the most tax advantages. In addition to deducting the actual wages and payroll taxes paid, plus administrative costs such as payroll services, there are sometimes federal and state-level wage-based tax credits for small businesses.
Vehicles and Equipment
You may be able to claim bonus depreciation or expense equipment in the year of purchase, which can result in a significant tax write-off. Be sure to consult with your dental CPA and tax professional regarding the tax treatment of major business-related purchases.
Lab and Dental Supplies
Supplies and tools used in procedures, occupational clothing and protective gear for yourself and your staff, and additional services such as medical waste disposal are all fully deductible.
Administrative, General, and Office Expenses
The purchase of office supplies, furnishings, computers, technical infrastructure, and incidental expenses such as meals and patient amenities are also fully deductible.
Partner With an Expert to Help Identify and Reduce Overhead Costs at Your Practice
It’s crucial to properly categorize overhead expenses to get the maximum benefits available. It’s easy to make mistakes from a business standpoint in running a dental practice, which is why it’s a great idea to engage a dental practice accounting professional.
The Dental CFO specializes in tax and financial advisory services for dentists at every stage of their careers. We can help you understand your overhead expenses, use them to reduce your taxes, and provide you with the best possible access to tax deductions, cost-savings measures, management guidance, and more.
Contact us today regarding your dental office overhead expense breakdown and tax reduction strategies.