Crossing the Street Blindfolded?

No matter where I lecture around the country, I find that one question keeps coming up from dentists in all quarters, whether they're buying a practice or equipment, hiring staff, or even enrolling in comprehensive CE: How do I know the value of this investment, and will I get a return on it? We often embark on new investments as though we were blindfolded. If we purchase new equipment for $80,000, we may be tempted to say to ourselves: I think I'll eventually generate $80,000 in production from it, so I'll recoup my investment someday . . . maybe. That's not a sound business principle. When we don't know how to properly measure a return on an investment, we feel out of control. It's time to take off the blindfold and open our eyes.

A common investment in today's dental office is the purchase of a new computer system. Here's how to calculate the ROI:

Determine Your Fixed Expenses

Fixed expenses include the direct cost of the purchase, plus the cost of any training as well as general and administrative costs involved in implementing the new system in your office. In our example, let's assume there are new equipment and training costs, indicated below, and negligible G&A costs, for a total fixed expense of $60,810.

Fixed Expenses

Determine Your Variable Expenses

Above and beyond the fixed expenses are variable expenses associated with increased production needed to get a return. These include the following:

Variable Expenses

The collection variance assumes the cost for not collecting 100 percent of production. In our example, we assume you are collecting at our range norm of 98 percent, so the loss of 2 percent is a variable expense. We also advise dentists to include a gross profit margin, minimally of 25 to 40 percent. If you don't expect a gross profit margin, there will be no return.

Determine Your ROI

Now that you know the expenses associated with your computer purchase, it's time to calculate the ROI.

Return on Investment Calculation

In order to get a return on your initial investment of $60,810, you will need to generate $148,317 in additional production. Now that you have a statistical interpretation of success, you can analyze your investment. Ask yourself:

1. Is this $148,317 in additional production feasible to accomplish in one year? Two years? Ever? Not every investment brings a monetary return. Some investments may increase efficiency, decrease stress, or just make you feel good about being in your practice. This is fine; however, you still need to calculate the ROI so that you can make an informed decision, not one with a blindfold on.

2. How will the new investment support the increase in production? Is the investment itself going to play an active role in increasing production? Buying new computers or other equipment, hiring additional staff, honing new clinical skills, remodeling, etc. can all play such a role. How would your new computer system increase production? Here are some possible ways: scheduling more efficiently; saving time using digital x-rays or other features; better recording of information; improved relationships with patients, treatment acceptance, and clinical efficiency.

3. What systems or behavior changes need to occur in order to get the ROI?

It's people who make results happen and reap rewards, not the purchase by itself, so prioritize with your staff the changes that need to be implemented to ultimately get a ROI.

The numbers give you knowledge, and knowledge gives you control. That's why it's so important to understand statistically how to create profit from your new purchases. As we like to say at Pride: The numbers will set you free!

Amy Morgan is CEO of Pride Institute

Originally published in Dental Economics, May 2005