Hygiene Part I:

"The moment I take my hands out of my patient's mouth, my income stops." Almost every dentist comes to this realization at some point in his career. At this point, many dentists start to think about investing in gold mines in hope of achieving that long-sought-after dream of passive income.

Passive income comes, as we know, from applying capital in such a way that we can earn income from the labors of others. The communists in Russia called this "exploiting the masses" and the net result was the Czar lost his head. In America we call it "capitalism" and once again many dentists have lost their heads over the concept of passive income.

In a dental practice, income is derived from the treatment of patients. Traditionally, this process begins with the new dentist performing all treatments personally.

Eventually, as the practice grows, the dentist realizes that it pays to focus on providing more complex treatments which have a higher economic return for the time they take to perform. There is more bottom-line profit in crowns than in prophies, even though both are clinically necessary.

The next step is to hire someone to perform the prophies. At this point the dentist takes the first step toward becoming a full-fledged capitalist who is about to exploit the labor of another human being - a hygienist.

This capitalistic venture is really a two-step process. The first step is the application of capital to equip an operatory space with the tools and equipment necessary for the hygienist to perform the required treatments. This comes either from the dentist's savings or from a capitalistic institution - the bank. In either case, this represents an investment of capital and a degree of risk.

At this point, the dentist has acquired one of the most important elements necessary in achieving passive income - an asset. The primary asset in every practice is operatory space. We measure this asset in terms of operatory days.

While this may seem very basic, it is amazing how few dentists ever fully utilize their asset of available operatory days to generate income.

Step two in the capitalistic process is to hire a hygienist. Let us assume that the dentist is working four days per week and that 25% of his or her time is spent performing treatments that a hygienist could perform. This means that there is at least one day of potential hygiene production per week.

Let us further assume that based on the dentist's fee schedule, a hygienist would average $475 per day in production. Collections at 96% would be $456, from which we have to deduct variable costs (disposable supplies and materials used in treatment), salary, and employer taxes. Our estimated profit before indirect overhead costs is $194 per day.

Production	$ 475
Collections (96%)	$ 456
...Less: variable costs (6%)	...- 29
...salary	.- 214
...employer taxes	...- 19
Profit before indirect costs	$ 194

This is the first level of profit to be realized from hiring the hygienist - direct profit on the hygienist's production. Adding just one day of hygiene per week provides $776 of passive income per month and $9,312 per year.

More importantly, the dentist is now free to use his or her time more productively. Previously, 25% of the dentist's time (two hours per day) was used to perform hygiene treatments. Let's say that he or she could bill $55 an hour for those treatments. Now, the dentist can use these two hours to perform more complex and more costly treatments - at, say, $180 per hour. That's an increase of $125 per hour, or $250 per day.

Assuming that collections are 96%, and variable costs including lab and supplies are 20%, the marginal net profit on the additional production is 76%. Therefore, if daily production increases by $250, the extra net profit will be $190. Remember, that’s $190 every day. In an average 17-day month, that comes to an additional $3,230 in profit per month.

Increase in Dr. Production	$ 250..
Gross Profit % on Dr. Production	..x 76%
Net Profit Increase per day on Dr.	$ 190
Average production days per mo.	..x 17
Net Profit Increase per month	$ 3,230

Adding the dentist's additional production to the hygienist's production, the total additional profit is $4,006 ($766 + $3,230) per month.

At this point, many hygienists may view the dentist as a fat capitalist who is getting rich off the sweat of their labor. They fail to recognize the cost of capital and risk.

As a capitalist, your risk is the cost of equipping the hygiene operatory. If you have to add a staff member in administration to schedule hygiene, that cost would also have to be considered.

In our example, we’ll assume that your cost is a $554-per-month loan payment on equipment for the hygiene operatory. When we subtract this cost from the previous increase in profit, the net return is $3,452 per month, or about six times your risk. As the number of hygiene days per month increases, your return on investment continues to grow. And that's what American Capitalism is all about.

Number of hygiene days per month	4	8	12
Profit on hygiene production*	$ 776	$ 1,552	$ 2,328
Profit on dentist's production*	3,230	3,230	3,230
Less: capital investment	- 554	- 554	- 554
Total Net Profit per Month	$ 3,452	$ 4,228	$ 5,004
* before indirect overhead costs

The MasterPlan Alliance specializes in helping dentists integrate personal financial planning with practice strategies to achieve financial independence. Jim & Suzanne Du Molin speak nationally on practice economics to professional societies and study groups. They have helped over 2,800 dental practices across the country to achieve financial control and motivate staff. For a no-charge consultation to see if they can meet your needs, call toll-free at 888-754-1380 or request to schedule an interview electronically.