When Practice Expenses Go Up, Where Should You Look First?

When practice expenses start climbing, the first reaction is often to start cutting costs.

But before you reduce staff hours, change suppliers, or eliminate expenses, you need to understand what is actually driving the increase. The best place to start is usually your financial data.

Start With the Profit & Loss Statement

If you have access to your Profit & Loss Statement, start there.

Your P&L gives you the bigger picture and helps identify which expense categories have actually changed. Rather than assuming payroll or supplies are the problem, you can see where the numbers are moving.

A helpful way to review a practice P&L is to break expenses into a few major categories:

• Doctor compensation

• Staff labor

• Clinical supplies

• Administrative expenses

• Marketing

Each category should be analyzed differently. Simply looking at whether the dollar amount increased does not always tell you what is really happening.

Before You Panic About Payroll, Check the Calendar

Payroll is often one of the first expenses people notice. But before assuming something is wrong, ask a simple question: Was this a three-payroll month?

If your books are maintained on a cash basis and you normally have two payrolls per month, a month containing three payrolls can make payroll expense appear dramatically higher even though nothing has actually changed operationally. Once you eliminate that possibility, look deeper.

Ask:

• Did employee hours increase?

• Did wages increase?

• Did benefits increase?

• Did overtime increase?

• Did production or collections increase along with payroll?

An increase in payroll is not automatically a problem. Growing practices often need to hire additional team members before the additional revenue fully catches up. The important question is whether the additional labor is creating additional capacity and eventually additional production.

Separate Doctor Pay From Staff Payroll

One mistake practices make is combining all payroll into a single number. Doctor compensation and staff compensation behave differently financially and should be reviewed separately. Doctor compensation tends to behave more like a variable expense because it often moves with production or collections. Staff labor is closer to a fixed expense. You need a certain number of employees simply to open the office and operate the practice. Combining the two can hide what is really happening.

Don’t Just Look at Payroll Dollars

Imagine your monthly payroll is $30,000. If collections are $100,000, payroll represents 30% of collections. But if collections fall to $80,000 while payroll remains $30,000, payroll suddenly represents 37.5% of collections.

Payroll did not increase. Revenue decreased.

That distinction matters because the solution is completely different. If the revenue decline is temporary, you may simply need to ride out a slower month. If it becomes permanent, however, staffing levels may eventually need to change.

How Do You Know When to Hire?

There is no perfect formula for determining exactly when a practice needs another employee.

However, there are warning signs on both ends. If employees regularly have significant downtime, the practice may already have too much staffing capacity — or the existing team may not be working efficiently.

On the other hand, running at 100% capacity makes it extremely difficult to improve systems, train employees, accommodate growth, or handle unexpected problems. A useful guideline is to start evaluating additional staffing when the team approaches roughly 80% capacity, with hiring becoming increasingly important as the practice approaches 90%.

Some available capacity is healthy. It gives the practice room to grow.

Supplies: Look at Cost Per Visit

Clinical supplies are another area where percentages can be misleading. Suppose supply expense represents a larger percentage of collections than it did last year. It would be easy to assume supply costs are getting out of control.

But what if insurance reimbursements declined? The supply percentage could rise even though the actual amount of supplies used per patient remained exactly the same.

That is why a more useful metric can be:

Clinical supply cost per patient visit

If supply cost per visit is increasing, you may genuinely have a purchasing, waste, pricing, or supplier problem. If supply cost per visit stays consistent while the percentage of revenue increases, the real issue may be on the revenue side.

Declining Reimbursements Can Make Expenses Look Worse

Sometimes the expense is not actually the problem. Lower reimbursement can make almost every expense category look worse when measured as a percentage of collections. If insurance reimbursements decline while staffing, supplies, and overhead remain relatively stable, those expenses will naturally consume a larger percentage of revenue.

That means practices should evaluate both sides of the equation:

What are we spending?

and

What are we getting paid?

Lower reimbursement is fundamentally a revenue problem, but it can easily appear to be an expense problem when reviewing financial percentages.

Marketing Should Be Measured Per New Patient

Marketing deserves its own measurement as well. Rather than simply asking whether the marketing budget increased, look at:

Marketing cost per new patient

For example, if you spend $5,000 on marketing and generate 50 new patients, your marketing cost per new patient is $100. That number becomes much more useful when comparing marketing channels. Referral and internal marketing efforts may cost very little, while paid search, Google advertising, or other online campaigns may have significantly higher acquisition costs. Looking at the total marketing bill alone doesn’t show you which strategies are actually producing patients.

One Financial Report Practices Often Overlook

One of the most valuable reports for understanding expenses isn’t necessarily the P&L.

It’s the Spend by Vendor Report. This report shows exactly where your money is going.

Instead of seeing one large category called “Dental Supplies,” for example, you can see how much money went to each individual supplier. That makes unusual spending much easier to identify.

It can also be helpful to separate vendors that provide different types of products. If one company sells both clinical supplies and equipment, separating those purchases makes the report much more meaningful.

A good vendor spend report can sometimes make expenses easier to understand than the P&L itself because you can immediately see who is receiving the practice’s money and how much is being spent with each vendor.

The Goal Isn’t Simply to Spend Less

Strong financial management isn’t about cutting every expense possible. It’s about understanding whether each expense makes sense relative to what the practice is producing.

Instead of asking:

“Why did this expense go up?”

Ask:

“What changed operationally that caused this number to move?”

That might mean looking at:

• Payroll as a percentage of collections

• Supply cost per patient visit

• Marketing cost per new patient

• Doctor compensation separately from staff labor

• Revenue and reimbursement trends

• Spending by individual vendor

Those measurements give practice owners and office managers much more actionable information than simply comparing this month’s expenses to last month’s. Office managers should also have some visibility into the financial side of the practice, particularly spending. Understanding where the practice’s money is going makes it much easier to manage resources, identify problems early, and help the owner make better decisions.

Want Better Visibility Into Your Practice Financials?

At DrCFO, we help medical and dental practice owners understand what their financial numbers actually mean, not just hand them another report. When you understand what is driving payroll, supplies, marketing, overhead, and profitability, you can make better decisions before small issues become expensive ones.

Need help understanding what’s happening inside your practice finances? Contact DrCFO to learn how we can help.