Financial Analysis and Control

Transcription

1 8 Financial Analysis and Control 8-1

2 8-2 The Dental Practice: A Management Simulation

3 Financial control looks at the numbers of the practice in an attempt to maximize profit from the practice. You can make the financial control process as simple or as complex as you want. The possibilities for gathering data are endless. With in-office computer systems, the problem is deciding which of the many reports and analyses you truly need. Try to remember the acronym KISS (Keep It Simple, Stupid). Don t inundate yourself with information; keep it simple. Look for major problem areas first. Start with some basic ratios (production, profitability, and collection ratios), and look for problems in these areas. If there are no problems, you probably don t need to do any in-depth analysis. Conversely, your practice may be having problems in one certain area that needs particular, additional attention. Other areas may be functioning well and only require periodic monitoring. Most people only think of costs when they look at financial control. The revenue side is equally important. Many also think that you should reduce overhead wherever possible. We contend that there is good overhead and bad overhead. AGood@ overhead is money that you spend that makes more money for you. Bad overhead does not contribute to making more money. It is wasted. For example, suppose you hire a new staff member, paying them $15 an hour. That staff member allows you to produce an additional $50 per hour. That is money well spent, a good piece of overhead. However, if the office does not increase production enough to make up for the additional costs, the additional money spent on the staff member would be bad overhead. This is simple in concept. The problem is trying to decide which costs are wasted and which contribute to the practice s profitability. That is what financial analysis is really about. Many dentists want to leave the numbers to my accountant. That policy is OK if your accountant is familiar with dental practices and understands your philosophy, goals, and where you want your practice to be. The problem is that most accountants don t know these things. They are more interested in tax numbers. If you find an accountant who is very knowledgeable about dental practice numbers, use them to your advantage. You might also find a practice advisor who uses financial analysis. Or you may need to be your own financial analyst. Regardless the method, you should understand these techniques so that you can communicate effectively with your advisors. Practice Stages Depending on where you are in the practice development stage, your needs, and therefore practice numbers, may look entirely different. Starting a practice is much like having a child. You must birth it, grow it, and raise it through problems before it becomes a fully functioning mature practice. There are four stages in a practice s growth. During the first phase (Start-up), the practitioner is concerned with getting warm bodies in the door. Marketing efforts become critical. Practitioners often use managed care, welfare patients, extended hours, emergency call, or other methods to increase the number of patient visits. Efficiency is not as much of a problem as in later stages, since there is often slack time. The growth phase sees acceleration in number of patient visits. Schedules begin to fill and the practitioner begins to decrease managed care and other Practice Growth Stages Stage Major Concern Start-Up Warm Bodies Growth The right warm bodies Maturity Becoming Efficient Development Goal Attainment less profitable patients. The maturity phase sees practitioners concerned with making the practice efficient from a production, cost, and revenue basis. Finally, during the development phase of practice, the dentist readjusts the practice to meet long term personal and professional life goals. The practice is concerned with different problems in each phase of its development. Different key indicators will then be more important at different phases as well. Critical Success Factors Five critical factors lead to business success of the dental practice. You should aim your financial 8-3

4 analysis at these factors, judging whether you are meeting them. The accompanying chart defines the success factors. This chapter describes the important elements that make up those factors, how to measure each of those elements, and what a representative value for each measure is. These measures become the basis of goal assessment, as discussed in the planning chapter of this manual. Factor 1. Adequate Production Production is the key to practice health. Unless you are generating an adequate production (and therefore dollars), then no amount of management skill can gain profitability. Production is a result of the number of procedures done, the types of procedures and the fee charges for each procedure. The number of procedures done is the result of all the management functions in the office - patient scheduling, Success Factors 1. Adequate Production 2. Maintain Collections 3. Generate Patients 4. Control Costs 5. Staff Effectiveness types of patients generated, your abilities and wants, and the efficiency of the production personnel. Remember, the number of patient visits drives everything. Office Production per Quarter tracks the total amount of dentistry done by the entire office for the quarter. Production should remain steady or rise each month. (Obviously, if you take a week off, then your production may be down for that month.) Many dentists set production goals for the office. This then becomes the production measure. Gross production is the production at your full fee value. Net production is gross production, less any adjustments that you make due to insurance plan or other requirements. Net production should increase (or certainly not decrease) each reporting period. If you concentrate on gross production, then you may work much harder for little additional return. Net production is affected by the number of patient visits, the service mix, fees charged, and adjustments from insurance plan participation. In order to do production, you must adequately schedule the office. Adequately scheduled does not just mean being busy. Instead you need a good mix of diagnostic procedures (such as new and recall exams), preparatory procedures (such as endodontics and restorations), and highly productive procedures (such as crown and bridge). The Procedure (Service) Mix examines the types of services done in the office. As a rule, a healthy general practice should have about one third of the revenue generated from hygiene procedures, one third from high margin lab-related procedures, and the final third from non-lab production. The fee that you charge influences your production. A higher fee, all other things being equal, results in higher production. However, higher fees discourage some patients from purchasing the dentistry that you recommend. Your insurance plan participation may limit or dictate fees for those patients. Your Fee Positioning shows where you have set your fees relative to competitors in your marketplace. You should try to position your fees at or above average for the area. Obviously, everyone cannot be above average, so you must monitor the external environment as other practitioners change their fees. You must use your capacity (facility and staff) well to have adequate production. Capacity Utilized is the ratio of actual patient visits to potential patient visits (or appointments). This number should be high (above 90%) for a practice to be profitable. This is a key measure of practice profitability. Regardless the size of the practice, it must be fully used (with few slack resources) to be fully profitable. You should check Total office, Doctor, and Hygienist Capacity Utilized on a regularly. Factor 2. Maintain Collections Once you do the dentistry, you need to be sure to collect from the patients for the work done. Several ratios indicate effectiveness in this area. The Accounts Receivable Amount shows the proportion of production that you are not immediately collecting. A raw amount for accounts receivable (e.g., $30,000) is meaningless. (Was that from a practice that grosses $25,000 per month or one that grosses $80,000 per month? Accounts receivable 8-4

5 will be larger for larger practices, all other things being equal.) This indicator says that for a practice with a moderate credit policy, about 1 times the average month s net production is an acceptable accounts receivable amount. Easy credit policies will generate higher accounts receivable; stricter policies lower. Practices that process a large amount of insurance (greater than 60-70% of patients) will also have a larger AR as they wait for insurance companies to process and mail checks. Speeding reimbursements (for example, through electronic claims processing) improves AR. You should use the net production amount (production less adjustments) rather than gross production as the numerator. Net production is the amount that you bill to the patients and insurance companies. If you collect all of this, the collection ratio (see below) would be 100%. The total Collection Ratio should be at or above 98% of the net production. Ideally, everyone should pay you. Most dental offices collect between 96-99% of net production (the billable amount). Since you do not expect to collect adjustments, we do not include them in this ratio. A lower collection ratio may suggest problems with collection procedures or a temporary surge in production, resulting in an increase in accounts receivable and potential cash flow problems. A very high collection number may suggest a credit policy that is too strict, discouraging patients from accepting large treatment plans. You might even have a collection ratio greater than 100% for a short time, as large past accounts are paid. Young, growing practices have lower collection ratios than mature practices, simply because last quarter s collections are compared to this quarter s higher production. The A/R Amount Over 60 Days tells you how well your front office is collecting the money from patients that have been billed. 60-day-old accounts are becoming problem accounts. They are more difficult to collect, and you have lost the use of the money for that time. You should see, at most, 1/4 to 1/3 of one month s net production (8% - 11% of a quarter s net production) in this number. If this number is high, then either your credit policies are too loose or your collection efforts are not strong enough. Managed care programs (PPO's, DMO's, etc.) significantly affect your practice. You must balance the value of additional patients against the discounted fees charges to those patients. Few dentists want to deal with managed care plans. However, most dentists in America do. If you do, then you need to track how well you are controlling the managed care in your office. These plans also affect your practice analysis. For example, using gross production will give an unrealistic result in determining collection ratios. If you are discounting 20% of the work done, then the highest you can expect to collect is 80% of gross production, a seemingly abysmal amount that may actually be excellent for the circumstance. A more accurate representation of collection efficiency can be determined by using the net production (gross production - adjustments) as a basis for this determination. Managed Care Percentage looks at the portion of your practice gross production represented by managed care. There are two options for this measure. Number one, if total managed care production exceeds 50% of total practice gross production, then managed care is simply too great a part of the practice. Not only are you losing a lot of money, you are also losing control of the schedule, as managed care patients replace full fee-for-service patients. Similarly, any one plan should not account for more than 25% of the gross production. The practice may be in a "risky" position if the programs change reimbursement schedules or cancel provider contracts. An alternative measure is to look at managed care adjustments. By this measure, adjustments should represent no more than 20% of the total office gross production. This takes into account the efficiency of all of the plans (in total) you are working with, but does not assess an individual plan. Both measures give similar results. The managed care analysis is greatly influenced by the local market of the dental practice. Some areas have very few managed care programs. In these areas, you would expect a lower percentage. In some areas, almost all of the insurance is some sort of reduced reimbursement, contracted (managed care) plan. In these areas, the ratios are still valid, but they may be hard to meet, leading to a lower practice profitability. You also need to track how well each plan is reimbursing for the care you provide. Managed Care 8-5

6 Efficiency looks at each individual plan. It asks the percentage returned compared to a similar, full fee patient. This way, you know how much of a discount is implied with each plan. To calculate this measure, take the total revenue (collections and capitation payments) of each plan, and divide by the full fee value of the services performed (gross production of the plan). You need to track this regularly, as plan administrators change their reimbursements and rules, often without telling you. By determining the percentage of full fee that each plan reimburses, you can decide which plans you want to reduce or eliminate, and which you want to keep or increase. Factor 3. Generate Patients for the Practice Without patients, there is no practice. Patients are either existing (recall) patients of the practice, or patients that are new to the practice, generated either from internal referrals or outside marketing efforts. Patient satisfaction with your care leads to internal referrals. Money that you spend for marketing programs leads to outside new patient generation. All are important sources of patients. You should monitor all regularly. Established practitioners can often live off internal referrals, without the need or expense for marketing programs. New and growing practitioners often need a planned marketing effort to generate the patient pool needed for success. Since new patients present with most of the large cases in an office, New Patients per Day keeps tracks of this statistic. Each practitioner should see at a minimum 60 new patients per quarter (or about one per day) to keep the practice adequately busy. New patients imply comprehensive care patients, not emergency or episodic care patients. Recall Effectiveness measures the percentage of patients due for recall in a quarter that were actually seen for recall visits. This ratio examines how effective the practice is in encouraging patients to return for periodic maintenance visits. In established urban practices, production resulting from the "recall" visits and subsequent findings account for 60-75% of the total production. Managing the recall program is obviously a very important component of overall practice management. We expect some patient attrition as people move from the area or find different reasons to switch dentists or forego dental treatment. However, you should try to reduce these two latter reasons through effective recall planning. You should strive to see 90-95% of the patients who are due for the month. If you fall short, the front office person or hygienist (whoever is responsible for recall management) should begin procedures to increase recall acceptance. (This is also, in part, a scheduling issue.) You might have more than 100% recall effectiveness if you see patients from previous recall cycles. Especially in buyout practices, you might send letters or make phone calls to patients who are still in the files, but who haven t made a visit in some time. Marketing $$'s / New Patient This ratio examines how much it costs to generate each new patient, compared with the production each new patient represents. If you are spending $10 to generate a patient who has a typical treatment plan of $800, your marketing program is obviously very effective. Most in-office computer accounting programs will track patient referral sources and dollars generated from the referral source. This is particularly important in assessing the cost/benefit of specific marketing plans. You should generate at least $5 of production for every dollar spent in marketing. Less than that may still be profitable, but only marginally. Patients often use a combination of factors (for example, one patient may use your yellow page ad, personal or family referral, and insurance plan participation) in choosing their dentist. It can become difficult to tease out a direct link for every new patient and marketing plan. This being said, if you are spending more than $100 for each new patient, your marketing costs are high. If these costs are less than $50 per new patient, then the cost of generating a new patient are low. This assumes that you are generating an adequate number of new patients. If not, you may need to spend more to generate the volume of patients that you require. Factor 4. Controlling Costs Since productivity depends upon both output (revenues) and input (costs), you obviously must control 8-6

7 both to be productive. There is a cost of doing business. Any cost that contributes to profitability is a good cost; any cost that decreases profitability is a bad cost. The key is to decide which is which. To accomplish this, most management experts compare a practice to norms, or average practices of a similar type. For example, every dentist has a cost associated with rental (or purchase) of office space. If the average dentist pays 6% of their production for rent and you are paying 9%, then some of your rent may be decreasing the profit of the practice compared to other dentists. The Overhead Ratio rearranges the information contained in the Income Statement. Rather than showing how much profit you made, the overhead formula shows how much it costs (overhead) for a given amount of work. The overhead ratio answers the question What percentage of my production went to pay the bills? This shows, in a rough way, the percent of every dollar generated that pays the costs of the practice. It also answers the converse, What percentage of my production was left as profit? The inverse (1-OH %) represents the profitability of the practice. That is to say, if the overhead is 70%, then the profitability of the practice is 30%.) The traditional (old school) overhead percentage is the total cost of doing business divided by the total collections. This was when production and collections were roughly the same in most practices. With the blossoming of insurance plan participation, many practices adjust large amounts of charges from insurance plan participation. Modern analysis calls for using gross production as the denominator (total costs divided by gross production). This is because the costs associated with production happen regardless the insurance plan or payment mechanism. So it is logical to relate those costs to the production of the dentistry. When you look at your overhead ratio compared with others, you are comparing your practice with other dental practices. When making this comparison, you make two implicit assumptions -- that your dental practice is similar to other practices, and that dentists are rational business people making similar, rational decisions. We can challenge each of these assumptions. Nevertheless, given a broad mix of practice types and styles, you can use these comparisons as a beginning point in understanding your practice s financial structure. In general dental practices, overhead (and the OH Ratio) fall into ranges -- more than 65% is high; less than 55% is good; and 55-65% is about average. This ratio balances for different parts of the country. High fee areas are also generally high cost areas. If your overhead falls into the good range, you may be satisfied, realizing that the trouble of additional analysis and control may not produce enough return to worry over. Conversely, you may want to maximize the potential profit from the practice and continue the analysis to detect areas to increase profitability further. If your overhead percentage is out of line compared with other practices, you need to look further at your numbers. Generally, the problem is that the OH Ratio is too high. However, your overhead ratio may actually be too low. This can happen when you unrealistically staff the office, do not account for all costs (such as working spouses), if collections surge because of anomalies in the collection pattern or if you do not purchase adequate supplies, equipment and material to keep up to date. Specialty practices have different acceptable ranges due to the different character of those practices. This also assumes that you are not doing any special tax avoidance strategies (for example, renting space from yourself or hiring family members at an unusually high price) that can skew results. The overhead ratio depends upon the point you are in the practice cycle. If you are in a start-up phase with few patients and relatively high debts and expenses, then your overhead will obviously be very high. New practitioners are often paying off buy-out or start-up loans. They can expect an additional 5-10% overhead for debt service while paying off loans. They may even run at a loss (more than 100% overhead) while building patient pool. The interest and depreciation expenses represented by this outlay are additional costs that established practitioners generally don t have. New practitioners in a buy-out situation often must replace or update equipment, supplies, and materials at an additional cost. Finally, many new practitioners simply cannot do the volume of dentistry that established practitioners do. This may be from the need to increase patient pool or the new practitioner s clinical inexperience. 8-7

8 Regardless, if production is less than a comparable established practitioner, then the overhead, and most other ratios, will appear to be out of line. Your personal and professional wants, needs, and desires will set what you consider acceptable range in all these analyses. For example, you may be considering two practice options. Practice number one produces $600,000 with a 70% overhead on five days per week ($180,000 net). Practice number two produces $400,000 with a 60% overhead on four days per week ($160,000 net). You must decide if the added management problems and time commitments are worth the additional net income. Specific Cost Categories look at the same thing as the overhead percentage, but breaks it into specific units. There are typical ranges of costs for each area of cost allocation. These standards attach values to various components of the expenses of operating a dental practice. Most are related as a Dental Costs by Category Category Percent of Collections Staff 25% - 30% Variable 15% - 23% Facilities 8% - 10% Miscellaneous 9% - 14% Owner s Exp 8% - 10% Profit 35% - 45% percentage of collections. When using these numbers, you are comparing your practice to the norm or other similar practices. You can compare every cost if you want, but that is not a good use of time. Concentrate on the areas where a change can make the most impact. The accompanying chart gives typical cost category percentages for general dental practices. There are two general types of office costs fixed and variable. Fixed costs do not vary with the amount of production. (Your rent is the same regardless the number of patients that you treat.) Variable costs change directly with production. The more dentistry produced, the greater these costs should be. Variable cost ratios run 15-23% for most general dental practices. Breaking these costs down further, dental supplies run 7%-10%, office supplies 2%-5% and dental lab costs from 7%-12%. Dental Office Costs by Type looks at these costs. Liquidity means how much cash you can easily access to pay bills, buy assets, and use for other cash flow purposes. You may have money in accounts receivable, investments, or in plant and equipment, but this money may not be readily available if you need it immediately. As a rule, you should have two months worth of expenses available as immediate cash reserves. In addition, accounts receivable (about another two months expenses) will come in slowly over several months. If you break your hand, or have another accident that limits your ability to produce dentistry, you can still pay the bills until your disability and office overhead policies begin payments. (You obviously need to coordinate these plans.) Factor 5. Promoting Staff Effectiveness Successful practices have effective staff members. Effective staffs don t just happen. The owner dentist creates them by hiring the right people, compensating them well, and motivating them to high levels of performance. People work for many reasons besides pay. Social interactions found on the job, personal growth, and a belief they are contributing to improve people s lives all play a part. As the practice leader, it is your job to tap into all these emotional reasons for working, and to use them to build a cohesive and productive team that meets the philosophy and goals of the practice. Many staff practice assessment items don t have specific numbers associated with them. They are specific to your individual practice. However, we provide some general guidelines. Your Compensation System must reward individuals and the team for high performance. Compensation includes both wages and benefits. Staff members compare these to other, similar jobs in the area. They use this information to decide if they are fairly compensated for the work they do. While simply paying a high wage won t guarantee loyal, hardworking employees, paying an inadequate wage will almost guarantee an unmotivated workforce. Compare your compensation to published averages for the area. Your total compensation package should be at or above average for the area. 8-8

9 (In this game, you will need to purchase marketing information to find the average rates for your area.) The Total Relative Staff Costs compare your total cost of employment to the average for the area. Total staff costs involve all of the expenses of hiring and retaining staff members. This includes gross wages paid (including withholdings), FICA matching, unemployment and workers compensation insurances, retirement plan contributions and any other benefits (such as health insurance) paid by the practice. The acceptable number is a range. Practice without a hygienist should be at the low end of the range. Practices that employ a hygienist (or multiple hygienists) should expect to be at the upper end of the range. Staff is the single largest area of cost in the dental office. A little savings here can make a large difference on the bottom line. You can further break down staff costs and compare them to the area averages. These include your Relative Pay Rate, and Relative Benefit Rate. This helps to determine which side of the compensation is not near standard. In this game, you must purchase a marketing information report to find the area s averages. To have excellent staff members, you first must select the right staff members. You do this through the recruitment, application, and interview processes. Assess your performance by looking at your probationary period appraisals and retention. If your selection process is effective, most of your probationary appraisals should be positive. You should also have few staff leaving your employment. While some Staff Turnover is inevitable (or even desirable in some cases), turnover is expensive for the practice. If you have a large number of employees (say eight) you would logically expect more turnover than if you have fewer employees. On average, if you have four employees, you might see one employee turnover each year. Total staff costs involve all of the expenses of hiring and retaining staff members. This includes gross wages paid (including withholdings), FICA matching, unemployment and workers= compensation insurances, retirement plan contributions and any other benefits (such as health insurance) paid by the practice. The acceptable number is a range. Practice without a hygienist should be at the low end of the range. Practices that employ a hygienist (or multiple hygienists) should expect to be at the upper end of the range. Staff is the single largest area of cost in the dental office. A little savings here can make a large difference on the bottom line. Because staff costs are such an important part of the cost equation for dental practitioners, we have developed a series of ratios to assess whether you have properly staffed the office. These are Anegative@ ratios. The lower the percentage, the better the ratio is. In your practice, you should look at all three categories. In this game, we only look at hygiene costs, because they are often the largest and easiest to understand and control. Clerical Efficiency Clerical efficiency relates the total clerical compensation to collections. Typical, well-run general practices spend 8%-10% of collections in clerical compensation. Higher than that, either you are overstaffed, or your production (or fee schedule) is too low. Less than the range, you may be understaffed, or your existing staff may be underpaid. If you are understaffed, your front office personnel probably cannot do billing, make appointments or collection calls in a timely manner. Problems with general office productivity may result Clinical Staff Efficiency This ratio relates non-hygiene clinical labor costs and revenues. Ideally, clinical labor represents 7%- 10% of the Doctor's collections. (Exclude hygiene labor and collections.) The doctor=s productive capacity and the state s expanded function laws will obviously influence this number. Hygiene Efficiency Hygiene efficiency examines the relationship between the hygienists' total compensation (including taxes and benefits) with the revenue produced by the hygiene area. We generally include the Aexam@ 8-9

10 portion of the periodic visit in the doctor's production, since the doctor does that service. This is probably a better ratio than production per hour for looking at hygiene productivity, since areas with higher fees also usually have higher salary levels. (They balance each other out.) Hygienists should be producing 2 2 to 3 times their compensation. That is to say, compensation should be 33%-42% of hygiene gross production. Financial Outcomes Financial outcomes are the results of the financial analysis and control process. Financial outcomes should improve over time. Net Worth is everything you own (assets) less everything you owe (liabilities). Commonly, new practitioners may show a negative net worth. This simply means that they owe more than they own. As they pay off the practice loan and accumulate savings (assets), then the net worth should continually grow more positive. The higher this number is, the better the outcome. Profit to Date is the accumulated profit from your dental operations. You calculate this by adding the profit (or subtracting the loss) from each quarter and keeping a running tally of the result. Practices that have a high growth strategy may lose more money early in the practice cycle than a more conservative growth strategy. However, they may make more later in the cycle as a larger mature practice. The total accumulated profit balances for this time difference. The higher this number is, the better the outcome. Ending Cash is the amount of cash left in your checking account when you have paid all of your bills. Normally, you want a 2-3 month s cushion in your account for the times when you have a low collection month, you take vacation or other time off, or have unusually high bills. Most checking accounts earn low (or no) interest. If you have excess cash (above two months expenses), it is best to sweep it into a higher interest earning account. These may have more limited check-writing privileges. The ideal amount here is about 2 months expenses. Loan Balance is the amount of principal that you owe on your loan. You should pay this off over the term of the loan. However, you might borrow additional money for expansion, working capital or other needs. During those times, your loan balance will increase. Otherwise, you should see your loan balance decrease as you pay off your loan. Doing Analysis on Your Simulated Practice There are three ways to do financial analysis on your simulated practice. All methods do the same thing. One (hand calculating) lets you dig into the numbers. Another (spreadsheet) is easier. The last (purchasing) is more expensive. Hand Calculating the Ratios The chart on the following pages describes the various ratios and the numbers you should use to calculate them. Use a calculator (or develop a spreadsheet) to calculate the ratios that you want. Using the Spreadsheet The web site has a Microsoft Excel spreadsheet that you can download and use to conduct the ratio analysis for your practice. You can use this instead of purchasing the analysis through the program. There is a video tutorial on the web site that gives directions for entering data and using the program. The spreadsheet is titled Blank Analysis Spreadsheet. It is located in the Additional Materials section of your web site. 8-10

11 Purchasing the Financial Analysis Package You can purchase the Financial Analysis package from the market research group in the simulation. Each quarter that you want the analysis order it by clicking on it when you make your web-based decisions. The program will deliver the printout of the analysis to your web site in the Team Analysis Reports section. An example of the printout is provided on the following pages. 8-11

12 Ratio Calculations Factor Ratio Calculation Standard Adequate Production Office Gross Production Number from printout (quarter to quarter) Level or increasing Office Net Production Number from printout (quarter to quarter) Level or increasing Service Mix - Hygiene Hygiene production / Gross production 33% Service Mix - Lab Lab related production / Gross production 33% Service Mix Non-lab Non-lab related production / Gross production 33% Fee Positioning Fee indicator / Average Fees (from a purchased report) 1.0 or above Capacity Utilized Total Total patient visits / Total capacity.90 or above Capacity Utilized Hygiene Hygiene patient visits / Hygiene capacity.90 or above Capacity Utilized Doctor Doctor patient visits / Doctor capacity.90 or above Maintain Collections Accounts receivable amount AR / (Net production / 3) 1.0 or below Collection ratio Collections / Net production.98 or above A/R Amount over 60 days AR 60+ days old / Net production.11 or below Managed care percentage (Mgd care collections + Cap pmts) / Total gross production.50 or below Managed care adjustments Mgd care adj / Total gross production.20 or below Single managed care plan (One plan collections + Cap pmts) / Total gross production.25 or below Total managed care efficiency (Mgd care collections + Cap pmts) / Mgd care production Relative PPO efficiency (PPO prod PPO adj) / PPO prod Relative Medicaid efficiency (Medicaid prod Medicaid adj) / Medicaid prod Relative Cap efficiency (Cap prod Cap adj + Cap pmts) / Cap prod Relative 8-12

13 Generate Patients New patient ratio New patients / Days open this qtr 1.0 or above Recall effectiveness Recall patients seen / Recall patients due.90 or above Marketing $$ per new patient Advertising $$ / New patients $100 / new pt or below Controlling Costs Overhead ratio Total expenses / Gross production 65% or below Staff cost ratio (no hygienist) Total staff costs (from printout) / Gross production.22 or below Staff cost ratio (with hygienist) Total staff costs (from printout) / Gross production.28 or below Variable cost ratio Total variable costs (from printout) / Gross production.23 or below Facility cost ratio Total facility cost (from printout) / Gross production.10 or below Liquidity (Ending cash / Total expenses *2) / 3 2 months exp or above Promoting Staff Effectiveness Relative pay rate Staff pay rate / Avg pay rate (from a purchased report) 1.0 Relative benefit rate Staff benefits / Avg benefits (from a purchased report) 1.0 Relative total staff costs Staff compensation / Avg compensation (from a purchased report) 1.0 Hygiene efficiency Hygiene expenses / hygiene gross production Staff turnover Turnover / year 1.0 or less Financial Outcomes Net Worth From printout Increasing Profit to date From printout Increasing Ending cash (Liquidity) (Ending cash / Total expenses *2) / 3 2 months exp or above Loan Balance From printout Decreasing 8-13

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