Updated: Dec 20, 2021
National banks have long seen and talked about the current inflation that has followed in the wake of the Corona crisis. So far, the Fed in particular has tried to talk down inflation as a passing phenomenon.
Inflation has so far been strongest in the US, reaching 8% on several occasions. In Europe, inflation has also risen, albeit at a more moderate pace. Inflation in Europe is currently at about 3%.
We will come back to this.
The impact of inflation on dental practices
Can't we just be unconcerned about inflation? The dental industry is running as it always has, and as long as there are no dramatic political interventions, things tend to go very well.
If we look at world markets again, you have probably heard about the supply shortages that have hit the world as a result of the many Covid-19 shutdowns. When supply chains are under pressure, bottlenecks occur and so do supply shortages. When demand exceeds supply, prices rise.
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Plastics are extracted from oil. There is a general shortage of oil throughout the world. Not because we don't have oil in the underground. In fact, the world has never had such large, known oil reserves as we have today. There just isn't enough capacity in the refineries to process the crude, just as there isn't enough tank capacity to ship it around the world. That means we can look forward to rising prices for the materials we work with in the practice.
It may well be that rising prices for bonding, composites and aligners are affordable. But what is the effect of an inflation?
When inflation rises, it's a reflection of rising consumer prices. Which always leads to a demand for higher wages, also among the practice's employees. Practice owners will probably agree that the staff groups in the practice have already been favoured with very high salary increases in recent years.
If we do not take into account the rising costs and regulate the prices of our services accordingly, it could have quite dramatic consequences. In fact, most practices have already felt the consequences, but may not have been as aware of them, yet.
Employed dentist or practice owner
In the past, it was quite easy to create a relatively lucrative business as a practice owner. Today, the situation is quite different. In many dental practices, it is more lucrative to be employed as a dentist, rather than being a practice owner. At least if you look at hourly remuneration. The reason is linked to rising costs. Which we will have to deal with in the near future.
Passion can drive us forward for a long time. But if there isn't some kind of reward, besides passion, being the owner of a dental practice, will suck in the long run. The passion risks ending up changing character and develop into depression instead. I think that would be a shame.
Just to illustrate my concern:
Most dental practices are extremely vulnerable. We saw this most recently during the first Corona shutdown, when Dental Associations estimated that up to 20% of all practices would go bankrupt after 3 months of shutdown!!!
Many practices only have a profit rate of 5-10%. This is not very much for a business with such high operating costs as a dental practice.
A few examples of the impact of inflation on profits
A practice with a 5% profit rate that experiences a 1% increase in practice costs will experience a 20% decrease in profit. Unless compensated by higher productivity or price increases.
Inflation indirectly gives us a 3% cost increase.
With 3% inflation, in this example, it would result in a 60% decrease in profits!...
Based on the same assumptions as in the previous example, a dental practice with a profit rate of 10% would experience a 10% decrease in profit for a 1% increase in expenditure - and a 30% decrease in profit for a 3% increase in expenditure.
I think this is worth bearing in mind the next time you offer a patient some sort of discount on treatment.
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The accountant will point out 2 areas where the practice can meet the increasing costs:
The trouble is that accountants are rarely well qualified to help identify specific actions that will save money and/or increase profits in a dental practice.
I have heard several dental practice owners ask their accountants how they could best minimise the practice's costs in the areas identified by the accountants as areas for action. To this, the accountants typically respond that it is the practice owner's job to figure out. After all, they were just accountants and specialists in identifying areas in the books that stood out from "best practice".
Similarly, I have heard the same kind of stories about how there should be opportunities for optimising earnings in some specific areas measured in the books. When asked about specific solutions, accountants typically responded that it's up to the practice owner to figure out.
Another round of savings?
Should you choose to focus on savings or earnings? I've previously argued why, for most dental practices, it doesn't pay to focus on cutting costs.