Barry Trexler
Today, expenses to produce revenue in dental practices equate to more than 60% of production. A key challenge for practices is that fixed and variable expenses have been on the rise since the COVID pandemic. Pre-pandemic, supply costs were less than 6% of revenue, while currently, supply costs are around 8% to 9%. Compounding this issue is the dramatic increase in staffing expenses along with the shortage of available staff. For example, year over year hygiene and dental assistant staff wages have increased 8% (from 2023 to 2024). Some practices have reported experiencing over a 20% increase in hygiene wages since the pandemic. In tandem with increased wages, practices are facing higher costs to benefits as well as expansion of benefits to attract staff. Both increased costs are applying pressure to dental practices to maintain comfortable cash flow and deliver pre-pandemic profit margins. Although there seems to be some relief to rising supply costs and interest rates, these costs are expected to continue to thin profit margins in 2025.
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"We are seeing overbalanced cost increases in practices (specifically groups and emerging platforms) that we work with," says Samantha Strain, Chief Development Officer of HealthStream Ventures. "I don't see much relief in sight for the industry in the near term. Practice profits are being pressured from these inflationary areas. This also creates downstream impacts on practices that are seeking to sell on the market."
In general, small and medium-sized businesses (SMBs) across the United States are seeking solutions to manage these rising supply chain and staffing costs and high interest rates. Focused business planning and a robust go-to market strategy are essential for a SMB to thrive in this environment. A strategic capitalization strategy is also needed to address variable and fixed costs. Variable costs such as supplies are subject to advancing inflation, and fixed costs such as rent are now a challenge as landlords seek to offset their rising costs.
As healthcare providers, dental practices have an embedded compounding issue not present in the daily operations of SMBs outside of healthcare. For dental practices, reduced insurance benefits and reduced payments compress cash flow as well as profits. To address these pressures some practices are choosing nontraditional sources to purchase supplies, while others might enter into dental support organization (DSO) arrangements that can provide steep discounts for purchasing due to buying power.
With the prevailing environment, dental practices need to focus on managing cash. Consistent monitoring of supply costs, negotiating supply costs, and extending accounts payable cycles should be some of the cash management activities dental practices utilize to manage this environment and retain profit margins. A thoughtful approach to financing supply chain costs is required. Supplies and new equipment can be financed with a revolving line of credit through a business credit card. Expenditures for equipment can potentially be deducted in the same year under current tax law (consult a qualified tax professional). Securing a business credit card for the dental practice can help the practice manage supply chain expenses so that it can extend its accounts payable and other liabilities. This makes cash available for fixed costs such as payroll and facilities. Practices can also leverage the credit line to pay for unexpected expenses such as equipment repairs. Like any form of credit, business credit cards and other working capital solutions should be evaluated for fair interest rates and any associated fees.
For the solo practitioner, a business credit card helps keep personal and business finances separated-welcomed news for a practice's CPA! Typically, a business credit card has a higher spending limit that can accommodate not only monthly supply expenses but also equipment purchases that may be needed. Business credit cards typically have tools for monitoring business expenses. Additionally, authorized users can be assigned so that the practice's office staff can use the revolving line to make supply and equipment purchases. Many business credit cards provide rewards in the form of cash back or points, which the practice can potentially use in a variety of ways to its advantage.
In 2025, dental practices will continue to face the combined headwinds of increased supply chain costs, staffing challenges, and a high-interest rate environment, all of which, and more, will challenge and potentially compress profit margin. Practices should implement capitalization and cash management strategies to facilitate the impact of increasing costs to a practice's profit and loss. If managed closely and effectively, a revolving credit line can help a practice increase cash flow on a monthly basis by extending the payment cycles for supplies and equipment.
Barry Trexler
President and Chief Executive Officer, Tua Financial Technologies, LTD (tuafinancial.com)
