Overhead Targets

In managing overhead, practices must track targets or key performance indicators (KPIs). The recommended KPIs for overhead from The Levin Group are as follows:²

• General practice – 59%

• Periodontics – 51%

• Orthodontics – 49%

• Oral and maxillofacial surgery – 50%

• Pediatric dentistry – 49%

• Endodontics – 42%

• Prosthodontics – 64%

These are recommended targets that would represent a healthy amount of overhead or expenses for a practice. The national averages tend to be approximately 5–6% above these recommended targets; however, overhead is increasing and it's possible that average overhead may end up being 8% or more higher than the recommended targets.

Most practices, as explained above, do not perform annual budgeting or overhead planning. But one approach that is easy to implement is to start tracking overhead against the recommended targets above. For example, if a general practice has a recommended overhead target of 59% and is operating at 65%, then that would represent an overhead that is 6% higher than the recommended target. While most of this is obvious, practices don’t take the time to plan for overhead. But here is why it is so important…

For every one percent that overhead is higher than the expenses necessary to operate a practice, the practice is losing $1,000 of bottom-line income on every $100,000 of production.³ This means that if a practice is 1% higher than the recommended target and has an annual revenue of $800,000, the practice will lose $8,000 of bottom-line income per year. If that same practice is 6% higher than the recommended target and the revenue of the practice is $800,000, then the practice is now losing $48,000 of bottom-line income per year.

Understanding the effect of overhead and realizing that most practices are approximately 5–6% over their recommended targets explains why it is so important to analyze overhead, participate in annual overhead modeling and budgeting, and keep track of overhead as compared to the annual goal monthly.