THINKING BUSINESS
a blog by Chris Barrow

Why your payroll costs are climbing (and what to do about it)

Payroll costs in dentistry are increasing as a percentage of sales.

To maintain your profitability, are you going to have to pass on that cost to your patients?

Consider the alternatives:

  1. pay less wages to fewer people

  2. pay yourself less

  3. make less profit

It seems that most owners are choosing the last of these options.

The Key Performance Indicator (KPI) for payroll costs used to be a very reliable 17.50% of sales.

(to be clear – that’s everybody except freelancing associates, hygienists and therapists)

I first measured and noticed that KPI in 1997 and it has stayed the same for almost 20 years.

The only exception to the rule was the occasional practice who salaried their hygienists. In this case, the KPI could rise to 21.5% of sales.

In the last few years, things have changed with the arrival of:

  1. salaried hygienists and therapists;

  2. salaried apprentice dentists;

  3. treatment co-ordinators;

  4. marketing managers;

  5. business development managers working alongside clinic managers

The higher the practice turnover, the more likely you are to be employing clinicians and managers, (notwithstanding the ongoing debate about the tax position of the freelancers).

So across my client base, the KPI range has now altered to:

  1. up to £500,000 sales – 17.5%

  2. £500,000 to £1.2m sales – 21.5%

  3. £1.2m to £2.5m sales – 21.5% to 25.00%

  4. above £2.5m sales – 25% or more

Back to my original point – where is this money coming from?

At the moment, the owners are paying – we are seeing the inverse effect on profitability:

  1. up to £500,000 sales – 35.00%

  2. £500,000 to £1.2m sales – 30.00%

  3. £1.2m to £2.5m sales – 25.00%

  4. above £2.5m sales – 20.00% or less

These reduced margins are as a result of an overall increase in operating costs, not just payroll.

Maybe, for the larger micro corporate, it just means acceptance of this lower profit margin?

The rationale is that 15% of £5m is better than 35% of £500,000.

It does, however, prove the point that bigger doesn’t necessarily mean better – it can just mean bigger.

The owner has to navigate a careful course en route from small to large – keeping a careful eye on the bottom line and those all important KPI’s.

Hiring fewer, less qualified people or delaying recruitment have never been winning strategies in a growing business.

The increasing payroll KPI is very necessary if you are ever going to get things done – and done properly.

Just make sure you can afford it.

That’s called planning.

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