By Steve Sunder
Jan. 2, 2019
You can strategize ways to generate revenues, but if you’re not carefully watching for, and controlling, expenses, you won’t meet your profitability goals.
Here are the ways I’ve seen practices use their profit-and-loss statements to successfully cut costs. If done correctly, these changes could equal as much as $98,000 annually in savings.
Start By Analyzing Your P&L Statement
A good place to start cost-cutting efforts is to look closely at your P&L statement with industry benchmarks to compare your operating ratios. Exhibit #1, below, shows the industry gross revenue benchmarks to a sample office gross revenues. In exhibit #2, you’ll see the optometric industry benchmarks to use in your P&L analysis.
Exhibit #3 shows the practice operational performance compared to the industry benchmarks. Your focus should be on areas that exceed the benchmarks as opportunities for cost reductions and opportunities to implement cost controls in the practice.
In Exhibit #2, we see the practice has higher-than-industry expenses in support staffing, marketing and promo and office supplies. These are variable costs that can be changed immediately so that the savings drop directly to the practice net income.
Reexamine Staffing Expenses
The highest expense area of the practice is support staff, so that this also can generate the biggest cost savings via cost reduction. However, a word of caution with staff reduction is to keep in mind the patient experience. If a staff cut is too deep, the practice could easily experience low patient satisfaction and lower social media reviews.
There is an equilibrium to the correct number of support staff to doctor and a positive patient experience. There is an industry benchmark for support staff revenue generation that should be applied as a gauge in determining your correct staffing level. The average industry benchmark for support staff revenue per hour is $83, or $172,640 per full-time employee per year. For example, the practice generates $750,000 per year in gross revenue then the optimum staffing level would be 4.3 (Gross Revenue / AVG Support Staff Annual Revenue = Staffing level number).
In this example, the staffing ratio cost to gross is 28 percent, or 27 percent higher, than the benchmark of 22 percent. The savings are geographical and position-dependent, so let’s use easy terms for this calculation. Assume an average support staff wage of $12.50 per hour. If you reduce this overhead by one FTE the annual savings for wages only would be $26,000 ($12.50 x 2080 [annual FTE hours]) = $26,000. These savings fall directly to the bottom line, also known as net income.
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Look for Marketing that Delivers Better Return on Your Investment
Marketing and promotions in our example are 11 percent of gross revenue, or 475 percent higher than benchmarks, making this an obvious area for cost control and reduction.
Assess other higher return marketing options, create your own internal marketing flyers, coordinate with local social groups to promote the practice, perform monthly medical presentations at social groups or retirement RV parks, or other community outlets.
Implement an annual marketing plan by month targeting highest return tools such as Facebook, your patient notification system, LinkedIn and other social media sites.
Transition marketing dollars from phone book, paper or other non-digital advertising to social marketing platforms.
You need to measure new patient growth on a monthly basis and compare to the industry benchmark of 12-24 percent, as this is the future lifeblood of the practice.
How much money could you potentially save by cutting this cost? In our example of a $560,647 practice, the annual marketing and promotion costs are $61,671 or over $5,000 per month. The savings cutting this expense down to the benchmark of 4 percent would be over $39,000, or $3,270 per month! These savings drop right to your bottom line.
Cut Spending on Office Supplies
In our example, the practice office supply expense is running at 8 percent, or 300 percent, higher than the benchmark of 2 percent.
Develop and implement monthly office supply cost controls with purchase dollar/unit limits. Why is this a place where costs can be cut? Office supplies are a variable expense that are controllable with cost control initiatives put in place.
Try online ordering from business supply houses or a member warehouse that provides delivery, so staff are not taken out of the office. If you have made purchases locally then you may be able to negotiate with that vendor for better pricing by presenting your historical purchases as the leverage. Place monthly order ceilings on items to avert purchase overages creating back-stock that is costly. With purchase limits in place, the monthly office supply expense will be static rather than experiencing cyclical peaks and valleys.
First, assess current office supply inventory that should be consumed before placing any new orders. Again, item-order control to limit the number of items that can be ordered, thereby eliminating over-purchasing. Facility logistics may improve because the storage room may require less room for eliminating the back-stock inventory, as there will be just-in-time delivery.
The annual office supply costs in our example is over $44,850 so that reducing this expense 2 percent would save the practice $33,638!
In closing, with good cost control initiatives in place, and practice operational performance meeting or exceeding industry benchmarks, this practice would save over $98,000 [staffing savings = $26,000, marketing and promo savings = $39,000, office supply savings = 33,638) that all falls to your bottom line. Those are significant, annual savings!
Steve Sunder is a health-care consultant with over 20 years experience in the eyecare industry at a multi-location practice, and as a consultant to other practices. To contact him: email@example.com