The Capital Expense Gap

As many of you know, DTI was acquired by HealthpointCapital last month. For purely personal reasons, I have also announced that I will not be continuing as Chief Executive Officer of the company I started. As much as I would enjoy taking DTI to the next stage of growth, I have chosen to spend the next few months changing diapers as my wife and I expect our fifth (yes fifth) child. I will truly miss the DTI family and I wish them all the best. Anyway back to the subject at hand - the capital expense gap.

As laboratories get more and more involved with new-fangled gadgets, how does one manage the future capital expense needed by laboratories? Not only will money be spent on upgrading software and hardware but also training staff to keep up. How do you amortize or factor in the cost of these technologies into your pricing?

What is the Capital Expense (CAPEX) Gap?

In 1997, I remember going to the Chicago Midwinter Meeting and buying many of the new-fangled gizmos that will revolutionize our industry for under $10,000. Today, how much would that revolutionary, supercharged, atomic powered milling gizmo cost? $50,000? $75,000? $250,000? What about the training costs? Upgrades?

This is what I call the capital expense gap. As I have mentioned previously, over the last seven years I must have looked at more than 300 laboratories for acquisition. Many of the laboratories that I reviewed did not put aside an annual budget to either upgrade or replace their current equipment. As technology advances, the costs involved in upgrading equipment advances with it.

Why do we have a CAPEX gap?

Well, one of the reasons is that we have been a victim of our own success. What do I mean? For the longest time, laboratories could become very successful without upgrading furnaces, handpieces and porcelain. I still see the occasional Ney Mark 4 in operation.

Because we were not upgrading, there was less need for training. Also, to replace things that broke down did not cost as much so you did not really feel it in your pocketbook. On top of this, many laboratories are so busy just making it through the day that who has time to plan?

Fast forward to the present. Nowadays, it is not only more and more expensive but there are also more technologies to choose from. Which one do you bet on? If you were running a five-technician laboratory, the wrong bet may take a year’s worth of income to recoup. Yet, many laboratories still have no mechanism to budget or plan out their capital expense.

How do we fix it?

Stop and smell the roses (create a spending plan before you spend - what types of equipment does your business need and what is the return on that investment). Then, set aside a percentage of your sales every year for a capital budget as well as a training budget (so often, people buy the latest piece of equipment, put it on a table, but never really train anyone else in the laboratory to use it). If you can’t afford this than you may need to reevaluate your pricing vs. productivity mix. Just imagine, if you have a laboratory with $500,000 a year in sales, your capital budget maybe as high as five percent of your sales.

Like any laptop or PC, plan to depreciate the technology over five years. I would expect that within five years, something else would come along.

Why should I care?

This is a good question. I would say that if you are at a point in your life that you just want to take every dollar out of your business and eventually wind it down, maybe you shouldn’t care. Save your money.

On the other hand, if you want to continue to grow your business and make sound decisions regarding your hard earned dollars, a Capex budget creates a discipline that forces you to save and make choices on which equipment to buy. When you are spending $50,000 to $250,000 the last thing you want to see is your purchase gathering dust. Just remember, before buying anything, ask yourself:

    * Why do I need this?
    * How do I pay for it?
    * How do I train someone to properly operate it?
    * What is the return on my capital, time, talent, training?

I welcome any comments you may have regarding this article or dental technology in general. Please feel free to email me at Pkalaw@KalawInvestments.com.