How labor management oversight leads to a healthier bottom line.
By Chris Foy, Controller, DEO
When running a business, whether it be a dental practice or a company in pretty much any other industry, our main goal is always to increase profit. On paper it’s a fairly simple equation – to improve your bottom line, you either need to increase your revenue, decrease your expenses or some combination of the two. Of these two paths to increased profitability, I always advise my clients to get a handle on their expenses first, as running a company that properly accounts for each dollar spent creates a foundation for your business that ensures as you scale you maximize your margins. And the most effective way to do that is with labor management.
Unfortunately, the labor market today is a tough one to navigate. Unemployment is at all-time lows. The pandemic has changed the way employees think about work. Inflation has current and prospective team members wanting higher compensation. And we are likely staring down a recession. That’s a lot to combat – the trick is not to overreact to these things, but to ensure your labor plan fits your practice. When you do that, you shield yourself from volatile forces in the labor market. For your labor plan, I recommend three areas of focus – 1) labor as a percent of overall expenses, 2) position pay bands, and 3) profit bonus.
Labor as a percent of overall expenses
An industry consultant pre pandemic may have advised that you keep your non doctor compensation around 25%. I think that’s a great benchmark, but I reject the notion that your practice must fall under rigid industry percentages. Rather, I think it’s far more beneficial that you look at all of your expenses and establish the model for your practice that suits you best. That’s not a recommendation to ignore industry standards – if you are significantly off, you should reflect on why you are so different than the dental space on the whole. But determine what that percent is for your business, and as you bring in more revenue and costs go up, make sure you add new labor costs you are maintaining in the same labor percent of overall expenses.
Position pay bands
You love your employees – I get it. Your team members are the key to your success. But you have to draw lines in compensation so you are able to take emotion out of the equation when talking about increasing an employee’s compensation. Establishing pay bands (that are reviewed annually and inflation adjusted) ensures that you are maximizing your labor efficiency. Remember, you are paying for a job, not a specific person. Frequently practices find themselves with bloated payrolls that lead to hard decisions during tough economies. Remaining rigid in a pay band is ultimately a good thing for your employees, because you are ensuring that you are running your office in a way that maximizes their job security. I’ve seen too many cases of dentists that have to start letting go quality people because when revenues stalled out they had no choice but to look at their inflated labor costs. It’s important to remember staying firm on a pay band does not restrict your employee from having the opportunity to earn a really good compensation package. A pay band should guarantee they are receiving a fair, market value base salary. But when your firm does well, they can share in the success with a profit bonus.
I firmly believe that any business that has employees should have some sort of bonus plan linked to company profit. When done right it addresses so many key parts of your business – it rewards the people who contributed to the success of the practice and it doesn’t pull you into the trap many businesses fall into which is the expected bonus. When employees understand that their bonus is tied to company profit, they work better as a team to meet the shared goal. Further, they don’t get pulled into the unrealistic expectation that they will receive a bonus each year even if the practice is in no position to pay them.
Just remember, though, every dollar of profit should not be paid out in bonuses. You should identify a reasonable percent of that profit to be put into a pool and disbursed to your employees. Every profit dollar should have a place based on what you feel is appropriate for your office (owner disbursements, tax accounts, investments, capital improvements, bonuses, etc.). It’s up to you to determine the best allocation of profit dollars, but making sure your employees are enjoying the success of your practice on some level is an investment you won’t regret.
Having a plan when it comes to compensation is critically important to your practice. It allows you to have comfortable control over your expenses in good times as well as bad. But the reality is, a plan is also a really good thing for your employees. It ensures that they are working for a practice that is shrewd in its business management and that prudency leads to job security while still offering great compensation paths.
Chris Foy is the Controller for the Dentist Entrepreneur Organization. He is also the owner of Dental Backoffice Solutions, a company dedicated to serving the accounting needs of dentists. He can be reached at [email protected]