How do you know if your business is performing as well as you expected? What financial metrics do you use to determine whether you are meeting the expectations you have set? If your business is doing well, how can you improve it to do even better? If your business isn’t performing well, what levers should you adjust in order to better meet your goals? The answer to most of these questions can boil down to three major categories: Revenue, Fixed Costs, and Variable Cost.
In order to understand revenue, you must know your payer sources. Let’s assume they fall into these buckets:
1. Client payments
2. Commercial insurance
3. Government funding
If you have government or commercial contracts, understand what your reimbursement rates are for various CPT codes, then start projecting how many encounters you can realistically complete in a day, week, month, and year. Then factor days without encounters into your projections:
How many days will you…
- Take for vacation
- Take for conferences or CE
- Need for sickness of family care
Once you have a sense of the types of CPT coded services you will provide, the corresponding reimbursement rates, the number of encounters you will have, you can then do some simple math to understand your total projected revenue.
“Sunk costs”–costs you will have to pay regardless of the amount of revenue you make in your practice–are your fixed expenses. Items that typically fall into this category are:
- Rent of Mortgage Payment
- Telephone and Internet
- Legal Fees
- Malpractice coverage
- Subscription, etc.
Becoming familiar with and understanding your fixed costs will put you in the best position to either maintain or proactively minimize these expenses.
Your variable cost is how much you want to take home in a year. If you’re in group practice, this cost is what you will pay your providers in a given year. Variable costs consist of three main components: gross pay, payroll taxes, and benefits:
- Gross pay is the actual dollar amount that is paid out
- Payroll taxes are self-employment taxes if you’re a solo practitioner. If you have a group practice, the payroll taxes are the “employer responsibility” of federal, state, and local taxes that may have to be paid on behalf of each employee
- Examples of costs associated with benefits are: medical insurance, dental insurance, retirement plan, short & long term disability, and transportation/parking pass
The true variable cost is the number when all three of these components are added together – that is the true “cost” of either being your own employee or having employees.
Once you have your finger on the pulse of revenue, fixed expenses, and variable costs, you now can create a simple equation:
Profit = Revenue – (Fixed Expenses + Variable Expenses)
More specifically, you can determine what the specific margin is per provider with the simple equation of Revenue – Variable Cost.
The sum of all your provider margins has to be greater than your total Fixed Expenses in order to be profitable! Once these metrics are understood, a practice owner is in a much better position to monitor goals and best understand your progress towards achieving them.
Having the right practice management system in place goes a long way towards understanding the financial metrics of your practice and exceeding the goals you’ve set. Click the button below to see a demonstration of the uniquely integrated practice management system built by Valant.[DEMOCTA]