Cost Breakdown of Dental Office Expenses

Controlling operational costs is a significant part of running a successful dental practice. Carrying out a meticulous dental office cost breakdown will help your practice identify unnecessary costs and improve your financial outlook.

Working with a fractional CFO will also give your practice access to vital financial data analysis and strategic guidance to improve profitability. An outsourced CFO can help you find ways to reduce costs, increase revenue, and raise capital when needed.

1. Staffing

Staffing is invariably the largest cost in a dental practice. This is because dental offices require different staff members to provide a range of appointment times and procedures, and to handle the everyday tasks involved with running a successful clinic.

A dental business should employ enough staff to offer the most common dental procedures, including dental exams and cleanings, fillings, crowns, implants, braces, and emergency care. Some of the more advanced procedures require the involvement of specialists (at a higher cost) whereas basic services can be performed by dental hygienists. 

Other essential staff like receptionists are also key to ensuring high patient satisfaction. Though staffing is likely to be your biggest expense, it's worth hiring enough high-quality workers to keep your practice running like clockwork. 

Note: Your own salary and any additional shareholder salaries must also be taken into account when calculating the cost of salaries and wages.

2. Dental Practice Overheads

The following dental practice overhead breakdown covers the most typical overhead expenses your dental practice can expect to pay each month: 

Dental Office and Equipment Rental

Dental office and equipment rental represents a significant monthly cost for a dental practice. The costs of renting an office will depend on the location and size of your clinic. 

Other Facility Costs

Utility bills, cleaning, medical waste disposal, maintenance, and building improvements are ongoing costs for any dental practice.

Clinical Supplies

Dental offices require medical supplies such as disposable patient bibs, toothpaste, floss, anesthetic, dental adhesive, PPE, and dental instruments and accessories. Dental practices spend an average of 7.6% of collections on supplies.

Lab Fees

Lab fees for a dental practice include the manufacturing of personalized crowns, bridges, implants, and retainers. Some dental practices outsource this task whereas others invest in their own CAD/CAM technology and 3-D printers so that they can manufacture these pieces in-house. 

Dental practices are unique in that lab fees are bundled into the patient’s service fee rather than charged separately. Lab costs represent an average of 5.8% of collections (same source as above).

Office Supplies

The items you purchase for your dental practice play a significant role in how patients perceive your clinic. Purchasing high-quality and modern office furniture, equipment, and materials shows patients you use the latest technology and practices. A polished environment also projects the image that your dental office is thriving.

Office supplies include things like pamphlets, new patient forms, desks, chairs, and writing utensils. The patients will primarily come into contact with these items at the reception desk and in the waiting room. The technology your practice uses like computers, tablets, and phones is also an important expense to take into account.

Business Administration

Running a dental business requires paying for professional services. This includes accounting, bookkeeping, design, and legal fees. Your dental practice will also likely require customer relationship management software and/or accounting software like QuickBooks. These software programs help you bill customers, handle scheduling, integrate with email and social media, and support sales management.

Marketing

Marketing is a significant cost but one too many overlook when calculating operating costs. Marketing plays an important role in attracting new patients and keeping your current patients interested. 

Professional Licenses

Dentists must maintain up-to-date licenses with their respective state boards of dentistry. This involves paying an annual renewal fee after the license is initially granted.

Insurance

Every dentist and dental assistant on your staff will require liability insurance. This is to safeguard them in case a patient sues them for malpractice. 

Local, State, and Federal Taxes

Local and state taxes vary significantly depending on where you set up your dental practice. Be aware of the tax implications of setting up in your chosen area before establishing your new dental office.

Other Costs

Dental offices invariably have other discretionary costs to factor in. Costs like business travel, continuing education, memberships, and subscriptions to professional publications will vary from one dental office to another.

Track Your Dental Office Expenses by Category

It is vital to track your dental office expenses by category rather than maintaining a single list of “expenses.” Categorizing your expenses is important for several reasons:

• It provides insights into what your expenses are, how to plan for them, and how to reduce them where possible. Analyzing this information will be an ongoing part of dental practice management.

• Categorizing your costs and revenue streams gives you a more accurate snapshot of your profit margin for each service your dental office provides. This helps you make service-specific adjustments to improve both your service-specific and overall profitability. 

• Categorizing your expenses helps your tax professional pinpoint ways to reduce your tax bill through specific business expense deductions.

Your Dental Office Income Statement

A summarized version of your dental office costs and revenue will appear on your monthly income statement. An income statement presents an overview of your revenue, cost of services, gross profit, expenses, income taxes, and net income for the month.

A professional in accounting for dentists will typically prepare your income statement based on the financial records maintained by your bookkeeper or recorded in QuickBooks. It is critical to review your income statement each month to identify and correct operational deficits promptly.

How to Improve Your Profit Margin

Improving your profit margin is essential if you are running at a deficit or your profit margin is not where you would like it to be. Participants in a 2023 survey on income, gross billings, expenses, and characteristics by the American Dental Association revealed that expenses (including shareholder salaries) totaled 97.7% of gross billings collected. For specialists, this figure was 100.3% of gross billings collected. Maintaining healthy profit margins in dentistry is clearly challenging.

Engaging outsourced CFO services is a strategic move to improve the profitability of your dental practice. An outsourced Chief Financial Officer (CFO) will analyze your financial data, create financial projections, and provide strategic guidance on reducing expenses, increasing revenue, and raising capital for improved long-term profitability.

Cost Reduction

The first approach to improving profitability is to cut costs. However, it’s important to understand the value of each expense to your business to avoid compromising on quality (and hence losing revenue). For example, cutting costs by ordering cheaper supplies may not be a good idea for your long-term success unless they provide your patients with the same level of quality.

The most successful practices examine each expense in light of the return it provides. They know that the cheapest alternative isn't always the best choice, even when cutting costs is important. An outsourced CFO can help you identify the expenses that have the best ROI and those that are merely a drain on your financial resources.

Increasing Revenue

Alternatively, it may be useful to see your overhead from a revenue point of view rather than just cutting costs. Your overhead will have less impact on your bottom line if you can generate more revenue by increasing your fees or carrying out more of your most profitable procedures. 

Your practice will benefit from the keen eye of an experienced CFO when working out which services to scale up and which to minimize or outsource.

Raising Capital

Strategic investments in equipment, training, or purchasing your own premises can lower your costs and improve your profitability in the long term. An outsourced CFO can advise you on funding options and help you prepare financial presentations to attract potential investors. Capital raising is particularly essential for new dental practices but also applies to existing dental practices that want to incorporate or scale.

Key Tax Write-Offs for Dentists

Tax write-offs are another way to improve your bottom line by reducing unnecessary spending on taxes. An expert in tax planning for dentists can help you optimize your taxes proactively. Some common dentist tax deductions include:

Salaries and/or Wages

Your practice can deduct actual wages plus payroll taxes in addition to admin costs like payroll services. Your practice may also qualify for state- and federal-level credits for small businesses.

Medical Equipment

Ask a tax professional about potential tax benefits when making major equipment purchases for your practice. For example, you may be able to claim bonus depreciation or apply Section 179 to expense the equipment in the year of purchase. These tax benefits tend to result in a significant tax write-off. 

It’s also important to consider the tax advantages of leasing equipment vs buying it when setting up your dental practice, as this decision could have a significant impact on the amount and timing of your equipment-related tax deductions.

Lab and Dental Supplies

Typical supplies and tools used during dental procedures plus occupational clothing and PPE are fully deductible. 

Administrative and Office Expenses

Office supplies, furnishings, computers, and other pieces of technical equipment are fully deductible.

Optimize Your Overhead Costs with Financial Professionals

Breaking down your dental office expenses is an important step in understanding where and how much your practice spends. Categorizing your expenses will help you understand your outgoings and identify areas for cost-cutting.

Working with an outsourced CFO is the best way to ensure you make the most effective financial decisions to improve the profitability of your practice. A tax professional can also assist you in optimizing your tax liability through strategic tax deductions for lower tax bills and improved cash flow.