Expense Series Part 5

Behind staffing costs, direct costs are typically the second largest expense category for dental practices. In the Portland area, a general dentist typically spends 12.3% of their collections on dental supplies and lab fees. With such a big portion of the practices collections going to one specific expense category, it is important to review these expenses frequently to make sure that they are in-line for your specific practice. As with many expenses there are a few adjustments you should make to see what the true expense percentage is in your practice.


Specialized Cases: If you are monitoring your direct costs over a specific period of time, you might need to adjust your expenses for any specialized cases for which you have not yet collected. An example of this might be a large implant case or a series of orthodontic cases. Often times you will have large cash outflows for these cases but the revenue might not be collected until after the case is completed.

Small Equipment: Because of the new capitalization rules, more and more pieces of small equipment are being expensed through the direct cost categories. If you had many different purchases of small equipment during the period that you are monitoring, you might find that you get a truer operating expense number if you adjust for these.

Inventory Levels/Purchasing Discounts: Because dental suppliers might run specials you might find that it is more cost effective to stock up on certain supply items at one period rather than to purchase them as needed. If you have a practice that typically buys in bulk, increasing the time period that you are analyzing will help average out these large purchases to give you a truer direct cost percentage.

Practice production and accounts receivable aging. As a double check, you might find that it is a better comparison to take direct costs as a factor of production to see if there are changes from period to period. Changes in production will affect supply purchases and these percentages might not show because of differences in collection numbers from one period to another.

After you have adjusted your direct costs to a more accurate percentage, you can now see how your expenses compare. If your expenses are high a few items to look at are:

Supply Budget. It is important to talk to the purchasing employee and review what the supply budget is. A good starting point to figure your supply budget (direct costs not including lab) is to take your monthly collection average and multiply it by 6.5%. If you average monthly collections of $80,000, this would be $5,200. After this amount has been communicated, inform the office employee that any supply purchases for the month that are going to exceed this amount, must be approved.

Talk to your dental supply rep. Dental supply reps want you to purchase supplies through them, period! If your supply costs are on the high side (and even if they aren’t) you can talk to your supply rep to see what they can do to help you keep your costs down. It is in their best interest to help you save money through them rather than have you go through a different supplier.

Are there other alternatives for dental labs? Many doctors love a specific lab because of the quality of the lab work that comes from that specific lab, the downside is, with quality usually comes a higher price. You might find that by sending some of your easier lab cases to a more cost effective lab, you will get the same quality for those products and a much more affordable price.

Do I like to use specialty products or do I do specialty work? Some practices tend to run a little higher than industry averages because of the products the doctor likes to use and because of the procedures the doctor performs. If you like to use gold in your practice, or if you are doing a lot of specialties (ortho, implants, oral surgery, endo, etc.) then it is important to know that your direct costs might be a little higher than industry averages because of this.

Cash Flow

Monitoring your direct costs, as with all of your operating expenses, is an important aspect of running your practice. With the proper monitoring tools and procedures in place, you will find this task easier and actually have some obtainable goals to work towards.

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