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The dental practice industry is rapidly moving toward massive consolidation. Most dental practices operate at 50% of their potential with slim profit margins, typically 15-25%. The root cause of these outcomes is a lack of entrepreneurial focus and understanding of how to operate a business.
We at OPS see an urgent problem in this, which is, dentists need to learn quickly how to fulfill their potential, increase profit and build a sustainable exit strategy to protect their assets and retirement prospects. The hard part is…How? How do you increase your potential, while increasing revenue, while building a sustainable exit strategy? That’s a lot.
Think Like an Entrepreneur
There are many ways to increase revenue, you can scale your business model and open a second or third location; plan and execute an expansion of your practice in another way, like adding an associate or hygienist; or you can implement and aggressive marketing strategy. There are a few effective ways to expand efficiency, fulfill your potential and increase your profit and revenue. And some of these will create a successful exit ramp when you’re ready.
Measure Twice, Cut Once
And in dentistry, you need to be measuring, like, all the time. But there is one key metric to look at, gauge and increase as you look to grow, build and exit. It’s called EBITDA.
This is the one essential financial metric for evaluating the performance of your practice and figuring out what you’re fiscally prepared to take on. EBITDA is a magical formula that allows you to measure the actual and fiscal success of your business. So, what is it?
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric used to measure a company’s operating performance by excluding certain expenses that can vary widely between different businesses. EBITDA provides a clearer picture of a company’s core profitability and operating efficiency.
Why is EBITDA Important for your Dental Practice?
In the context of dental practices, EBITDA offers valuable insights into the business’ financial health and performance. And if you’re interested in fulfilling the potential of your practice, which leads to an increase in profitability which leads to an increase of protecting your most valuable asset on your way to retirement, then it’s EBITDA that will allow you to see the big financial picture and track the value of that asset.
Three Invaluable Tools in One
EBITDA does three things –
- 1. Focuses on Core Operations: By excluding non-operating expenses such as interest, taxes, depreciation, and amortization, EBITDA focuses solely on the core operations of the dental practice. This allows practitioners to assess how well the business is performing in terms of generating revenue from patient care.
- 2. Facilitates Comparisons: EBITDA provides a standardized measure that allows dental practices to compare their performance with industry peers or benchmark against historical data. This comparative analysis can help identify areas of strength and areas needing improvement.
- 3. Simplifies Financial Analysis: Calculating EBITDA simplifies financial analysis by removing the impact of non-operating factors that can distort profitability metrics. It provides a clearer picture of the underlying profitability of your dental practice, making it easier for practitioners to make informed decisions.
How to Calculate EBITDA for Your Dental Practice
Calculating EBITDA for your dental practice involves several steps –
- Start with Net Income: Begin by determining your practice’s net income, which is the total revenue minus all operating expenses, including salaries, supplies, rent, utilities, and other overhead costs.
- Add Back Depreciation and Amortization: Next, add back depreciation and amortization expenses to the net income. These are non-cash expenses that represent the gradual reduction in value of assets over time.
- Add Back Interest and Taxes: EBITDA excludes interest and taxes, so you’ll need to add them back to the net income. Interest expenses represent the cost of borrowing, while taxes are statutory payments to the government.
- Adjust for Non-Recurring Expenses: Finally, adjust for any one-time or non-recurring expenses that are not reflective of the normal operating performance of the practice.
Once you’ve completed these steps, you’ll arrive at your practice’s EBITDA figure, which can be used to assess its financial performance.
Use EBITDA to Measure your Success
Now that you understand how to calculate EBITDA for your dental practice, let’s look at tactics for how you can use this metric to measure success –
- Monitor Trends Over Time: Track your practice’s EBITDA over different time periods to identify trends and patterns. A consistent increase in EBITDA indicates improving profitability and operational efficiency.
- Set Performance Goals: Use EBITDA as a benchmark to set performance goals for your practice. Establish targets for EBITDA growth and strive to achieve them through strategic initiatives and operational improvements.
- Identify Areas for Improvement: Analyze your practice’s EBITDA to identify areas where costs can be reduced, or revenue can be increased. This may involve optimizing staffing levels, improving billing and collection processes, or expanding service offerings.
- Inform Strategic Decision-Making: EBITDA provides valuable insights that can inform strategic decision-making for your dental practice. Whether it’s expanding into new markets, investing in technology, or negotiating favorable terms with suppliers, EBITDA can guide you in making informed choices that drive long-term success.
EBITDA is a valuable metric for measuring the success of your dental practice or organization. By focusing on core operating performance and excluding non-operating factors, EBITDA provides a clearer picture of profitability and operational efficiency. By calculating and monitoring EBITDA, dental practitioners can make informed decisions to drive growth, optimize performance, and ensure the long-term success of their practices.
One Tool – Three Powerful Uses
This is one powerful way you can focus on the three areas: low potential, slim profit margins and little to no exit strategy. But by using this one metric effectively you are switching your mindset from dentist to dental entrepreneur. You are getting out of the dentist’s chair and taking a 10,000-foot view of your practice or organization.
And it’s imperative you take this step, for yourself, for your family, for your team and for your legacy. My business partner, Dr. Jack Bayramyan, and I believe the future of dentistry belongs with dentists. Using EBITDA is one way to keep that future safe.
One More Tool to Measure Growth in your Dental Practice
I run a regular mastermind built exclusively for dentists. A mastermind is a group of peers that come together on a regular basis to work out their biggest challenges, share resources and lean on each other to get through the rough patches and celebrate the wins. It is the single most effective tool that an entrepreneur has in his or her entrepreneurial toolkit.
One of the best ways I know to remain steadfast in your goals, bust through your obstacles, find resources and community to keep you strong is joining a Mastermind. Other benefits of this mastermind are the incredible opportunities you will get to improve your leadership skills, understand the importance of team culture within your dental practice and learn to create greater team cohesion. You will learn from those who’ve walked in your shoes and found success.
We have created a strong community and we would love for you to join us. Click the button to register for the next one and we’ll see you there!