Dental Practice Profitability with Darren Nicholson [CPD Available]

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Hello everyone, another episode on the Dentists Who Invest podcast.
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I'm going to delay by Mr.
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Darren Nicholson from Azets No Less.
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We're here to talk about management information, the numbers that matter, KPIs, and what those mean for you at different stages of your dental journey.
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I'm gonna say that what I mean is starting that as an associate, thinking about finding your first practice, purchasing your first practice, and then it's consolidating or looking to expand, and eventually, maybe one day going to the point where you have multiple practices and you're thinking about it going beyond that.
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What information do we need to know and when all of that will be evolved into today's podcast?
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As ever, you can claim your CPD for this episode within the official Dentists Who Invest Smart Money Members Club.
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Smart Money Members Club also includes multiple mini courses and webinar series on finance for dentists, including how to become as tax efficient as possible, as well as understanding investing.
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All of this content comments as verifiable CPD, and you can download your certificates there and then upon completion of each lesson.
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In addition to this, we also include a whopping 10% discount on your dental indemnity and a 5% discount on lab bills for dental principles, amongst other perks and discounts for members.
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Please use the link in the description to claim your verifiable CPD for this episode.
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Darren, good to have you today on the podcast.
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Obviously, we've done a little bit of an intro as to yourself before the episode began, so people will know a little bit about you.
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And I think there's nothing holding us back from jumping straight in.
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Shall we start out with what that journey looks like for an associate whenever it comes to the information that they need in order to stay abreast of, well, this is ever this is more important than ever with making tax digital, isn't it?
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It is, yeah.
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No, so hello, hi.
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So yeah, associate dentists these days do have a bigger burden in terms of bookkeeping and management point because they've got to do the quarterly reports for making tax digital.
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They've got to submit income, they've got to submit their expenses.
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So bookkeeping has become a necessity for them.
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Whereas before, they could just put everything in a shoebox and send it in at the end of the year.
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Um that's no longer the case.
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They need to now start gathering information, which I think for many of our clients, originally it felt like a burden, it felt like an extra burden they didn't really want to have to deal with.
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But what we're trying to explain is actually it's uh provides possibilities because now you are tracking your performance, you're tracking your um uh monthly, quarterly um income and expenditure uh regularly, and it builds up a picture so that when you get to a point say you get to the want to get to the next stage of your career, and you get to a point where you want to start looking at banks to try and get some uh funding to buy a practice, uh you've got a full history of how you've performed, um, which lenders generally want as a minimum when they're trying to decide whether or not to give you the money you need to buy that first practice.
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I understand.
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And I know that we've banged this drum a few times, more than a few times, with the making tax digital side of things, but I want to know, given that I'm guessing you deal with some associates, Darren, how how how well is everybody navigating this?
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Have most dentists got their got their got their stuff together, got their got everything in order whenever it comes to how can I say this, not running a file of making tax digital, would you say overall, or would you say there's still some laggards out there?
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We have we started off not being very optimistic, I've got to be honest.
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We thought this is gonna, there's gonna be a significant chunk of our client base that are gonna just not want to get involved or or not really want to take this seriously.
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Um, but we started off with a partnership with Zero, the bookkeeping package, um in 2024.
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So we got quite a big run-up, and we from then have been talking to our clients and trying to get them engaged in the process.
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Um, and actually, I think for that first quarter submission we were 95%, we got everybody in, and people were engaged and people were set.
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I mean, obviously there were chases and and um and uh uh a little bit of phone tennis trying to get everybody to get all their info in, but in the end it was a lot more successful than we thought.
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And uh I think the idea that you can now take a program like Xero, link it to your bank account, take photographs of your pay statement, get that up into zero just using the app on your phone, it's not too time consuming, and it's actually it makes the year-end process a lot easier as well.
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It gives you an idea of what tax you're gonna have to pay in 12, 18 months' time.
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So um once we'd explained all that to our clients, they kind of got on board and we got a good response, and we ended up having a lot more successful first quarter than we'd anticipated.
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Um there's no penalties, there's no interest for late submissions or anything at the moment, so it's kind of a non-pressure, soft landing from HMRC's perspective.
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Um even so, yeah, we're we're pretty happy with how how it all went.
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There we go.
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I was just curious more than anything else, how it's in the field.
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All right, brilliant.
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Well, we sat the scene of associates.
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Now I think it's probably time to move on to principles.
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Would you agree?
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Yeah, great.
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Yeah, so I mean that's really where the management reporting comes into its own.
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Um, obviously, with an associate set of accounts, you've only really got three or four lines, sort of income labs, and then the admin costs.
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Whereas when you buy practice and you run the practice, there's an awful lot more metrics to keep an eye on.
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Um, there's an awful lot of uh information out there and a lot of benchmarking statistics, which is something we use a lot and possibly talk about a bit later.
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But um when you get a practice, it it really becomes essential that you get robust or keeping robust management reporting systems in so you can have the information you need to make the decisions you need to maximize your profits and spot when things are going wrong.
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Um uh and plan for the future, you know, cash flow is king, and you need to know what your tax bill is gonna be as soon as possible so you can plan for it.
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I think a lot of Dennis chase their tail whenever it comes to their tax bill, as in it until the what the their accountant is gonna say, uh, you know, retrospectively basically, because it's what management accounts are what, however long after the actual uh, you know, when you actually pay the tax bill is later than when the your end of year concludes, of course.
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Yes, yeah.
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So I mean the old the old sort of way of doing things, which some clients still do, was to wait till the year end, chuck everything out of us, and then we prepare the set of accounts, and then there's only a few months before the tax bills are um due.
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So it's um usually it was it was often a shock to them because they didn't realise that they'd made more profits that year, and therefore the tax was up and their payments on an account weren't enough.
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So the old system probably wasn't ideal, which is why bookkeeping and management, particularly now that it's so much easier with Zero, QuickBooks, all those sort of softwares where you can just link your bank, give us access, and throughout the year we can just access your data without you really having to do anything.
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Um we can provide you with a tax estimate, even if it's just based on management information, i.e.
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not full year-end accounts.
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We can provide you with a tax estimate 12 months before it's due, uh, which is what some which is what we endeavor to do for our clients.
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Um, which obviously not to say they still don't get to the 31st of January thinking, oh no, I haven't got enough money, but that still happens, but at least they've had some forewarning and they they've got the ability to plan for it.
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Um Sure.
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And is there any ways that prospectively Dennis can stay abreast of this now, as in we can know as much as possible, we can even predict what our tax bill might be before that time?
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Absolutely, yeah, which is which is something that we do with all our clients.
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So what we do with our clients is we uh get them looked linked linked up to a bookkeeping software.
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Then every month we will provide a monthly uh report that says this is what happened in the last month, this is what you did in the same month in the prior year, and then if they are more engaged in the whole process, we've also produced a budget which says this is what you're expecting to do compared with what you did.
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Which is brilliant for managing the business, but in terms of tax, it gives us the ability to say if your run rate stays like this, your tax bill in 18 months' time will be X.
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So we can really give them uh you know a hell of a lot of advanced warning as to where their tax liability is gonna land um month on month.
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And then we tweak every month, obviously, we see what they actually did, and then we tweak the projection um uh each month so that they can sort of get sort of zero in on what it's actually gonna be um uh when the time comes.
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Understood.
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You know what's something that I hear a lot of dentists talk about, and it's actually really relevant to this conversation, whenever it comes to KPIs and what to measure in order to boost their cash flow.
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Any insight and any thoughts on that?
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Yeah, well, uh we're Nasdale members, so National Association of Specialists, dentists, accountants, and lawyers, which gives us access to the UK-wide benchmarking.
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So we get statistics every year saying what the average dentist did in terms of turnover, what the average is for materials as a percentage of turnover labs, staff costs, associate fees.
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So we've got pretty robust uh benchmarkers, benchmarkers to use.
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Um then we do a bespoke report for each client.
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So what our approach is every client wants something a bit different out of their management report, I think.
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So to be honest, there are some that they probably spend five minutes looking at it at the end of every month, and all they really want to do is to give themselves a bit of peace of mind that what they thought happened in that month is reflected in the numbers, and so they look at the report and go, yeah, that's what I thought, or oh no, that's not what I thought, why not?
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And then they can go back and drill down into that.
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And then there's the other extreme where people really decide, okay, I really want to look at chair utilization, I really want to look at UDA performance for each associate and profitability per associate, and we do a full raft of KPIs, which we've agreed in advance, um, and then we can show them each month their performance against the agreed upon KPIs.
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So it's um a very, very sort of powerful management tool in that case.
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Um, but like I say, it depends on how invested the dentist is in spending a little bit of time looking at this stuff, agreeing a budget in advance, agreeing what KPIs are important to them, um, and then us designing the system that allows them to look at that on a ideally a two-page report.
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And and in your experience of doing this, the KPIs that generally matter, are you able to rank?
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I know obviously it's we can't be too prescriptive, it's going to be different depending on each dental practice, but do you know is there any that you've commonly found across lots of practices that really, really, really matter?
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Because I think dentists struggle with this a lot.
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Okay, so turnover against target is the obvious one.
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Everyone, everyone does that, and it's it's it's still as important as it always was.
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Um, we look a lot at direct costs, so making sure that your labs, material spend, staff costs as a proportion of turnover, so that's you know you can relate it to bigger and smaller practices, um, stay within reasonable bounds.
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Um, for example, material should be about five and a half to six percent of your total income on average.
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Um, if it goes above that, then you need to start looking at wastage, you need to start looking at who your suppliers are and whether you can get a better deal elsewhere.
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Um you need to sort of uh just drill down into numbers and find out why you're spending so much more than the next practice.
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So direct costs is a really good KPI to monitor because it's something that's direct, you can be directly responsive, you can see a problem and fix a problem within a couple of months, and it can make a huge difference to your bottom line.
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Um beyond that, the marketing spend um can obviously be tied to income increased turnover.
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So you can monitor if you're spending money on a marketing strategy, MR KPIs allow you to then monitor how successful that strategy has been in real time every month um to see whether it's worth persevering with that or just switching up and changing the strategy.
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Um and then you get down to the bottom lines.
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So eBitDAR, if you're interested in raising finance or selling practice, eBit DAR becomes very important.
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Uh or net profits is obviously the standard metric which everyone sort of looks at and allows us to calculate tax and it also allows them to sort of plan what they where their cash flow is going to go.
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Yeah, and you know what?
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I really wanted to ask someone like yourself a question like that because obviously you've seen into lots of dental practice and you have context, and context is king because to a dentist, whether their materials cost is 10,000 a month or 1,000 a month, how can I say this?
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They have no idea how that compares to the people.
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And I think that's extremely valuable.
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So even being able to say, right, it realistically it should fall within this range.
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And if it's outside of that, well, we've got to figure out what's going on is massive to a lot of dentists.
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And dentistry, it's not a new industry, it's been around for a long time.
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So no doubt there's going to be somebody somewhere who's measured these things and got approximations for them and averages for them, which is extremely valuable.
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Absolutely.
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Any more on that topic?
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00:16:19.600 --> 00:16:23.039
Okay, yeah, well, I mean, so Nasdaw, I'm trying to think.
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NASDAQ, there's something in the region of a thousand dental practices.
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It gets another every Nasdaq member submits information anonymized, of course, for average material spend, lab spend, associate fees, wages.
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So we've got you know a big sample size of data, which we then sort of can drill down.
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So we can also split it by NHS practices, mixed practices, private practices, and then we can say I can say you are expected to spend five and a half percent of your total turbine over on clinical materials.
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Um labs is a bit higher usually.
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Obviously, private dentistry would expect to spend more materials because they're given a high better sort of better quality service, so they're sort of providing better quality materials which cost a bit more.
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Um so it that that's an easy one to monitor, and I've had a lot of good results with that because we've spotted material spend going up to 10%, for example.
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People have looked at it and they've thought, you know what, there's six months worth of stock sitting in our stock room, and some of that just goes out of date, and then we just end up chucking it out, and uh the nurses are just opening a new box every time they want uh a swab or whatever, and so you've got all this stuff that's not not usable, and it's just basically killing profits because you're just buying too much and then it's getting chucked or it's going out of date.
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Um that's happened more than once.
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Um another thing is just sort of obviously looking at who's supplying you the stuff and swapping around and swapping and changing and getting better deals with you know CTS Henry Schein, whoever it might be.
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Wonderful.
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And I'm sure you could probably we could probably do a whole podcast just about that stuff in and of itself, because I'm sure there's so much depth to it.
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But yeah, it's good to get some clarity on that one today and even some input because what I'm guessing part of what you do is you'll go through these numbers and say to them, hey, do you know what?
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This is too high, look at this and this and this, something along those lines.
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And there's immense value locked up in that.
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The next thing we were gonna move on to was the principals out there who've got their first practice and now they're consolidating and they're thinking to themselves, hmm, how can I maximize a potential exit that's gonna come along someday, even if that's like 10, 15, 20 years in the future?
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So to me, so you're looking at looking at people who are looking to sell.
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This is this is people who are looking to sell.
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I I would say so.
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This is this is the next natural step in a dentist's journey.
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So, how might what we've said up until now in the podcast differ for people in that position, or would it pretty much be exactly the same?
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Well, there is definitely all the all the things I've said still hold true for someone who's looking to sell.
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They want to basically maximise their EBITDA, which is the common metric that is used to value a practice, particularly when corporates are coming in, they have kind of a standardized approach, they look at the EBITDA, the practice, they apply their multiple to it, and that's how they uh arrive at their valuation.
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So maximising that eBIT DA is all about reducing costs as much as possible without you know without reducing client care, uh patient care, um, and and maximising turnover, all those things are much easier with management reporting because every month you can just have a quick, like I say, my ideal is a two-page report.
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So it's not you're not spending hours sort of trolling through loads of information.
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A two-page report, you can say, okay, I need to look again at my materials, I need to look again at uh you know, postage and stationary, all those little bits that you can you can chip away at with the information that the management report provides um to maximise your EBITDA, which then will allow you to sort of approach a potential seller or go to an agent and say, look, this is what I've done over the last three years.
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Here is chapter and verse, literally every single month over the last three years, it's I can prove this income, I can prove this expenditure.
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So you know, buyers have an awful lot of confidence that what they're looking at in terms of numbers and what they're projecting in terms of profitability for the practice is sort of cast iron because you've got all of that history of uh data to support it.
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Nice, wonderful.
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Well, it's good to know even if we're just reaffirming that we just keep doing what we're doing, that's valuable as well.
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All right, let's move on.
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Principals who want to potentially release some equity in their business to get some finance next practice.
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Yeah, so again, having decent management systems is uh is is very sort of attractive to a lender.
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The lenders obviously do their due diligence before they're gonna sort of give you any money.
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Um so they want to know that they you know the year-end accounts are usually by the time they're prepared, what, six months out of date, or depending on what time you go to the finance, they might be even longer if you're part way through the next year.
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Um, and so they're looking at sort of historical data, which isn't uh ideal because a lot can happen in 12, 18 months.
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So if you can also, as well as the year end accounts, provide them with management reports to say this is what the current year looks like.
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And look, you know, it's getting better every year.
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You know, we've put up our you know, our treatment plans have gone up by 5% there, and that's reflecting the turnover.
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It gives the lender that much more confidence that.
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you're not going to have any issues with um sort of servicing the debt.
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So they are more prepared to lend to you in the first place, which gives you a broader range of lenders sort of bidding for the bidding for the the work.
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And hopefully that as a data is sort of a downward pressure on rates and a downward and a sort of a pressure to give the, you know, so they they compete against each other to get the best, to give you the best terms because they want to lend to you because they can see the history and they can see the the the the future.
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The other thing that MIs allows you to do of course is forecasting.
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So if you've got monthly information it makes it that much easier to say that's what happened in the last 12 months.
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This is what we anticipate for the next 12 months and then that again you can give that to a lender and say this is how we're going to service the debt.
00:22:52.160 --> 00:22:54.319
This is the cash surplus I've got every month.
00:22:54.319 --> 00:23:15.519
And from that I can make your capital repayments I can make your interest repayments still support my own standard of living with the drawings that I'm taking and uh you know there's still a cash surplus at the end so it's all sort of comfortable and um the lenders have a lot of security and confidence that the loan is going to be serviced without any issues.
00:23:15.519 --> 00:24:52.400
Interested to know I mean beyond your bookkeeping software is there any other software that can facilitate us getting really good management accounts we don't you don't even have to name names we just just even well I mean the practice softwares that we all know dentally and exact um are every day getting a little bit better at um providing the financial side uh the information obviously those things are primarily clinical softwares but the financial element to it the the cash in and the receipts and the treatment planning and all those things and it's now getting to stage where that software can link into Xero and can link into QuickBooks and can link into the other softwares that allow us even more um it gives us a great ability to project project the future and to drill down into the the data so okay your turnover for a month was 50 grand um but of that two grand came from toothpaste and and toothbrush sales six grand came from hygienist income you know those sorts of drill downs it makes it all that much more easier to manage the business and put it in a good position for third parties be they lenders or potential buyers to see exactly what's going on um and sort of make sure a much more attractive business um to invest in or to lend to interesting so really we should have the equipment or tools so to speak that we need already in practice?
00:24:52.400 --> 00:25:57.279
I think so yeah I mean there's not I mean we've also got the other thing that we do use more and more now is um uh online invoice and receipt document storage facility so um you can and most invoices nowadays come in electronically so the supplier will email you your invoice for materials or whatever it might be the labs will invoice you so there are systems now that we use a lot that you can just forward that invoice directly into the system it reads it scans it pulls it into the bookkeeping software so that within the bookkeeping you can drill down and immediately see any invoice relating to any cost so if you want to look up okay why was my material spending so large last month you go into the software you drill down into materials you find oh there's six Henry shine invoices you drill down into it and you can see the actual invoices there and then on the system and you can say oh yeah I had to build buy a new handpiece which shouldn't be a materials we need to put that into equipment and it fixes the problem sort of thing.
00:25:57.279 --> 00:26:23.039
Yeah there we go there we go interesting all right fair enough in essence most people should already have the software stack but they need to do this it's just a bite honestly yeah the young younger dentists absolutely they're all pretty much on it the older dentists less so we sort of have got a lot of our clients up and running on the system but some are still holdouts and still like to just um do things on Excel spreadsheets.
00:26:23.039 --> 00:26:27.119
But um yeah more and more we're getting everybody into these new systems.
00:26:27.519 --> 00:26:38.400
You know what you know what I've always noticed and I've heard a lot of accountants say this when they look in a dentist bookkeeping software it's not always set up correctly and that the information isn't quite right.
00:26:38.559 --> 00:27:05.440
Why do you think that's the case and how can we overcome that I think it's the case because still even though the second a dentist leaves university they are running a small business there is no business training as far as I'm aware there's no training whatsoever for dentists as part of their qualification in how to how to you know prepare a set of books or or or or or the or the admin side of running a business.
00:27:05.440 --> 00:27:19.759
And so what they're doing is they are just categorizing things in the wrong way putting things in the wrong place and so things end up on the balance sheet that should be on the profit and loss and vice versa.
00:27:19.759 --> 00:27:58.240
So it can have a huge impact on the profits that the the system is showing and it's not a difficult thing to fix and if if you've got an accountant involved they should be going through and tidying it all up after you but um often if the client's doing their own bookkeeping then yeah they're putting things in the wrong place and it's it's A giving a false view of the practice whether it's you know profitability or cash and B, if you then share that with a third party you know it can really muddy the waters and and make um make people's decisions a lot harder because they don't really know what's going on.
00:27:58.480 --> 00:28:24.079
So proper categorization is key really I think that might be the crux of it you know and then also as well as that I think if you set the accounts up like I don't know let's say you set your bank account up five years ago but you then you you've just added you've just synced it with zero one year ago to my knowledge it doesn't unless you upload the historic data it doesn't necessarily know that as well.
00:28:24.160 --> 00:29:05.440
That's a big one right that causes problems because it brings in a balance and and um uh the bank doesn't match because it's not got the historical data and you've just when you first link it you need someone to come in and have a look and just uh do a sense check and make sure that everything's um sort of represented representative of reality um because that doesn't always happen yeah the the the software as clever as it is and it's getting cleverer every day and we're all going to be out of work in five all us accounts are going to be out of work in five years but at the moment the software is not quite clever enough to sort of uh cross all the T's and dot all the I's and then and make sure that all the balances are right from from scratch.
00:29:05.440 --> 00:29:10.799
You need somebody to go in and have a look and make sure that um everything ties back and reconciles.
00:29:11.119 --> 00:29:27.440
I remember going through a similar issue myself and then it said it it says on the platform you know this is not just zero this will be other bookkeeping softwares as well I'm sure uh that you can upload your bank statements as a PDF and then I did that and then it still couldn't quite figure out what was going on.
00:29:27.440 --> 00:29:29.119
It was even more inaccurate still.
00:29:29.119 --> 00:29:39.759
So yeah shout out to the all the people out there who may have noticed that on their bookkeeping software platform that's probably why and maybe you need a second pair of eyes on it.
00:29:40.160 --> 00:29:51.119
Yeah I mean yeah the those old softwares what they would do is they would try and read the PDF and they would make mistakes um and they would misinterpret the numbers and put the data in the wrong place.
00:29:51.119 --> 00:30:04.960
Nowadays more often than not it's a direct bank feed so it's the data sucks through into the software from the bank there's sort of no PDF or statement involved so that's less of an issue these days but yeah.
00:30:05.440 --> 00:30:43.440
Interesting all right let's talk management accounts for the practice owners how does that whenever we reach that level does anything that we've said change or do the fundamentals still remain the same fundamentals remain the same but I mean our approach is always bespoke reporting so we like to have a conversation with our clients when we're setting the system up finding exactly what they need and what they want to focus on and then we build a report specifically to their um their needs.
00:30:43.440 --> 00:33:27.599
So when it's a multi-site what generally you're looking at is bottom line you want to know that each site is performing well so you need to make decisions about shared costs because usually when there's multi-site there is some head office costs for want of a better term um you know if you've got a central marketing budget uh or or you know different admin costs particularly you know accounting fees legal fees consultancy fees you need to sort of come up with a decent way of splitting those to allocate it appropriately to each practice um usually when you get to those multi-practice mini corporates um the the owner has become a lot more business savvy by that stage and so they want more drill down dates they want to know profitability by dentist so each associate has his own little PL to say you know so they can just have a quick look and say this guy's performing well this guy possibly needs a bit of support you know um this guy's killing it and maybe I should recognise that so they they the multi-site practices tend to be a lot more involved um and we're doing sort of more drill down KPIs on either profitability per performer or profitability by chair you know chair optimization becomes a bit a bit more of a big factor for those guys and you know what you've hit on something interesting there in your experience of that as in specifically optimizing per chair what are the what are the levers that we can pull or how do dentists do that uh so initially you need to um just make sure that your software dental exact or whatever it might be is recording the data so we know what income is coming from what chair and they they're all more than capable of sort of having that functionality um class systems or categorization systems whatever it is within the system so that when we get the the data we know what income has come from which chair and then it's just a question of um deciding a reasonable way to allocate the costs to each chair um and you know and also we can work with the the day books so that we know you know whether the whether the chair was fully booked all day long or whether there was three hours gap in the afternoon when they just couldn't find any patients and we can sort of crunch all those numbers and give a concise report so that you know um what each chair is bringing in every day um and and and where the gaps are.
00:33:27.599 --> 00:33:39.759
Fantastic fantastic Darren I think we've done a really thorough job of talking about management accounts for dentists anything more that you'd like to add or is is now a good time to round off?
00:33:40.160 --> 00:34:03.279
I think the only thing I just I suppose the only thing worth mentioning is just the word of caution about MIs is there is a tendency to um provide massive reports with tons of data that the dentist then has to spend an hour on his Sunday going through and you know it's about cost benefit analysis.
00:34:03.279 --> 00:34:20.480
The report should really be concise and focused on the things that you need and not just all the information that's possibly available because you know then you just you can you can just suffer from information overload and it it just devalues the whole process.
00:34:20.480 --> 00:34:32.239
So I think the key thing I always say is day one let's build a report and a design a system that gives you what you need in as concise a manner as possible so you have to invest as little time in it.
00:34:32.239 --> 00:34:39.599
You can just look at a report make your decisions without spending hours of your life sort of crunching numbers yourself.
00:34:40.559 --> 00:34:41.280
Nice one.
00:34:41.280 --> 00:34:50.559
Darren thank you for your time I was just curious if anybody listening to podcast today wants to reach out to you after this episode how are they best off finding you?
00:34:50.960 --> 00:35:01.440
So you could go to the dental landing page on the Azets website um we've got um myself and Vanessa's bios on there and all our contact addresses uh otherwise it's yeah darrennicholsazets.co.uk