Are you a dental business owner, partner, or manager who wants to improve your business’s profitability without indiscriminately cutting costs? At PorterKinney, your local WA dental CPA, we want to help you understand and optimize your business’s financial health. Today, we are providing dental practice owners with insights into key financial metrics they should track to measure their profitability, efficiency, and growth. From easy-to-understand explanations of key dental benchmarking metrics to insights from industry influencers and real-life numbers, we’ll walk you through it all.
Key Financial Metrics for Dental Practices
When addressing dental benchmarking, a business can utilize various metrics in conjunction with its dentist CPA to identify strengths and weaknesses. Let’s start with the ten critical financial metrics that will significantly impact your business based on 10,000 data points collected between 2020 and 2024. Here, we will compare the averages for dental practices and the goal numbers for achieving a highly profitable practice.
Net Profit Margin
Net profit margin measures the percentage of profit earned in relation to its revenue. The average net profit margin is 12.9% after owner salaries, with a goal of 30% or more to achieve a highly profitable practice.
Revenue Growth Rate
Revenue growth rate refers to how a business grows over time. The average annual revenue growth rate for dental practices is 7.2%, with highly profitable practices reporting 10% or more. Should a dental practice achieve a 10% revenue growth rate, it will double every 7.2 years.
Revenue per Employee
Revenue per employee refers to how much revenue each team member generates, calculated by dividing the total revenue by the number of employees. The average revenue per employee is $152,448, with highly profitable practices pulling $200,000 or more.
Revenue per Chair
Revenue per chair measures how efficiently a dental practice uses its current space. The average revenue per chair is $231,721, with highly profitable practices earning $300,000 or more.
Dental Supplies as a Percentage of Revenue
Dental supplies are a non-negotiable factor of running a dental business. However, keeping their cost as a vital factor when evaluating your business’s budget is still critical. The average cost of dental supplies averages 7.3%, with highly profitable dental practices getting the costs down to less than 7%.
Lab Fees as a Percentage of Revenue
Similarly, lab fees are a critical component of budgeting. The average lab fee percentage is 5.2%, with highly profitable businesses reporting between 5% and 8%.
Payroll as a Percentage of Revenue
Your employees make up the backbone of your dental business, so balancing production with employee labor and satisfaction is a key component of budgeting, especially when considering hiring more team members. On average, payroll makes up 33.8% of revenue, with highly profitable practices reporting 30% or less.
Rent as a Percentage of Revenue
Rent is another metric of running a dental business that can be manipulated to minimize costs. On average, rent should be around 5.8%, with a highly profitable business paying 5% or less. An easy way to reduce costs is to consider purchasing your building with an LLC and then paying the rent to yourself.
Interest as a Percentage of Revenue
On average, dental practices have 1.1% of revenue as interest payments, but the goal is to eliminate them. Highly profitable businesses work quickly to pay off debt, so they have 0%.
Advertising as a Percentage of Revenue
Lastly, advertising is necessary for any business, including dental practices. On average, dental practices report 1.4% of revenue for advertising, whereas highly profitable practices report 3-7% and start-ups report 10%. Of course, to achieve success with advertising takes careful management, as you need to calculate the ROI of each campaign.
Benchmarking Against Industry Averages
When conducting dental benchmarking, it is essential to consider four critical parameters that will affect how your number compares to the average.
First, compare your business to similar businesses in terms of size and age. A new dental business with a team size of 5 will have different numbers than a 20-year-old dental business with a team size of 30.
Second, consider the region where the business is located. Even here in Washington, the cost of running a business in Seattle will be vastly different from that in Spokane. Due to this, you not only want to compare your business to similar businesses in your region, but you may also want to consider comparing expenses, such as rent, to those of other businesses in your local area.
Third, consider the services rendered. For example, dental practices that specialize in cosmetic dentistry often generate higher revenue per patient, but experience lower patient volume. Alternatively, dental businesses that appeal to families often see more frequent visits, but at a lower revenue per patient.
Lastly, it is vital to consider how the dental industry changes year over year. Luckily, as an essential service, dental businesses often experience less profit fluctuation due to economic changes than, for example, a restaurant or retail business. However, that doesn’t mean they are exempt. For example, the Dental Economics’ 2024 DE/Levin Group Annual Practice Survey revealed that overhead costs are on the rise, with 64% of practices reporting increases, and half of those seeing hikes of 10% or more. However, at the same time, profit increased by 6.4%, indicating that growth is possible even amid rising costs.
As you can see, all of these aspects can heavily influence your numbers. To give you a basic snapshot, here are the healthy financial metrics that would indicate a successful dental practice:
The Benefits of Using Dental Benchmarking
Taking the time to accumulate and compare key financial metrics is more than just data collection; it is a way to strategically improve the business through informed decision-making. By taking this data and identifying strengths or weaknesses, you can do the following:
- Find ways to increase production without overextending staff.
- Minimize inefficient operating expenses.
- Optimize pricing structures and service offerings.
- Improve patient retention and acquisition.
- Streamline cash flow management.
- Leverage tax strategies and deductions to maximize profitability.
- Support long-term planning, including expansion, retirement, or transitioning ownership.
Of course, we understand that collecting, analyzing, and implementing all this data is a chore, especially for a busy business owner or manager who has numerous responsibilities to manage. That’s where we come in!
Why Partner with PorterKinney, PC for Dental Practice Financial Guidance?
Whether you are a brand-new dental practice or an established business, understanding how your company compares to industry and regional standards is key to your financial success. If you’re looking to optimize financial performance and gain a deeper understanding of your revenue and expenses, we at PorterKinney PC are here to help.
As your local WA dental CPA, we at PorterKinney PC have specialized in dental CPA services tailored to industry needs. With expertise in dental benchmarking, tax planning, and financial strategy, we offer a proven track record of helping dental practices reduce overhead and increase revenue.
Our goal is to help you increase your profits to more than $1 million per owner, eliminate headaches, save time, and maximize your business value while minimizing your tax burden. Together, this will help you run your business the way you want it, while building a legacy you can be proud of.
Curious about how your dental practice compares financially? Schedule a consultation with PorterKinney, PC today to gain expert financial insights and strategies.
