That's Life: Do Not Turn Your Nest Egg Into Chicken Feed
That's Life: Do Not Turn Your Nest Egg Into Chicken Feed
It’s never been easy to run a successful dental laboratory, and in this turbulent economy, it’s especially difficult.
The changes in materials, equipment and techniques, combined with managed care, competitive pressure and the high cost of new technology all make operating a profitable laboratory more complex and much more difficult. Some laboratory owners wonder if it can be done at all.
Nearly 50 percent of all business failures occur during the first five years. More than 500 businesses fail every day! There are many reasons for business failure, however Dun and Bradstreet attribute incompetence and bankruptcy to more than 45 percent of those failures.
When asked to define profits most of those failed business owners replied, “What’s left over after paying the bills.” Unfortunately the average laboratory owner (with a great deal of technical training and little business experience) gave the same answer.
There are four basic types of businesses: manufacturing, wholesale, retail and services.
The above listing is deliberate, and is intended to illustrate the traditional flow of goods and materials from their source, the manufacturer, to the wholesale distributor and finally to the consumer through either a retail outlet or service provider. In traditional business, it is not unusual for the manufacturer to earn the smallest margin under pressure from each successive layer to make their desired margin. While not viewed in the traditional sense, a dental laboratory is a light manufacturing business.
The manufacturing industry is by far the most complex and hazardous of all types of business ventures:
- First there must be substantial investment in fixed assets, equipment and a facility. A miscalculation here, or the excessive purchase of unnecessary fixed assets, could put a heavy strain on cash needed for working capital.
- Raw materials, going into the manufacture of the finished product must be purchased in the right quantity and at the right price. Purchases of supplies and materials are recognized as they are consumed, not as they are purchased. No laboratory can reach its desired profit level unless its costs are identified, recorded and controlled.
- Labor is the most troublesome of all for the manufacturer, and of course the dental laboratory is extremely labor heavy. The cost of labor is your biggest expense and the aggregate number inches up year after year. Unless you are paying your technicians on a piecework basis, this is a difficult yet critical expense to manage.
- The manufacturer is constantly playing a game of keep up with the Jones. The dental laboratory owner must continually strive for more efficient methods of manufacture to reduce operating costs while simultaneously keeping abreast of competitors and new technology.
- In addition to all the foregoing, struggle to have a profit for distribution as well as retain a cash surplus to carry the business.
Without having sound financial practices including realistic operating budgets, one of more of these items getting out of hand may very well be the downfall of the business. Like the sales figures in our business plan, we also monitor our budgets on a daily, weekly and monthly basis. Our monthly product and loss statement will also give us year to date data to help even out fluctuations.
No two dental laboratories are alike, and therefore establishing operating budgets will be a very personal thing. For example, a one-technician laboratory operating from a laboratory in his home will have significantly less overhead than a laboratory operating from a commercial space. One laboratory owner may be satisfied with a 5 percent return on investment (profit), while another may not be happy with less than 20 percent.
Next month, I will give some suggestions for establishing realistic operating budgets.
