Growing Your Dental Practice: Reinvestment Could Be the Key

March 21, 2023

I’m always amazed at the number of dentists that listen to the show. It’s always very humbling when I meet one of you in person and you tell me how much you enjoy our content and how it has helped you in your businesses. So, with this entry, I want to pay special attention to all of the dental entrepreneurs and look at growing your dental practice. However, the principles I’m discussing can be applied to any business. So, don’t check out on me! Let’s look at why growing your dental practice could begin with your paycheck.

Follow Along With The Financially Simple Podcast!

This week on The Financially Simple Podcast:

(2:17) A few basic assumptions before we begin
(5:20) Opportunity Cost
(7:21) Calculating Opportunity Cost
(8:27) Highest and Best Use of Reinvestment
(10:51) What High Revenue Growth practices do differently
(14:03) Maximize the number of patients seen each day (throughput)
(16:22) Viewing your practice through a buyer’s eyes
(18:05) Calculating average revenue growth

A Few Basic Assumptions

Before we get too deep in the weeds, I want to outline a few of the basic assumptions I’m making in the delivery of this information. First, we are assuming that you already own a healthy dental practice, but this doesn’t mean you can’t use these same principles when launching a practice or other small business. Next, we’re approaching this subject with the understanding that all of your business debts have been paid. You now have significant cash flow and for all intents and purposes, you’re reaping the benefits of being successful.

Similarly, you’ve secured your lifestyle. You’re no longer living paycheck-to-paycheck and you’ve begun investing outside your practice. This could mean you’ve developed a real estate portfolio or you’re maxing out your retirement plans, etc. The point is, you no longer have all of your net worth tied to your dental practice. Most financial advisors would tell you to do this (myself included). However, we can’t forget that the largest asset in your net worth calculation is your practice. Therefore, we must work to maximize your dental practice valuation. But how?

Growing Your Dental Practice

In the introduction of this blog, I made the statement that growing your dental practice could begin with your paycheck. Now, I know you’ve spent years going to school to become a dentist and you probably want to reap some of the rewards from that investment. You should live the lifestyle you wish to live. So, don’t misunderstand me. However, understanding that your dental practice likely accounts for 80% of your net worth, it probably behooves you to pour some of your resources back into your practice.

However, you don’t want to simply throw money into the business without knowing how it could affect the value of your practice. This is where you must begin to consider the cost of capital. In other words, how much is it costing you to make or not make this expenditure? Or, what could you earn by investing your money elsewhere?

To determine your cost of capital, simply subtract your rate of return from the higher-yielding investment from the rate of return of a lower-yielding investment. For example, let’s say you have $1 million in a bank account that’s earning .25% interest. If you left it alone, you would have earned $2,500 at the end of the year. However, if you took that $1 million and put it into an FDIC-insured Certificate of Deposit (CD) earning 2% interest, you would have earned $20,000. Therefore, the cost of capital to put your money in a CD is $17,500.

Don’t Stop There!

Once you’ve identified your cost of capital, you must determine where the highest and best use of your reinvestment lies. You may determine that you’ll yield a greater return by reinvesting in your practice. But you’re not finished yet. You must also determine which investment inside your practice will generate the greatest long-term growth. You want to reinvest your resources into areas that can produce a multiplicative effect on your dental practice’s valuation.

For example, according to NexHealth’s 2023 State of Dental Today report, 6.2 percent of dental practices saw revenue growth of more than 20% in 2022. So, what are they doing differently?

What’s Different About High Revenue Growth Practices?

For starters, they’re investing in automation. The report indicates that High Revenue Growth practices were three times as likely to invest in automation. This can increase value by helping your practice become hyper-efficient. Some of the benefits of automation include:

Streamlining your patient intake process.
Automated appointment and follow-up treatment scheduling.
Expedited billing and collections processes.
Ensuring patient privacy and adherence to regulatory & compliance guidelines.
And much more…

An added benefit to automation is an improved client experience. This can go a long way toward improving client loyalty and increasing your number of appointments. NexHealth reported that increasing appointments was the top priority for the coming year among High Revenue Growth practices. This is, in part, because increasing appointments allows you to increase revenue without incurring the added costs of acquiring a new patient.

Maximizing the Number of Patients Seen By Investing in People

Similarly, these practices place an emphasis on maximizing the number of patients seen each day. In fact, 55% of High Revenue Growth practices reported seeing 11 or more patients per day. This is in contrast to just 32% of practices reporting negative growth in 2022. By investing in your people through comprehensive training and education, and developing best-in-class screening/hiring practices, you could drastically improve the efficiencies in your practice.

If you’re not being weighed down by administrative tasks that could be handled by someone else, you’re free to see more patients.

Look At Your Practice the Way a Buyer Would

Finally, look at your practice as though you were building it for the ultimate buyer – the one who will purchase it from you. Ask yourself which areas of your practice need improvement. Do you need to update your technologies and equipment to remain competitive? Are there specialists you could add to your team to broaden the scope of your services and create new revenue streams?

Perhaps you could invest in developing a best-in-class marketing department by becoming a thought leader through podcasts, blogs, or vlogs (much like I’ve done). As a dental entrepreneur, there are an endless number of ways to reinvest in your practice and take advantage of the multiplicative effect that pouring into your business can bring.

Calculating Your Average Revenue Growth

Calculating your average growth rate can provide a useful barometer for the overall health of your practice. Between 2018 and early 2023, the dental industry experienced a Compound Annual Growth Rate (CAGR) of 1%. But how does your practice compare? To calculate the average growth rate of a dental practice, you need to use the following formula:

Average growth rate = ((Ending value / Beginning value) ^ (1 / n) – 1) x 100

In this calculation, the “Ending value” is the value at the end of the period that you’re calculating the growth rate. Basically, this is the total revenue of your practice at the end of the year. “Beginning value” refers to the value at the beginning of the period you are calculating. In this case, it is the total revenue of your practice at the beginning of the year. The “n” refers to the number of periods you are calculating for the growth rate. For example, if you are calculating the average growth rate over five years, then “n” would be 5.

Let’s say your practice has a total revenue of $800,000 at the beginning of the year, and $950,000 at the end of the year. Using the average growth formula, your year-over-year growth rate calculation should look like this:

Average growth rate = (($950,000 / $800,000) ^ (1 / 1) – 1) x 100
Average growth rate = (1.1875 ^ 1 – 1) x 100
Average growth rate = 0.1875 x 100
Average growth rate = 18.75%

You can repeat this process over many periods to calculate the average growth rate over that time frame.

Wrapping Up…

Friends, I know this is a lot of information. Growing the value of your practice requires deliberate planning and clear, measurable action steps. It’s easy to become overwhelmed when working through this. That’s where having a trusted advisor to coach and encourage you throughout the process becomes so important.

Life is hard but you’ve got to admit, it’s still so good. Growing your dental practice can be frustrating, but it doesn’t have to be. By making well-informed decisions about when and how to reinvest in your practice, you can make it at least financially simple. Let’s go out and make it a great day!

If you don’t have someone to come alongside you during this process, reach out to us. Our team would love to help you grow your greatest asset… your practice!