It's come to my attention that it's worth chatting about simple economics in the dental business, because when we begin to chat about the simple economics that we have in our dental business courses, not everyone has the ability to grasp them or has considered them before, and so, first things first, a little bit about the names of things.
Number one, turnover. That’s the money that you take in as a business from the things that you sell, or also perhaps from the investments that you have if you have any, but mostly it's deposit money that comes into the bank on a month-by-month basis.
Number two, costs. These are divided into two.
- Fixed costs or overheads, these are the costs you have regardless of what happens: your rent, your heating, your wages. You have to pay these even if no one turns up.
- Variable costs or costs of sale. These are the costs that you incur, but only if you sell something. So, the price of your dental implant, for example, or the product itself that you have to buy.
Following on from this, some of the other important things you need to consider are the profits. Profit is what's left after you've taken the turnover and removed the fixed and variable costs. I know this sounds basic, but some people get very confused at this stage.
Lots of people in the dental business that I've found confuse profit with ‘owners' wages. The profit is not the owner's wages; the profit is the profit. The owner's wages either come out a fixed costs or variable costs, or both. The profit is left after everyone has been paid.
This is a fundamental misunderstanding in many small businesses.
The analogy is that the boss pays the bills at the end of the month and keeps the change. That is not the way a business works or grows.
The reason for that is that when you take the profit, you'll pay tax on the profit overall. If you've taken your own income from this, you may have a variation of which tax is paid. Once you've taken the tax off that, you're left with the post-tax profit, and once you have the post-tax profit on net profit, you can then decide how much to reinvest, how much to reserve ( for a rainy day or a crisis ), and how much to pay out on a bonus.
Reserves are massively important because reserves give you the opportunity to make clear conscious decisions when times are difficult. Remember back to the COVID pandemic. Businesses that had active reserves were able to wait and look and see what was going on. Businesses that didn't ( like ours at that time) had to react. It was hellish.
The other couple of things you need to know in the brief introduction to economics and dental practice are the difference between capacity and occupancy. If you think of your dental chair as a hotel room, and therefore your multiple dental chairs as multiple hotel rooms, you have an amount of capacity that those chairs can be earning fees. This is the amount of time that you have a dentist working on those chairs. Let's say, for example, 8 hours per day, so you may have 8 hours of capacity over four chairs, which is 32 hours per day.
Capacity allows you to work out what the operating cost of your surgery is per hour, because you can understand how much your fixed costs are, how many hours you're open, and therefore how much it costs per hour to work it.
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