Vol. 14 Issue 4
The formula is simple. And it can lead to financial solvency.
Examining a practice is an ongoing chore. In part II of this three-part series, the author shows how to determine the financial break-even point of the practice.
The ultimate dream of private practice is to run a company that operates smoothly and efficiently and delivers the highest quality care, while maintaining financial
stability and profitability. Most practice owners start out with the best intentions to turn the dream into reality, but only a few succeed.
Too often, practices get into trouble when they begin to grow. During growth periods, people have a tendency to make quick decisions without planning. Everyone ends up working so hard that no one has the time and tools to evaluate the direction of the practice. As a result, practices get in trouble because they didn't look for the warning signs.
However, you don't have to fall victim to this kind of predicament. By using a few tools, you can evaluate the practice and stay on track.
One costly oversight that cripples small practices is the underutilization of objective measures from operational and management levels. It's not good enough to only know basic operational statistics, such as the number of patients you see and money collected. You need to apply analysis tools that compare production and revenue to operational expenses, which provides feedback about current business trends and offers insight into future expectations. In order to build a strong foundation, you need to track your break-even point and then use the information to create objective performance reviews.
Private practices struggle to reach goals because they don't have statistical drivers in place. One of the most important statistical drivers is the break-even point. Without this figure, you end up making marketing, operations and human resource decisions without knowing what the practice needs to prosper.
The break-even equation is relatively straightforward, but identifying variables can be difficult or deceiving. The textbook formula is: Total monthly fixed costs divided by reimbursement per visit-variable unit costs=break-even point.
Or you can keep it simple with another formula: Normal monthly operating costs divided by average reimbursement per visit=break-even point.
You need to know how many visits are required to pay the bills, with a little left to compensate for the risk you've taken as the owner. Calculating your break-even doesn't need to turn into a mathematical nightmare, as long as you understand which financial elements to add to the expense side of the equation.
For instance, many small practice owners opt not to pay for disability insurance and employee benefits. Cutting these expenses saves money in the short term, but it becomes a source of contention with employees and results in higher turnover rates. Instead, you should add these
types of short-term expenses to your break-even calculation.
In addition, you should also account for the current rate of inflation, merit raises for employees and the profit margin you'd prefer. Adding these "extras" helps plan methods of production to meet your ideal financial goals. If you beat production goals, then you can choose how to use the money.
Consider the case for adding these extras into your equation versus excluding them. If your fixed expenses are $100,000 and variable expenses are $20,000, your break-even point without extras is $120,000. If your average reimbursement per visit is $75, you need 1,600 visits to break even.
But if you add extras for inflation (1 percent, $1,200), merit raises (3 percent, $3,600) and owner's percentage (30 percent, $36,000), you need $160,800 to break even. Your required
visits jump to 2,144.
The difference between the two break-evens is more than 500 visits. Accurately calculating your break-even gives you the power to plan resources for future operations and make sure you can actually meet a goal of 500 more visits.
Take a look at the situation of one private practitioner. Jack got a better view of his practice when he decided to make operational changes after a bumpy period of growth. Jack's practice has two therapists and two people to handle the front desk, billing and collections. The practice sees an average of 480 visits a month, at an average reimbursement rate of $70 per visit. His break-even for monthly operating costs looks like this:
• rent: $3,000
• equipment loan/lease: $500
• payroll and benefits: $21,500
• start-up loan: $1,500
• supplies: $1,000
• utilities: $1,200
• other costs, such as marketing, insurances, meals and entertainment: $3,000
• inflation (1.5 percent): $475
• merit raises (3 percent): $951
• owner's percentage (30 percent): $9,510.
His total operating costs equal $42,636. Applying the formula, he needs 609 visits to break even: $42,636 divided by $70 = 609 visits.
At first, Jack was dumbfounded by this statistic because he couldn't imagine how the practice could add another 109 visits each month in order to hit his ideal financial goal.
However, break-even is a dynamic statistic that changes based on production outcomes and expenses. While it's important to increase production to meet the break-even, you also need to lower expenses to make production requirements more obtainable.
In Jack's case, he can reduce expenses for supplies to $750, cut utilities to $800 and lower the other costs to $2,000. He should also put objective measures in place for clinicians, billing and collections, to work toward increasing the reimbursement rate to $80 per visit. (This depends on clinical billing knowledge and effectiveness of time use.)
By making these adjustments, he reduces total operating costs to $41,417. After applying the
formula ($40,417 divided by $80), Jack needs 505 visits per month.
The new break-even shows that by cutting costs and increasing reimbursement, the practice only needs an additional 25 visits per month. He can accomplish this moderate increase by setting an objective measure for the front desk staff to increase the arrival rate of 85 percent to 90 percent. That minor adjustment should account for the extra visits.
Developing objective measures from the break-even becomes a useful motivational tool for your staff. With these measures, you have data to analyze trends in the staff's performance. You can set operational objective measures at levels high enough to achieve your break-even.
Putting objective measures into performance reviews gives clinicians visible goals to strive for and a reason to perform.
And reaching goals provides a sense of accomplishment. In a team atmosphere, the staff has objective measures to hold each other accountable.
To create an operational plan where operational measures contribute to the break-even, you should identify key statistics for each staff member. Some of these key statistics include:
• billable units per patient
• arrival rate for front desk staff
• percent collected vs. percent billed for your billing and collections staff.
Then, determine an objective measure for each statistic that yields sufficient production to meet your break-even number.
Using objective measures becomes a powerful management tool that gives you a solid base for making staffing decisions. And you can minimize the emotional flair that accompanies subjective reviews by referring to supporting objective measures.
By charting the progress of each staff member, you create an early warning system that let's you know if you'll hit the break-even. This gives you the power to makes resource changes quickly and proactively.
By calculating the break-even and creating objective operational goals, you develop an environment that demands teamwork, communication and accountability. You create a competitive advantage because the practice is proactive instead of reactive. And you establish starting blocks for solving problems, rather than assumptions that lead to rash decisions.
Turning that dream into reality is up to you.
Patrick Kinzeler, MBA, is president of a management and marketing services company in Phoenixville, Pa. He can be reached at firstname.lastname@example.org or (610) 917-1151.