Making a dental clinic profitable is not a goal that can be achieved by rudimentary cost-cutting or passive managerial techniques. What makes a clinic profitable are data-driven decisions and financial strategies, not gut feelings. To hit these periodic goals, clinics must work towards building an internal business model that works alongside their core healthcare duties. And ideally, both should work in tandem without disrupting one from the other.
An integral part of this business model that should be compromised is oversight of key financial performance indicators. Tracking these indicators periodically works like a symptom-and-cause function, allowing clinics to understand “how” and “why” they are financially performing the way they are.
This blog provides a list of those dental financial KPIs that clinics must track monthly and explains the role each plays in an all-round healthy financial ecosystem.
Dental Financial KPIs That Clinics Should Track Monthly
Before getting to the financial KPIs, there’s an important point to understand. In addition to the dental financial KPIs mentioned in this section, other financial metrics need to be monitored on different schedules. Cash flow and overhead costs, to name a few, require daily oversight, while others, such as inventory turnover or Customer Acquisition Costs, should be reviewed quarterly.
Similarly, there are KPIs that need to be tracked over the long term, like Return on Equity, Debt-to-Equity Ratio, and Accounts Receivable (AR) rates. Therefore, along with monthly KPIs, there should also be regular practices in place to monitor those dental financial KPIs, similar to the ones outlined below:
Collections Ratio
Collections Ratio measures the percentage of the revenue collected by the clinic. This is typically collected by dividing total collections by the total adjusted production over the same period of time. On average, a healthy functioning clinic should aim for a collection ratio of around 98% to a 100%. This is to indicate efficient billing systems and proactive insurance follow-ups.
Having consistently low ratios suggests higher-than-average write-offs, poor payment options for patients, or excessive outstanding insurance claims. In case the dental clinic is facing such low ratios consistently, it requires monthly tracking to ensure that the gap between the services provided, and the revenue received remains as minimal as possible. Keeping this gap at minimum highlights the effectiveness of a clinic’s financial protocols.
Net Income Margin
Net Income Margin represents the profitability of the dental clinic after all of the operational expenses, taxes, and compensation, including the dentist’s salary. It is calculated by dividing net income by gross revenue, providing a clear percentage of how much profit is generated from each dollar. A high net income margin indicates efficient operation and pricing, while a low margin indicates that the clinic might be overspending in some area of operations relative to its income. Monthly tracking enables the clinic to evaluate the true profitability and adjust its spending behaviour immediately, rather than waiting for an annual tax report.
Overhead Rates
The overhead rate measures the overall cost of operating a dental clinic. This includes costs such as salaries, supplies, lab fees, and rent, as a percentage of total revenue. For a well-run dentistry, this operating overhead generally falls anywhere between 55% to 65%. Though this percentage can vary with other factors, like the specialization of the clinic or location. Monthly monitoring of this KPI presents the opportunity to identify any potential spikes in costs. These spikes can appear due to excessive spending on dental equipment or disproportionate staffing expenses. Identifying these cases gives the opportunity of immediate action before these factors can have a diminishing impact on the clinic’s profitability.
Production vs Collections
The amount of money collected by the clinic (Collections) subtracted by the amount of dollars associated with the services provided (Production) during the month is the KPI that requires monthly oversight. Having a significant discrepancy between high production and low collection amounts translates to a serious issue that requires immediate attention. Some potential reasons for this issue include billing errors, insurance verification, or the patient payment collection process. Ideally, both production and collection should work in tandem with each other.
This can be assured if the clinic has a monthly tracking system that helps pinpoint or avoid such a bottleneck altogether, by analyzing whether the issue has been created on the production or collections side.
New Patient Acquisition Rate
The number of new patients added to the clinic each month is a vital indicator that directly impacts a clinic’s financial and growth strategy. Tracking this KPI gives clinics the opportunity to diagnose if they are maintaining, losing, or growing their patient base. For an average dental clinic, a doable and ambitious enough goal is to increase their patient base by 10 to 15% increase each year.
If the clinic falls short on meeting their target or if there is a drop in the number of patients, it usually prompts an immediate review of their marketing strategy, referral networks, or changes in their internal management. A steady influx of new patients is essential for replacing lost patients and maintaining high production levels.
Accounts Receivable (AR) Days/AR Days
One of the most crucial dental financial KPIs to track, as it dictates the financial reporting of a clinic and can have a direct impact on its tax valuation. This KPI tracks the average number of days it takes for a dental clinic to collect payments after a service is provided. This gap between service and payment is typically caused by communication with the patient’s insurance providers. A healthy clinic should aim for an AR Day count of less than 30 to 45 days, which is a fast enough rate for receiving payments for an average clinic. In the case of a rise in AR days, that is a symptom of a backlog of submitting insurance claims or a lack of follow-up payments. Monitoring AR Days monthly is a way for clinics to ensure a healthy cash flow and also avoid any potential.
Production Per Hour/Days
Production per hour or day measures the overall efficiency and profitability of clinical hours. It involves calculating how much revenue is produced by each individual dentist or hygienist, broken down on a per-hour basis. This metric helps identify which dental procedures are the most profitable and whether the scheduling for which department is optimized for maximum value. Monitoring this regularly ensures that a clinic’s staff are not in any way underutilizing their time with lower-production procedures. It helps evaluate the strategy around scheduling the team’s ability to fill the day with high-value treatments, directly impacting the overall financial performance of the clinic.
Conclusion
Dental financial KPIs, as mentioned above, are used for two important purposes: first, to establish a strong financial base for your clinic, and second, to monitor the ongoing financial health of the clinic. An important point that clinics need to understand is that there is no need to compromise between quality of care and financial performance. Tracking financial KPIs is a starting position to create the financial strategy of a clinic, and there are many ways to do so. One of the best ways for clinics that have recently started regularly tracking their dental financial KPIs to begin is with a simple checklist. The checklist will help clinics maintain consistent and accurate monthly financial reporting.
To improve efficiency and decrease time spent tracking KPI, clinics can utilize automation in their processes. Furthermore, the use of expert financial consultants will provide clinics with the ability to ensure that they are achieving their dental financial KPIs through both current and future performance. At the same time, developing and executing long-term financial strategies and tactics that support long-term viability.
