Question:

10% Reduction in Collections = How Much Profit Loss?

Most orthodontists would say that 10% reduction in collections creates a 10% reduction in profit or take home pay and that’s not so bad…

WRONG!! 10% shrinkage of your practice costs you way more than 10% of your take home!

How can that be? Well it is not simple math/accounting (because accountants will tell you that the amount of profit per case is the same, but it is simple economics and has a great deal to do with what some call BAM (bare ass minimum). BAM is the amount of money you need to collect every month to break even on fixed expenses. Let’s look at an example where a fictitious office’s BAM is $1000 a month. To be clear, BAM is the amount of money it takes to cover things like payroll, rent, insurance, equipment, utilities, maintenance, property tax, marketing, etc. (these are things you must pay for every month whether you see 1 or 1000 patients) and is pretty much the same month to month if you work the same number of days (yes, yes the utilities can fluctuate and someone can be on vacation but just roll with me here). So, if you think of the office collections like an economist and not an accountant, the first 1000 dollars of collections each month has ZERO profit. It is only after the BAM is accounted for each month that any profit is collected. Thinking about it this way, once you collect enough to cover the BAM, the only overhead that comes out of that money comes from variable expenses like brackets, wires, aligners, lab costs, auxiliaries, etc. – things that you only use more of when you start more patients.[1] In this example, let’s say the variable expense is 10% (just to make the math easy) and let’s assume this fictitious office collects $1500 dollars a month on average so:

$1500 (monthly collection) – $1000 (BAM) – [$500 (money above BAM) x. 1 (overhead rate for collections above BAM)] = $450 (profit per month)

But now let’s take a 10% loss to our monthly income and run the numbers again and see what that does to profit:

$1350 – $1000 – ($350 x .1) = $315

And now, let’s compare and see what kind of reduction to profit there is when the practice declines by 10%:

$450 – $315 = $135 (dollars in lost profit due to 10% shrinkage)

$135/$450 = 30% (reduction in profit!!!!!!)

Any questions?

[1] If you think about monthly collections this way, you will start to see why I’m so against expensive brackets, wires, indirect bonding, wire bending robots, precision brackets and aligner systems, but that is a discussion for another time.