Finances

Annual Financial Review: Scrutinize Expenses, Fine-Tune Profits

By Rachael Click, OD

SYNOPSIS

Creating an annualbudgetbased on last year’s financial successes and failures allows you to plan for profitability.

ACTION PLAN

EXAMINE CONTRIBUTION MARGIN & BREAK-EVEN POINT. Figure out how many patients you need to see to break even.

GATHER DATA ON ONGOING BASIS. Use practice management and EHR to deliver and crunch numbers for analysis.

PLAN FOR LONG-TERM. Consider big picture in where you want to be in five years in addition to immediate needs.

Reviewing what worked from the previous year to decide on financial investments in the new year is an annual ritual in my practice. Doing this allows me to decide, based on past performance or solid projections, how best to spend my practice’s money. Looking at two specific aspects–contribution margin and break-even point–helped me to fine-tune my practice budget

Dr. Click uses the spreadsheet pictured above from The Williams Group to track and monitor her practice’s finances.

EXAMINE CONTRIBUTION MARGIN and BREAK-EVEN POINT

First, I look at the contribution margin and the break-even point to see how many patients it took to break even in the previous year. At the same time, I also look at last year’s growth.

Editor’s Note: “Contribution margin is the dollar contribution per unit divided by the selling price per unit. ‘Contribution’ represents the portion of sales revenue that is not consumed by variable costs, and so, contributes to the coverage of fixed costs”– Wikipedia

I use our contribution margin to determine which investments are working for the practice. Then I use our revenue-per-patient to determine how many patients it will take to break even on the investment. For instance, I learned that by adding an exam lane, it will only take two additional patients a month to break even and three to become profitable.

Another example: Last year I started stocking CooperVision’s Proclear 1 day contact lenses in the office. We learned that to break even, we had to sell 19 annual supplies or 76 boxes. After studying last year’s contribution margin, we broke even and became profitable before our 90-day billing was completed with CooperVision. We will likely be expanding the stock this year. In addition, we learned that we increased our one-day sales over 50 percent from the previous year. Our CooperVision rep suggested we stock Biofinity, too, since it can be a good alternative for the price conscious patient. However, we didn’t see any growth in Biofinity sales from the previous year. Since the practice grew as a whole, we interpreted that as a decline. So, rather than stocking Biofinity, we are putting some of the additional revenue into expanding the stock of the Proclear 1 day.

GATHER DATA ON ONGOING BASIS

We are on a calendar year for our financial planning. I start looking back at the numbers in November and put the final touches on everything at the end of year. The key metrics I look at are percentage growth, revenue-per-patient, capture rate, multiple pairs and sunglass sales, and annual contact lens sale rates. We also track other things like AR percentage sales, Transitions sales and new vs. established patients.

We gather the data on a daily basis from our practice management software and then we enter it daily into an Excel spreadsheet that helps us track our metrics. The spreadsheet then tallies the stats for us on a weekly, monthly and annual basis.

PLAN FOR LONG-TERM

Consider Big Picture

Ideally I would like to have three to six months of practice expenses in savings. One of the disadvantages of being a new practice is that you can’t save as you would like since you don’t have the patient demand and cash flow. Savings has always been something very important to me and I’ve been able to save something. However, last year I was able to start a more regimented savings program that my accountant helped me design. The percentages are likely to change each year depending on our projected growth plans and upgrades that we need for the office and/or equipment.

My practice is now five years old. Because of its infancy, I’ve always had pretty aggressive growth projected. I have had years where the goal wasn’t met, but I didn’t necessarily diminish the next year’s goal because of a bad year. Instead, I reviewed the things we think didn’t worked for us and then tweaked those things to try to make them work for the next year. For example, the year we didn’t meet the goal was a year where we had a very unhappy staff member. This person was not performing and was generating patient complaints. After trying to resolve the situation, we were unable to and had to part ways. While that is an extreme measure, I learned a valuable lesson about how important office morale is to our practice and how it can directly impact the bottom line.

Another decision informed by the previous year’s financial performance: We stopped using our Vision Treatment Plan forms. We used to have a recommendation form for every patient that summarized their findings and needs. We got out of the habit due to us getting busy. I noticed that while we were meeting our financial goals, we were working harder instead of smarter. We’ve implemented them again and the baton pass from doctor to optical has been much smoother.

Consider Current Year and Next Year

I understand that as the economy picks up, and more people are willing to spend, we can expect our practice to sell more second pairs, sunglasses, etc. I opened my cold-start practice in October 2008–the month the economy went into a deep recession. Because I started from nothing, I think I was at a slight advantage compared to some established practices. I learned that we had to focus on service and perceptions of value. Even though the economy is better today than five years ago, patients have choices about where to seek their services. I tell my staff every year that we are applying for the job for next year during the current exam. We have to make sure we give great service and that people understand the value. We need to continue to give strong recommendations, but be able to tailor our product choices to the patient’s budget without sacrificing quality. I have found that when we can do this, we are helping the practice have a strong current year and a strong next year.

Calculate Immediate Staffing Needs

There are three numbers I look at when I am thinking about staffing levels for the next year. One is the full-time equivalent. The Williams Group helped initially with the next two metrics. The second is the staff expenses benchmark. Salary, taxes and benefits should be between 18-23 percent for a solo-doctor practice. Lastly, I look at staff productivity. I have a benchmark that states it should be between $70-90/FTE based on collected revenue. I tend to hire when the staff expenses benchmark tilts below 21 percent and when the staff productivity is above $80.

I am going to try something a little different this year based on a recent article from Tip of The Week about hiring before you need it. The thinking behind this is that it would then free up time for staff members to do other things to promote the practice and potentially be less stressed. My numbers are very close to my above thinking but slightly under. I have found a perfect addition to our team. So, I am going to follow this advice and hire a good employee rather than pass this person up and wait for the numbers to reflect the middle.

Calculate Marketing Spend

Our EHR program runs a report that tells us how patients have found us. We have it broken down into categories like advertising, referral, location, insurance and internet. Thankfully, our report showed that referral was the number one way patients found us last year. It was then followed up by insurance. This year I would like to grow at a slightly higher percentage than previous years, so I am going to invest a little more in advertising, but we are focusing on referrals. We are going to tighten up our Share The Care program and implement it as much as possible.

Related ROB Articles

Key Financial Metrics to Track–and Improve–for Profitability

Practice By the Numbers: Track Your Key Expenses

Measure Your Capture Rate to Compute Your Profit Potential

Rachael Click, OD, is the owner of Preferred EyeCare Center in Mount Pleasant, SC. To contact her: drclick@preferredeyecarecenter.com.

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