Ep 161: Keeping a Sharp Eye on Profitability

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Dr. John Meis (00:02.274)
Hey everybody, welcome to this episode of The Double Your Production Podcast. I'm Dr. John Meis and with me is a new guest and he will be a recurring guest and with me is TTI's CFO, Scott Brogi. Hey, Scott.

Scott Brogi (00:14.202)
Hey Dr. John, how you doing?

I'm doing fantastic. Do you want to give everybody kind of a quick synopsis of your background and how we came to be working together?

Yeah, absolutely. So I actually started off in banking in New York and went through a credit training program and then ran a couple credit teams and ultimately went out and started helping companies get loans and then expanded into the corporate finance side of things, other banking products, and then ultimately got into investment banking a few years later.

So, you know, have really spent most of my career helping companies get loans, get different products that help them grow their business. And over the last 25 years or so, I've raised over 100 million dollars in capital and help them navigate those waters so that they have the resources they need to continue to grow their businesses. We connected earlier this year because you've been doing a lot of the same things for dental practices and we thought there was a great fit to bring some of that strategic finance experience into the dental world to help the practices that TTI is working with.

Yeah, and it's been fantastic having you on the team. You've brought really a fresh perspective and also a level of expertise that, we wouldn't even have dreamed of having.

Thank you.

So we're excited to have you on the team. We're excited to be able to help our clients in a deeper way. So we're going to talk today about profits and we talk about profitability a lot and some people think that that's a know kind of a taboo topic in a profession but the fact of the matter is dental practices are businesses and they're businesses that are getting really squeezed right now Scott so what are you seeing the squeeze you know what's that coming from?

Yeah. Yeah, I mean, obviously there's there's a lot of pressure from the insurance world, right, in terms of what those what those payments look like. So that can inflict a lot of pressure. And then a lot of folks have a situation where maybe a DSO was starting to open more offices. So that can be another competitive dynamic that that they would be bumping against. But I think a lot of times it really comes down to the efficiency that you have in your own business and how you're handling patient flow and how you're moving clients through your operation to keep things humming. So a lot of it's what you can control..

Yeah, you know, dentistry has operated really quite inefficiently, always. And that is the lever that we have right now that we can pull as to increase our efficiency. And so we were talking earlier about dentists and how they make decisions. And in my book, Cracking the Code, we talk about three different hats that make the dentists wear when they're making important decisions. And those three hats are the clinician, the manager, and the investor. And of course, you've brought a level of sophistication on the investor side. But those three hats, when they make decisions with those three hats, they really think about things differently. Clinicians, if you make a hat only with the clinician hat you are going to do things differently.

Mm-hmm. Right.

I recently talked to a practice, was in a very small town and they bought one of the implant robots to do implants. Well, and he was only doing about three implants a month. And this, you know, I don't know what they are 150 K maybe.

Mmm. Right. Big spend.

Will it make the treatment quality better? Maybe. Will it do it more efficiently? Probably not. So, you just added an expense. So an investor would look at that and say, well, that wasn't such a great idea.

Right.

..but for the dentist, it's cool and fun. And if you decide to do something that's cool and fun and knowing that there's not gonna be return on investment, no problem. But you need to have the investor hat to decide if there is gonna be an ROI. You may decide to get it anyway, but it's better to know ahead of time than to not know.

Right, right. Yeah, and I think a lot of times people may look for that magic bullet where they can go bring something in and, you know, a lot of times it can end up being a paperweight pretty soon if it doesn't have the right fit into how your practice is actually operating.

Yes, so true. So true. I think every dentist who's been in practice for any length of time has some piece of equipment or technology that was going to transform his practice, his or her practice, and it's sitting in the garage or the basement or yeah.

Right, right, Yep.

So when we think about how, so you're a finance guy, so we got to talk about some numbers, right? And so we think about how we measure success with these three hats, there's, you know, they really look at some different kinds of numbers..

Yeah, absolutely. think, you know, starting with kind of the clinician side, people are going to tend to think about productivity numbers. So I know things like collections, production for both the doctor and the staff are going to be big elements. And then, you know, new patient flow is always another one that people talk about a lot. So I think those are three of the bigger elements that I tend to hear from our practices.

Yeah, and those are the three numbers that most dentists can tell you right off the top of their head. And if we were thinking about the next level of better information, not that those are bad numbers to know, but if we take it a level more sophisticated, a clinician might look at clinical efficiency stats like the
productivity per hour and you know stuff like that. Those would be you know better numbers. Case acceptance would be another one. Audio care which you might measure by remakes. You know we can come up with more sophisticated measures. How about the management?

Mm-hmm. Yeah, I mean, one of the things that always one of the stats that always blows me away is what you've what I've heard you say about incoming calls, right? Because there's so much focus on, hey, we need more patient flow. But how about we actually take care of the patient flow that we already have? So I think the I think the statistic is something like only on average, only 60 percent of the inbound calls to a practice are being answered. So what better place to start in terms of how you can manage your practice to really optimize the opportunities that you have already coming in the door, right? Before you go and spend money on marketing dollars.

Thank you, it sounds so crazy, but it's really true. People aren't capturing the demand they already have by not managing the phones properly. There's just all this opportunity lost. you know, other things I think managers, if we take it to a more sophisticated level, retention.

Mm-hmm.

You know, right now, one of the drivers of increased costs is team turnover. And there is a lot of churn. I think it's lessening now, but there's a lot of churn. People moving from office to office, there's been a big increase in on people cost, know, there was, know, hygienists are making, you know, 30, 40, 50 % more than they were just two years ago. So retaining the people you have is very important.

Mm-hmm. Right.

And then performance to budget would be a number office managers should watch. But what have you found about dental practices and budgets?

Yeah, it's kind of amazing because I've been involved in a number of different industries over the years, raising capital, helping them put plans and budgets together. And most of them actually have a plan and a budget. And I have been a little bit a little bit surprised at what a what a rare animal that is in the dental world. So I think there's a lot of room for improvement because I mean the practices that we're coaching and working with, these are significant enterprises, right? These are $5-$10 million a year businesses. We were talking to somebody at the retreat we were just at in Charlotte who is up to 80 employees now, right? And so he couldn't have even imagined that a few years ago, but these are significant enterprises.

And in most industries, you're going to have a plan for how you continue to grow to get from here to there. Right. And so for most businesses, that's going to be a budget, which you would typically do for a couple of years. Right. So you're going to have, we're in 2026, typically you would have a budget for how you plan to grow this year, but then also a couple of years out so that you have more of a plan and more confidence around making investments and how those are ultimately going to pay off for you.

So that's something that we help practices do is do that kind of planning so that you can think about the expenses. You can think about the investments that you want to make in that team to keep productivity high and profitability. And I think that's one of the other surprises that I've had is that profitability isn't something that's really focused on. Again, think practice owners tend to think about production numbers, collections, so it's what are you making? But I think there's a famous saying is it's often more about what you keep, right? And so as opposed to what you make. So I think that's something we need to keep in mind as well.

And if we think about the investor and what kind of metrics they really are held accountable to, what would those be?

Right. Yeah, I mean, those are typically going to be, you you're going to look at sort of top line and growth in revenue or collections, right? And then you're going to look at you have certain direct expenses, right? So lab supplies, those kinds of things, maybe some of the direct staffing costs to provide those services. So those are going to be essentially what's cost of goods sold. So the revenue less the cost of goods sold is going to be your gross profit, right? So that would be the first dynamic.

And then you're going to have your operating expenses. So things like rent, marketing, probably the staffing costs for the rest of your team. And then, you know, the expenses, office supplies, the other things that are going to be there. And then so gross profit, less operating expense is going to give you net operating income or NOI, right? It's often referred to. So that's essentially what profitability is, net operating income, right? There may be some other things depending on the practice that may factor into it a little bit, but that's really kind of the key profitability number that we're talking about, usually NOI as a percentage of revenue is going to be an important metric to look at because that's your relative profitability.

So we see practices that are kind of in the single digits when they look at NOI to revenue. And that's probably, you know, could be a business that's earlier in its life cycle. So still going through growth. Maybe it's a de novo where you're still building the revenue to fit the expenses, right?

But then I think, you know, when you see a healthier, more established practice, that's going to be in a 10 to 15 % profitability kind of margin typically. And then, you know, we have seen some, practices that have grown dramatically over the last five to eight years, and they've been able to reach a point where they can get to over 20 % in terms of profitability. So when you think about the difference between earning at a 5 % margin versus a 20 % margin, that's going to mean that you're making and keeping a whole lot more of whatever you're producing on the top.

Yeah, you know, and that that is the the real key of understanding your profitability is it gives you a window in what you can improve. And if you think about, you know, that what you were just describing, it might be a, you know, five, seven 10x increase in profitability, if we're managing it well, but we can't manage it well, unless we can measure it.

And almost nobody measures profitability, almost no dental practice until they reach a significant size. Almost none them measure profitability accurately. So why is that?

Mm-hmm.

Yeah, I think, you know, people get so busy with what they're doing, I think making the plan for where you want to get to may be the last thing on the checklist, right? And it should probably be the first thing on the checklist, right? So that you've checked the box, if you will, on where you want to end up. And then you can course correct as you go along.

I mean, the way most businesses typically view that they have a three to five year plan or budget, and they make some assumptions about how quickly they want to grow and then how their costs are going to increase. But they're really focused on that net operating income margin or profitability to track progress along the way, because, you know, we do a GPS process here with some of our clients where we get into laying out a five-year plan for them. And we show how growing the hygiene side or the dental production side or other elements like adding locations or adding on a de novo can really change where you are, right?

But you want to keep a fix on that profitability margin as you're going through it to make sure that you have a handle on doing it all profitably so that you can maintain more and have the resources to keep reinvesting and building a much bigger and ultimately much more valuable practice.

You know, I've observed that most dentists, they measure and think about profitability by looking at their bank balance. And if there's money in the bank, they think I'm okay. But they're never really quite sure. They have this low level of uncertainty and anxiety about it that's running all the time. And they get, you know, financial statements from their accountant.

Right. Mm-hmm.

Usually those financial statements are not particularly timely. They're often not particularly accurate as well. Dentists have had no training on finance. They have had very little, if any, business training. And so those documents sometimes feel like they're in a foreign language. And Scott, you and I are going to get together for another podcast where we kind of walk through those and take the complex and make it simple, which is what we love to do at TTI. And so let's walk through when we are determining the profitability of a practice. We'll take those financial statements, but there's always some corrections that we need to make or some adjustments we need to make to come down to a real number or a number that's at least very, very close to real number, right?

Yeah. Right.

Well, what are some of the things that we look for as far as adjustments?

Yeah, and kind of where you're trying to end up at when you're done with that is taking that net operating income or, you know, net income number that we were talking about and making some adjustments to it to get to, you know, what is typically called EBITDA. And that's how investors think about cash flow from a business. Right. And then they can look at how many years worth of that cash flow would I be willing to pay to be able to operate that business. And EBITDA is just earnings before interest, taxes, depreciation and amortization.

So it's really trying to get to what's a stabilized net operating income, right? So that you can assess those things. So some of the add backs that we typically see, you know, probably the biggest is removing the dentist or getting the dentist out of the chair. Like, so what's the cost of replacing your production if you needed to bring in an associate to do that so that you could, you know, move from being the clinician to more of the manager or the investor, right?

So, you know, typically that's something where we'll look at what the production is for that lead doctor and you know, apply a factor like 30 to 35 percent, depending on the geography, so that we can estimate what the cost would be of bringing in an associate to replace that doctor's production. And so a lot of times what we'll see is that doctors won't really fully bake into their financials what the cost would be of replacing themselves. Right. So they can ultimately move up to that manager, that investor kind of a role. So that's one of the big ones.

And then in the EBITDA calculation, if you've got some debt and you're paying interest on that, if somebody else was looking to buy your business, they wouldn't have that cost, right? So interest is typically an ad back, depreciation and amortization also are expenses that you paid in the past that a new investor wouldn't have. So those tend to get added back. then, you know, there can also be personal expenses that may be getting run through the business. So it could be things like cars or vacations or subscriptions or other things. So those are a number of the add backs. Often they're called those are called owner discretionary expenses. That's another term that you'll see kind of thrown around, and by some of the bean counters out there, right?

Yeah. Yes.

That's the add backs that you want to make so that you can really get to a clean EBITDA. And in most businesses, that's how an investor is going to look at the value of that practice. Right now, know revenue or collections is another big one within sort of the dental community. that's different industries get valued different ways.

That's another one that's out there, but EBITDA is really kind of the core in terms of knowing where you are and knowing what the relative production or profitability is from your business.

Yep, yep. Awesome. So the real lessons that I've observed and you've helped me understand them from really the finance standpoint is that most practices have potential that's right there that with some slight changes can improve the profitability and sometimes it's dramatic how much it improves the profitability.

Mm-hmm.

So there really is hidden potential in there. And most people don't know whether they have it or they don't have it because they don't know what their profitability is and they don't know what's good and what's not good. So we put together a tool that we use with our clients that helps them make a quick calculation as to what their profitability is. And it's just a very, very simple tool using numbers that are very easy to get.

Right. Right.

We call it our profitability quick calc tool. And we're going to, for a period of time, we're going to make that available for people who aren't our clients. And so you can look in the show notes and the show notes will tell you how you can get one of those profit calculators so that you can see where you are. And if you want to move up the scale, that's what TTI does. It helps practices become more organized, more productive, more efficient. It helps practices do that by utilizing and leveraging the team at a higher level so that most dentists think if they're gonna be more profitable, they're gonna have to work harder and drill more and more stress. And no, that's not it at all. That is not what we observe and that's not what we train to. We train to really the exact opposite of that.

So Scott, I want to thank you for being a guest now on your first TTI podcast. And you'll all be seeing more of Scott as time goes on. So that's it for this episode of The Double Your Production Podcast. We'll see you next time.

Ep 161: Keeping a Sharp Eye on Profitability

Ep 161: Keeping a Sharp Eye on Profitability

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