Building a Budget That Supports Long-term Dental Practice Success

By Andrea Russel, CPA, senior manager, Hungerford

You found a building, purchased equipment, hired some hygienists, and now you’re a few years into your journey as a dental practice owner.

But how do you set yourself up for long-term dental practice success?

Well, one of the most important things you can do is create a well-balanced budget and stick to it.

But if the thought of outlining a budget makes you want to pull your teeth out, here are some tips to help you get started.

Align the Budget with Strategic Goals

Every practice is going to have different business goals. Are your goals related to growth, patient experience or expansion plans?

Whatever it is you’re trying to accomplish, make sure you allocate resources to accomplish that.

Want to grow? Invest in marketing and modern equipment.

Want happier patients? Upgrade the experience.

Want to expand? Hire more people.

This is a collaborative process. Discuss your goals with your accountant, and they can help you adjust your budget to support these goals while monitoring your spending and revenue.

Monitor Key Expense Ratios

To prevent overspending and identify areas that need attention, monitor key expense ratios. Staffing, supplies and occupancy costs are the three most important ones to examine.

What percentage of your overhead should go to each expense? While these are not set-in-stone numbers, these are the kinds of figures we see with our clients:

• Staffing: 25%-30%
• Supplies: 15%
• Occupancy costs: 10%

These percentages must stay in balance with revenue benchmarks. If those numbers creep higher, profits can vanish fast.

Create a Cash Reserve Plan

Your practice should be able to withstand unexpected events and continue to operate, whether it’s something inconvenient like equipment failure or something more catastrophic like a worldwide health pandemic.

Ideally, you want to have enough money saved so that you can operate your practice for three to six months until you can start generating revenue again.

Additionally, a line of credit can help you get out of an emergency quickly. And the great thing about credit is that you only pay interest on whatever you borrow, and the funds can be re-borrowed as the balance is paid off.

A cash reserve plan ensures you can handle unforeseen expenses without jeopardizing operations or growth plans.

Factor in Technology & Compliance Requirements

As technology improves and your equipment gets older, you’ll need to budget for new equipment, tools and software.

Furthermore, because you’ll have patients’ private health information, you need to ensure any software you use is HIPAA compliant.

Remember: Tax laws are always changing, so you should (or have a CPA who can help you) understand these laws and how they’ll affect your budget.

For example, the One Big Beautiful Bill Act raised the bonus depreciation percentage to 100%, which means you can deduct 100% of any equipment cost from your taxable income, versus having to spread those costs over several years.

Use KPIs to Measure Performance Against Your Budget

KPIs (key performance indicators) ensure you’re on target with your budget goals, allowing you to see how expenses or revenue deviate from expectations.

You could drive yourself crazy trying to track dozens of KPIs, but most dental practice owners are not financial experts, and that’s OK.

So, here are the five most important ones we recommend to our clients along with a good bar to shoot for:

1. Collections ratio: Average time it takes to collect invoices (95%-98%)
2. Production per dentist: Revenue generated from dental procedures ($850,000-$900,000)
3. Production per hygienist: Revenue generated from preventative and maintenance services ($240,000-$250,000)
4. Hygiene reappointment rate: Percentage of patients who scheduled their next appointment before leaving (85% or higher)
5. Overhead ratio: Measures operating expense in relation to revenue (60%-65%)

These figures will give you a good barometer of how your practice is performing and allow you to have discussions about necessary adjustments.

Integrate Tax Strategy

If you’re just starting your dental practice, the first thing to consider is your entity structure. Whether you’re a sole proprietor, a partnership, a single-member limited liability company or something else, your entity will determine your liability protection, as well as your tax advantages.

Even if you’ve been operating your practice for a couple of years, you might want to review your entity structure with a CPA who can help you determine if you’ve selected the right one.

If you own the building you operate in, you might want to consider doing a cost segregation study. This will increase your cash flow, which you can use to reinvest in your business.

Remember the 100% bonus depreciation we mentioned earlier? That’s another tax strategy that lowers your taxable income.

You don’t have to be a tax expert to take advantage of these opportunities. A CPA can walk you through the options that make the most sense for your practice.

Long-term Dental Practice Success Starts with a Resourceful Budget

If building a budget sounds too overwhelming, we’re here for you. We’ve helped dozens of dental practice owners reach their business goals by creating a customized budget that works for them.

Contact us today to discuss your options so you can spend more time focusing on what matters to you — your patients.