Adding locations should multiply your profits, not divide them. Yet many growing dental groups discover that expansion brings declining margins despite increasing revenue. The numbers tell a concerning story: revenue climbs while the percentage that reaches your bottom line shrinks.
Understanding why this happens requires looking at your practice through a financial lens. The benchmarks that indicate healthy profitability, the metrics that signal margin erosion, and the economic decisions that either protect or undermine your bottom line all deserve careful attention during growth phases.
This article examines how to evaluate and protect dental practice profitabilityas you expand, with a focus on the financial indicators and advisory relationships that keep growing practices on track.
Understanding Profitability Benchmarks
Before you can protect margins, you need to understand what healthy margins look like. Industry benchmarks provide the reference points that help you evaluate whether your practice is performing well or quietly losing ground.
Overhead as a Profitability Indicator
According to the American Dental Association, overhead should remain at 63% or less of total income to maintain strong profitability. This means at least 37% of collections should flow through to profit before owner compensation.
The ADA further recommendsthat fixed expenses like rent, insurance, taxes, and utilities should account for about 4% to 7% of production, while variable costs, including payroll, lab fees, and supplie,s should run around 45% to 55%. Industry-wide, practice overhead averages around 62%, with leading consulting firms recommending a target of 59% for general practices.
These benchmarks matter because every percentage point of overhead directly reduces your profit margin. A practice collecting $1 million annually with 65% overhead keeps $350,000 before owner compensation. That same practice at 60% overhead keeps $400,000. The 5% difference represents $50,000 in additional annual profit without treating a single additional patient.
Why Growth Often Compresses Margins
Expanding practices face predictable margin pressure from several directions. New locations require full staffing, facility costs, and operational infrastructure before patient volume reaches mature levels. During this ramp-up period, overhead percentages spike as fixed costs spread across limited production.
The challenge intensifies when practices lack visibility into location-level performance. Profitable established locations can subsidize struggling new ones, masking problems in consolidated reporting. Without clear financial data showing each location’s contribution, owners often don’t realize margins are eroding until the damage is significant.
Understanding these dynamics helps you anticipate margin pressure rather than react to it after profitability has already declined.
Key Financial Metrics That Signal Margin Health
Dental practice profitability depends on tracking specific metrics that reveal whether growth is translating into increased profit or simply more activity with less reward.
Collections Ratio
The gap between production and collections directly impacts profitability. The ADA recommends practices collect 98% of billable production. Every percentage point below this target represents revenue that was earned but never captured.
A practice producing $100,000 monthly that collects only 93% instead of 98% loses $5,000 every month. Over a year, that gap represents $60,000 in foregone profit. During growth phases when attention is focused on expansion activities, collections often slip by unnoticed until the cumulative impact becomes substantial.
Track this ratio monthly. When it declines, the financial data signals a problem requiring investigation, whether the cause is billing errors, staffing gaps, or process breakdowns across locations.
Overhead by Category
Breaking overhead into categories reveals where margin pressure originates. Rather than viewing overhead as a single number, examine each component against benchmarks to identify specific areas exceeding targets.
Personnel costs should range from 24% to 28% of collections. This represents the largest controllable category, and often, the first place margins erode during growth. Hiring ahead of revenue, compensation above market rates, or staffing inefficiencies all show up in this number.
Clinical costs, including supplies and lab fees, should total approximately 12% to 14% of collections. Facility costs, including rent and equipment, typically run 5% to 10%. General business expenses should remain around 8% to 11%.
When any category exceeds benchmarks, the financial data points to where margin improvement opportunities exist. This targeted approach is more effective than across-the-board cuts, which can damage quality and morale.
Profit Per Provider
Track profitability at the provider level, not just the practice level. This metric reveals whether all providers contribute proportionally to practice profit or whether some generate volume without corresponding margin.
Significant variance between providers warrants investigation. The cause might be differences in case mix, efficiency, or overhead allocation. Understanding these differences helps you make informed decisions about scheduling, compensation, and growth planning.
The Financial Case for Revenue Decisions
Certain business decisions significantly impact dental practice profitabilitybut often get made without adequate financial analysis. Approaching these decisions with clear financial data leads to better outcomes.
Insurance Participation Evaluation
Insurance contract participation directly affects revenue per procedure. Each contract you hold determines how much you receive for the same clinical work. Yet many practices maintain insurance relationships without periodically evaluating their financial impact.
The ADA provides guidanceon fee-schedule considerations, recommending that practices review their contracted fee schedules annually. Payers may use charges you submit to determine maximum allowable fees, making your full fee reporting an important factor in reimbursement.
From a financial perspective, evaluate each insurance relationship by calculating effective revenue per hour for procedures performed under that contract. Some contracts generate acceptable volume at reasonable reimbursement. Others may fill chairs with work that contributes little to profitability after accounting for the overhead consumed.
This analysis doesn’t require becoming an insurance expert. It requires having financial data clear enough to evaluate whether each payer relationship supports your profitability goals. Work with financial advisors who can help you model the impact of contract decisions on your bottom line.
Fee Schedule Review
Many practices fail to adjust fees to keep pace with rising costs, slowly eroding real revenue. According to the ADA, it’s important to report your full fee on claim forms, as several payers set fees based on market rates.
Annual fee review should be standard practice. Compare your fees against current market rates and your actual cost structure. When overhead rises but fees remain static, margins compress even if patient volume holds steady.
Fee decisions are financial decisions. They should be based on an economic analysis of your costs, market positioning, and profitability goals, rather than on assumptions about what patients or insurers will accept.
Schedule Productivity Analysis
Empty chair time represents pure overhead without corresponding revenue. According to Dental Economics, if a dental practice were to sustain one no-show per day for a year, it could lose $20,000 to $70,000 in production.
From a financial perspective, no-shows and cancellations don’t just reduce production; they also increase costs. They increase your effective overhead percentage because fixed costs continue while production drops. A practice running 70% overhead at full schedule might effectively run 75% or higher when accounting for lost chair time.
Financial analysis should quantify the actual cost of schedule gaps to your practice. This data supports decisions about confirmation systems, cancellation policies, and scheduling practices. When you can clearly see the financial impact, the case for addressing it becomes compelling.
The Value of Financial Advisory Relationships
Managing profitability during growth requires financial expertise that most practice owners don’t possess and shouldn’t try to develop on their own. The practices that scale most successfully leverage professional financial guidance.
What Financial Advisors Provide
Specialized dental financial advisorsbring perspective from working with many practices across various growth stages. They recognize patterns that owners immersed in daily operations often miss.
Beyond identifying problems, good advisors help you understand the financial implications of business decisions before you make them. Should you add that insurance contract? What staffing level can your current production support? When should you expect a new location to reach profitability? These questions have financial answers that advisors can help you find.
Advisors also provide benchmarking against similar practices. Knowing whether your 65% overhead is normal for your size and specialty or signals an opportunity for improvement requires comparison data that individual practices don’t have access to on their own.
When Professional Support Makes Sense
Consider engaging a professional financial advisor when the complexity exceeds your comfort level. Multiple locations, significant debt, and rapid growth all increase the value of expert guidance.
Fractional CFO servicesprovide executive-level financial leadership without full-time executive costs. This model works particularly well for growing practices that need sophisticated financial guidance but aren’t large enough to justify a full-time CFO.
If you find yourself uncertain whether your margins are appropriate for your growth stage, an outside perspective helps. What seems concerning might be normal for expansion phases, or what seems acceptable might actually indicate problems requiring attention.
Tax Strategy and Net Margins
The profit you keep after taxes matters as much as the profit you earn before them. Tax planning directly impacts net margins and should be part of your profitability strategy.
Entity structure decisions, depreciation strategies, retirement plan contributions, and timing of major purchases all affect your tax position. These decisions interact with growth planning in ways that benefit from professional guidance.
Work with CPAs who understand dental practicesspecifically. The tax optimization strategies that work for dental groups differ from general business approaches, and specialized expertise leads to better outcomes.
Monitoring Profitability During Growth
Protecting margins requires consistent attention, not occasional review. Build monitoring habits that catch problems early.
Establish Regular Financial Review
Monthly financial review should become non-negotiable during growth phases. Quarterly review works for stable single locations, but expansion introduces variables that require closer monitoring.
Review overhead percentage, collections ratio, and category-level expenses against benchmarks each month. Investigate immediately when metrics move outside acceptable ranges. Small variances caught early remain manageable. Large variances discovered late become expensive problems.
Watch for Warning Signs
Certain patterns indicate margin erosion before it shows up in your profit numbers. Increasing reliance on credit lines to cover operations suggests cash flowisn’t keeping pace with costs. Growing accounts receivable relative to production indicates collection problems developing.
Staff overtime is becoming routine rather than an occasional signal of either understaffing or inefficiency. Rising supply costs without corresponding production increases suggest waste or pricing changes requiring attention.
Recognizing signsthat your practice is losing financial control early gives you time to correct before problems compound.
Create Accountability
Assign responsibility for monitoring key metrics. When profitability belongs to everyone, it often belongs to no one. Clear accountability ensures attention remains focused on the numbers that matter.
Financial advisors can provide external accountability through regular review meetings. Knowing you’ll discuss margins with an outside professional creates focus that internal monitoring alone may not achieve.
Frequently Asked Questions
What profit margin should a growing dental practice maintain?
According to the American Dental Association, overhead should remain at 63% or less of total income, implying profit margins of 37% or more before owner compensation. Leading consulting firms recommend targeting 59% overhead for general practices, yielding 41% margins. During expansion phases, margins may temporarily compress but should recover as new locations mature.
How do I know if my overhead is too high?
Compare your overhead percentage against the ADA benchmark of 63% or less of total income. Then break overhead into categories and compare each against benchmarks: personnel at 24% to 28% of collections, clinical costs at 12% to 14%, facility costs at 5% to 10%, and general business expenses at 8% to 11%. Categories significantly exceeding these ranges indicate specific opportunities for margin improvement.
Why do profit margins often decline during dental practice growth?
New locations require full staffing and facility costs before patient volume reaches mature levels, temporarily spiking overhead percentages. Additionally, management attention often shifts toward expansion activities while existing operations receive less focus, leading to slipping margins. Without clear financial visibility into each location’s performance, profitable locations can subsidize struggling ones, masking problems until they become significant.
How often should I review fee schedules?
Review fee schedules annually against current market rates and your actual cost structure. The ADA recommendsreviewing contracted fee schedules annually and always reporting your full fee on claim forms. When overhead rises but fees remain static, margins compress even with stable patient volume.
When should a growing dental practice engage financial advisory support?
Consider professional financial support when managing multiple locations, carrying significant debt, expanding rapidly, or facing persistent margin challenges that internal efforts haven’t resolved. Fractional CFO services provide executive-level financial guidance suited for growing practices without requiring full-time executive costs.
Building Sustainable Profitability
Dental practice profitabilityduring growth requires active financial management, not passive hope that expansion will automatically generate returns. The practices that scale successfullycombine clear financial visibility with professional guidance to protect margins throughout their growth journey.
Start by establishing clear benchmarks and consistently tracking your performance against them. Approach major business decisions with financial analysis rather than relying solely on intuition. Build advisory relationships that provide expertise and accountability you cannot generate internally.
Growth should create wealth, not just activity. By maintaining focus on the financial metrics that matter and engaging professional support when complexity warrants it, you position your practice for profitable expansion that rewards the work you’ve invested.
Ready to strengthen your practice’s financial performance? Connect with Duckett Ladd’s teamto discuss how expert financial guidance can help protect your margins during growth.
