Dr. John Meis: Hey everybody, welcome to this week’s edition of the Strategic Thinker. I’m Dr. John Meis here with Drew. How are you doing, Drew?

Drew Schaefer: Great, how are you doing?

Dr. John Meis: I’m doing fantastic. So, we are at that - approaching, anyway - that time of year when practices ought to be thinking about strategic planning and budgeting. And so, I thought maybe we could have a little discussion about why that’s helpful, what order to do it in, and then some clues on the process for doing it. How does that sound?

Drew Schaefer: Sounds great, it’s everybody’s favorite time of year with budgets. 

Dr. John Meis: Absolutely. So, why is it that practices should even have a budget?

Drew Schaefer: I think, first and foremost, it’s to really set some financial goals and really measure your success around that. I think for those who have not historically had a budgeting process, it’s a great educational tool for maybe if you’re a little more detached from the in’s and out’s cashflow-wise of your business, is really understanding where the money is coming from and going in a lot more intricate detail. 

Dr. John Meis: You know, very few smaller practices go through the process of budgeting, but as practices and groups grow, it becomes a lot more important, doesn’t it?

Drew Schaefer: Yeah, I think early on really the focus is driving top-line patient care and collections, and that’s obviously going to be your biggest driver of profitability. But, as far as really tweaking and maximizing that and really setting yourself up to grow profitably, you’ve got to really take that next step to really get a lot more granular on all the other elements. 

Dr. John Meis: I just reviewed 15 P&Ls from practices and the highest one had a net operating profit percentage of about 24% and the lowest was zero. And, if you don’t have a process for looking at this and projecting out, you don’t necessarily know where you can make progress.

Drew Schaefer: Yep. And, I think what a lot of groups realized last year when COVID hit and there’s people working with their lenders and the lender’s asking for a 12-week cash flow plan to see what was economically feasible, I think that really helped a lot of leaders realize how little they truly knew as far as pulling the levers if need be.

Dr. John Meis: Yeah, Warren Buffet has a joke that he says, “You can only tell who’s skinny dipping when the tide goes out.” 

Drew Schaefer: Exactly (laughs).

Dr. John Meis: Last summer, the tide went out and a lot of people were caught unaware. And, fortunately most practices were able to weather that, but not all were. And so, it’s important I think also to have some milestones. Are we on track with our plan? And, if we’re not, where are we off? Is it on the revenue side? Is it on the expense side? It really helps you to see if you’re going in the right direction.

Drew Schaefer: Yeah, it really helps you hold different team members and providers accountable as well as give measurable ways to incentivize profitability for all the team members as well. 

Dr. John Meis: I kind of think of the budgeting process as being part of strategic planning, so which comes first, the plan or the budget?

Drew Schaefer: I like to think the strategic plan is more longer-term, like 5 years, and there’s a component that’s the current next year, and so the strategic plan says, “Well, here’s where we want to get.” And then, from a budget perspective, based off of our current constraints and what we’re currently doing and the commitments from our team members, are we able to get there in that Year One and stay on plan? Or, do we need to adjust our plan or go back to the budget and tweak some things to make sure we stay on plan?

Dr. John Meis: And, it’s so important when you have growth in your budget, and assuming every single practice is going to have growth in their budget, really where is that growth coming from? That’s part of the planning process. Can we get there with what we have? Do we need more? Do we need to acquire? Do we need to start? What exactly is going to happen? Do we need to add providers? What exactly is going to happen in order to hit those growth goals?

Drew Schaefer: Exactly.

Dr. John Meis: And so, we’ve heard frequently, “What’s the difference between a goal number and a budget number?”

Drew Schaefer: Right, yeah. So, the first thing is that the budget needs to be realistic. So, pie-in-the-sky numbers are going to get you off the budget… first off, your budget is wrong the day you publish it. So, you’ve got to take that with a grain of salt, and look at it over the course of the year, not just month-by-month. But, the budget’s with our plan, and then the goal is really where we’d like to push ourselves to exceed that budget and grow maybe faster than our plan or give opportunities for our team members or providers above that plan in their careers and financially.

Dr. John Meis: So, there’s kind of a range of acceptable performance, somewhere between budget and goal.

Drew Schaefer: Right, exactly. And, the budget… there’s lots of different factors that go in, and they’re based in what the practice or the organization is doing currently. But, there’s also factors as far as if the companies is levered with debt service, and even if the company is levered, but the individual owners are, it should be grounded in some minimal return as well to help keep the doors open and eventually grow the organization as well.

Dr. John Meis: Yeah. So, I’ve seen a variety of budgeting processes, anywhere from looking at last year and adding X percent to each variable item in revenue. Walk through some of the different methodologies that can be used to develop a budget.

Drew Schaefer: Yeah, I think the method you just mentioned is the most common we see early on, and I think that’s fraught with underperformance. If you’re looking at 2020 and saying, “Well, we’re going to grow 3% from a COVID year,” when in fact we know that dentistry has rebounded. And, with so many of our clients, they’re having their best years ever, I think you’d really be setting the bar too low and the expectations too low for everybody. So, I think really what you have to do is evaluate your capacity compared to prior years and normalize some of those COVID effects. Look at if you’ve expanded, added operatories or provider hours. Evaluate really everything on a provider capacity level and build that up. It could be very granular, by day, by provider. Minimally, it would be ideal to have it monthly by provider and build up from there. So, there is a cost/benefit for how granular in internal competencies you have to have that process, but the more detailed you are, the better chance to you have to articulate your plan and hold people accountable to it as well.

Dr. John Meis: Yeah, and it seems like organizations, to some degree, early on there’s not a whole lot of granularity to it, it’s pretty basic, pretty simple. As the organization grows, it gets more complex, more specific. And then, at some point, it becomes less granular again because the organization hits a size that it just can’t have that level of granularity.

Drew Schaefer: Exactly, yes. And ultimately, once you get to a certain size, you’ll have offices that outperform their budget and others that underperform, and as long as you have a solid process, it more nets to be a pretty neutral affect in that sense.

Dr. John Meis: Another variance that I’ve seen between groups is how involved the people at the office level are in developing the budget. What are some of the things that you’ve learned about that that you think have been helpful?

Drew Schaefer: Yeah, I think that varies by how empowered individuals are at the office level to make decisions on staffing, on purchasing, etc. So really, when we’re talking about budgeting as a process, it really needs to align with your organizational daily processes. And, if you’re seeing that there’s a disconnect, maybe that’s a good opportunity to say, “Well, maybe we should be empowering more at the office level.” Ultimately, the people that are responsible for each of the elements, whether it’s on collections and making sure we’re collecting everything we’re producing, or if it’s on dental supplies on who’s ordering everything, having input of the people that can most affect that is going to make it the most valuable ultimately.

Dr. John Meis: Yeah, it’s a bit of a difference in philosophy. Some groups want their practices to run as individual business units and having the leaders in that actually managing the business and making decisions within a certain level of parameters. Other groups don’t want their offices to think at that level at all, they just want to tell them what to do and hope that they can execute on what they’re told. But, certainly if you’re of the first group where you expect your practices to function as independent business units, that certainly makes you think that having the team more involved in the budgeting process would make sense.

Drew Schaefer: Exactly. And once again, especially if there’s some level of incentive compensation that’s based off of those results as well. But yeah, that’s why there’s no one simple budgeting model because it really depends on the organizational structure and philosophies, and that’s what’s most important to align.

Dr. John Meis: And, another use of the budget is using it for forecasting results, once you have kind of a sense of what’s going on. It makes it easier to forecast out based on any changes, any unexpected and unseen events that might happen, such as a pandemic.

Drew Schaefer: Right, yeah. And, once you get to a mature office, you can get a little more in forecasting out 5 years, use some of the more higher-level assumptions such as a 3-5% growth rate and keeping your profitability margins in line to have more of a longer-term plan and structure in place. I think the other valuable piece of the budgeting process is once again reminding yourself of all the granular pieces. I think what is so interesting in dentistry is with technology and all the add-ons that you get for the different services that you can outsource from a front-office perspective or different marketing, and it’s changing so much on a monthly basis that companies are getting bought, things are getting bundled. So, I think it’s also a great time to look at those elements. And, what are we really paying duplicate fees for that we could consolidate? Or, really reevaluating your lab relationships or dental supplies. Instead of just reporting, “Well, we’re at 7% of revenue spent on labs.” Well, have you just accepted that as what it is, or is part of your long-term vision to get that down. And, what’s the plan to do that? So, as far as getting granular in the strategy, I think it’s a great opportunity for that, and really set that goal for the following year. 

Dr. John Meis: I always say, “No company ever got to greatness focusing on expenses,” but no company that ever got to greatness could ignore them either. And so, making sure that we’re focusing on taking care of patients and driving revenue, but beyond that, there is a dramatic difference from group to group on their expense structure. If nobody’s watching it, it just tends to grow and grow and grow, margins deplete, and that’s when practices get into trouble.

Drew Schaefer: Exactly.

Dr. John Meis: Alright, very good. Well, thanks Drew! I appreciate it. This is Drew Schaefer and John Meis signing off, we’ll see you on the next episode of the Strategic Thinker. Thank you.

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