Understanding COGS in a Dental Practice: A Guide to Managing Costs of Goods Sold
In any dental practice, maintaining a healthy profit margin depends on controlling operational expenses, including the often-overlooked Cost of Goods Sold (COGS). Understanding and managing COGS is crucial for long-term financial health, as it directly impacts profitability. It is also a major data point that buyers (DSO’s and Private Buyers) will focus on when considering the purchase of your practice. This article explores what COGS means for a dental practice, how to track and optimize it, and why it’s an essential metric for financial management.
What are COGS in a Dental Practice?
Cost of Goods Sold (COGS) refers to the direct costs associated with the materials and supplies used to deliver dental services. These are costs incurred to provide treatments to patients and include items that are either consumed during procedures or form part of the dental treatments. Unlike operating expenses, which cover rent, utilities, and salaries, COGS only focuses on materials and supplies directly linked to patient care. Key components of COGS in a dental practice include:
Dental Supplies: Disposable items such as gloves, masks, cotton rolls, impression material, and anesthetics.
Restorative Materials: Items like composites, bonding agents, crowns, dental cement, and veneers.
Orthodontic Supplies: Braces, aligners, and wires used in orthodontic procedures.
Prosthetic Devices: Crowns, bridges, dentures, and implants sourced from labs.
Laboratory Fees: Costs for external dental labs that manufacture custom prosthetics, crowns, or aligners.
Sterilization Supplies: Materials used for infection control and sterilization of dental instruments.
Why COGS is Important for Dental Practices
Tracking COGS is crucial because it allows practice owners to understand the relationship between revenue and the costs of delivering services. Here’s why keeping an eye on COGS matters:
Profitability Insight: High COGS can erode profits even if revenue appears strong. Monitoring this metric ensures that your pricing strategies and margins remain healthy.
Pricing Decisions: COGS directly affects how you should price dental services. If COGS are too high relative to pricing, profit margins shrink.
Inventory Management: Analyzing COGS helps you identify inefficiencies in supply use or over-ordering, preventing waste and overstock.
Budgeting: Knowing your COGS helps in creating more accurate budgets and financial forecasts, enabling better cost management and planning for growth.
How to Calculate COGS in a Dental Practice
To calculate your dental practice’s COGS, you can use the following formula: COGS = Beginning Inventory + Purchases - Ending Inventory
Let’s break this down:
Beginning Inventory: The value of the dental supplies and materials on hand at the start of the period (e.g., month or quarter).
Purchases: The cost of additional materials and supplies purchased during the period.
Ending Inventory: The value of dental supplies and materials that remain at the end of the period.
For example, if you begin the quarter with $10,000 in supplies, purchase an additional $5,000 worth of materials during the quarter, and have $4,000 left in inventory at the end, your COGS for the period is: {COGS} = $10,000 + $5,000 - $4,000 = $11,000 This $11,000 represents the cost of the goods consumed during the quarter, which directly relates to your services.
Key Strategies for Managing and Reducing COGS
COGS in a dental practice can fluctuate significantly based on how well costs are managed. Here are some key strategies for keeping COGS under control:
Streamline Inventory Management
Inventory mismanagement can lead to overstocking or stockouts, both of which increase costs. Practices should implement the following:
Automated Inventory Tracking: Use practice management software to track inventory levels in real-time, set reorder alerts, and reduce excess ordering.
Vendor Relationships: Build strong relationships with suppliers and consider negotiating bulk purchase discounts to lower supply costs.
Inventory Turnover: Regularly assess inventory turnover rates to ensure you’re not holding on to supplies for too long, which could lead to expiration and waste.
Evaluate Supplier Contracts and Costs
Regularly reviewing supplier contracts is essential. Sometimes, long-standing suppliers may increase prices incrementally over time. Consider:
Price Comparisons: Periodically compare pricing from different suppliers to ensure you’re getting competitive rates for the materials you purchase frequently.
Vendor Consolidation: Purchasing from fewer vendors can lead to better discounts and easier tracking of supplies.
Optimize Treatment Processes
Optimizing how materials are used during procedures can also lower COGS:
Efficient Material Use: Train your staff to minimize wastage of expensive materials, like impression compounds, bonding agents, or composite resin. Small amounts of wasted material can add up over time.
Procedure Standardization: Standardize treatment protocols to ensure consistent material usage across different procedures. This prevents the overuse of materials and makes ordering supplies easier.
Monitor Lab Fees
Lab fees for creating prosthetic devices, crowns, and aligners can be a significant part of COGS. Consider:
Negotiating Lab Fees: If you have a high volume of lab work, negotiate better rates with external labs.
In-House Milling: For practices performing many restorations, investing in CAD/CAM technology for in-house milling of crowns and other devices can reduce external lab costs over time.
Track COGS Regularly
Tracking COGS should be a monthly or quarterly task for practice owners and managers. Regular monitoring allows you to:
Spot Trends: Identifying trends in rising supply costs early helps you address the issue before it impacts your profitability.
Set Budgets: With regular tracking, you can create more accurate budgets and ensure that actual COGS remain aligned with projections.
COGS as a Percentage of Revenue
One of the most useful ways to analyze COGS is as a percentage of total revenue. Ideally, COGS should range between 12-16% of revenue in a general dental practice, depending on the types of procedures performed. Practices with higher-end services like implants may see higher COGS, while general dentistry practices might have lower COGS percentages. If you are a general dental practice and your COGS is approaching, or worse, eclipsing 20% you may have an issue to address.
To calculate COGS as a percentage of revenue:
COGS as % of Revenue = COGS / Total Revenue x 100
For example, if your practice’s COGS for a given period is $15,000 and your total revenue is $200,000, the COGS percentage is: 15,000 / 200,000 x 100 = 7.5%
Tracking this ratio over time helps ensure that your pricing and cost management strategies remain effective.
Effectively understanding and managing the Cost of Goods Sold (COGS) in a dental practice is crucial for maintaining profitability. By carefully monitoring and optimizing direct expenses such as materials, lab fees, and supplies, practices can sustain healthy profit margins while delivering exceptional care. Key strategies include streamlining inventory management, negotiating favorable supplier contracts, and consistently analyzing COGS as a percentage of revenue. These proactive measures not only bolster the financial health of your practice but also enhance operational efficiency. By keeping COGS in check, you not only increase your earnings as an owner but also potentially boost your practice's sale price when it's time to sell. It’s a win-win for your bottom line!
Ready to start talking about COGS and your exit strategy? Reach out to us at info@getwicklow.com or visit www.getwicklow.com.
