Everyone wants to improve their business…but sometimes we all need a little friendly prod to get us going. So to get your creative and strategic juices flowing, we’re featuring two theories to consider when running a successful dental practice. Take some time to read them through, think about them in the context of your practice and involve the team in applying them to your future plans.
Porter’s 5 forces
Whether you run a successful dental practice, are thinking about your exit strategy or are about to invest in your first dental practice, Porter’s five forces provide a useful brainstorming tool that will help you explore and analyse all the external factors that will affect your business and your decision-making. You can use this tool with your dental practice team and get them to think around the various forces and ask what they mean for your practice and whether you need to develop strategies to take advantage of potential opportunities or stave off threats.
1) The threat of new entrants into your market or territory is based on the market entry barriers. These barriers can take a variety of forms from the cost of set-up (setting up a window cleaning business is a lot easier and cheaper than setting up a printing company), to distribution channels and even local and national government legislation.
2) The power of buyers: (Patient) buyer power is one of the two horizontal forces. The most important factors that determine buyer power are the size and the concentration and behaviour of customers. Buyer power is high when there are only a few large players in the market, such as large grocery store chains. It is also high if there are a large number of small suppliers supplying the same products or services – as they can shop around.
3) The power of suppliers: This tends to be the opposite of the power of buyers. The switching costs are high (for example, switching from one software to another). The power of suppliers is also high where the brand is powerful (Microsoft, Mercedes, Pizza Hut, etc.). If the customers are fragmented and not in clusters they will have little bargaining power, (i.e. you’re the only dentist for miles around).
4) The threat of substitutes: Ultimately, if you were a manufacturer of fax machines, your biggest competitor wasn’t other manufacturers, but the emergence of email. Some non-dental businesses (beauticians, hairdressers) can also provide services that cross over with those of dentists (e.g. botulinum toxin).
5) Degree of competitive rivalry: This force is probably the most easily recognisable, particularly if your practice is in a town with four or five other practices. How much do you analyse the competition in terms of their pricing, services and image?
Saw-tooth cash flow management
Poor cash flow management is a common cause of failure in small businesses in general. A dental practice cash flow is normally relatively simple but can be expected to follow a typical ‘saw-tooth’ shape.
The cash (bank) balance goes down as wages, bills and suppliers are paid; some cash is collected for treatments throughout the month but is unlikely to cover the general costs. The balance then rises sharply as PCT plan monies or membership plan monies are received usually on a monthly basis leading to the ‘saw-tooth’ shape above. Over several months, assuming the dental practice is profitable, there should be a slow drift upwards with the peaks (credit balances) becoming bigger and the minimum balances moving up too. If there is an overdraft, the maximum borrowed each month should decline. Banks will look at these ‘highs and lows’ as an indication of the health of the business.
The simple ‘saw-tooth’ is expected and should continue until a large unexpected item comes along and causes a problem. The fall in the cash balance can be significant and unless it is planned can cause financial problems. Ideally, the gradual rise in balance over several months should be more than the subsequent fall, i.e. the fall essentially takes you back no further than the start point; if not, you may be losing money in the long-term.
The important thing is to plan 12 months ahead and produce a cash flow forecast, estimating what the general month’s trend is but more importantly adding in the big occasional items such as tax. Your accountant will be able to help with this but there are also plenty of simple cash flow tools around. The second most important thing to do is regularly review if your balance at the time is where you expected it to be; if not and there is a large item about to ‘hit’ you may need to talk to your bank.
Tax is one of the usual large items but also keep in mind capital expenditure on, for example, a surgery re-fit or new equipment. If this is a small item, you may be able to absorb it within your normal cash flow but if it is a more significant cost you may want to consider loan, leasing or hire purchase, which spread the cost. If you do this, make sure you include the monthly costs in the next cash flow forecast.
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