Want more profit? Why your expenses (probably) aren’t your problem
We meet with practice owners every day who ask us to review their expenses to help them increase profitability. Often, they’re looking for places in the budget where they can cut back or save. Should I find a different internet provider? Should I buy fewer office lunches?
Even though it’s always a good idea to be aware of how small expenses add up, our clients can be surprised to hear our response: saving $50 a month on your internet isn’t going to materially change the profitability of your practice. Typically, that drives business owners to look at two of their biggest expense categories, rent and payroll, to understand why they aren’t as profitable as they’d like to be.
As a general rule, we recommend your rent approximate 5% of your revenue. Total payroll should range between 25-35% of revenue. Do a quick calculation to see if your practice fits within those guidelines. When expenses are so high they’re hurting profits, these are usually the categories that are really driving the problem.
Correcting these categories requires drastic measures. You could sublease part of your space. Or, you could move and fire half your staff.
Since both of these solutions are almost impossible to enact, we’d like you to consider another option: increasing revenue. That’s the part we like to focus on.
Think of it this way – you have space and a team that is ready and waiting for more patients, more sales, more production.
What can you do to capitalize on that reality? We’ve got a few simple steps you can take to shift your cash flow in the direction of higher profitability by growing your revenue:
Step 1: Understand how much revenue you should be generating. How much should you be collecting in order to bring your existing rent and payroll costs into alignment? We discussed that rent should be about 5% of your revenue. How much revenue is then required for your rent cost to be appropriate? If payroll is to be about 25-35% (including all producers) of revenue, how much revenue would be required for your payroll cost to be in alignment.
Step 2: Compare that revenue number to where you are now. Is the increase in revenue achievable? How long will it take for you to get there? If you’re finding that there is a huge increase required to bring these costs into alignment, then, yes, maybe considering moving and reducing your staff makes sense. In most cases, however, we see that the increase is reasonable and achievable. If that’s the case for your practice, it’s time to make a plan!
Step 3: Create a budget. (We’ve got a step-by-step article on making a budget here.) Determine what steps you need to take to generate the revenue required close the gap. Set provider goals and hold your team accountable to meeting them. Each provider should be pulling her weight and meeting her goal, so empower your team by providing sales training to teach them how to effectively sell your services. You can expand your services, expand your marketing, the options for revenue growth can be endless.
Here’s the bottom line: save yourself the time of going through your internet bills to see where you can save a few pennies. Generate actual dollars by focusing on how you can increase your revenue instead. For more ideas and to make a plan, email us at firstname.lastname@example.org.