Where is Your Net Profit?

You’ve worked hard all week; the office atmosphere is rife with discipline and brisk efficiency. The staff have been getting along with one another and you are proud of the team spirit they’ve both individually and collectively demonstrated. In fact, your staff has almost read your mind and anticipated your every need. All of the patients have arrived on time for their appointments, and the majority of them have even heeded your advice and accepted your treatment plans!

Now it’s Friday afternoon; the staff has received their paychecks, which reflect production bonuses that you’ve doled out in appreciation of their contribution to the overall increase in production. But then you look at your bank balance and you’re surprised and sorely disappointed at the lack of funds left over for you. What happened?

Where is your net profit? Did you work hard all week just to earn less money? The bank balance should be going up, not down!

You wonder if it’s worth all the effort. All of that increased production might just have landed you into a “higher office-overhead/higher tax-bracket” situation. It’s that frustrating income vortex — the place where, despite producing and collecting more, you take home the same amount or less. And following a few of these “successful” weeks, you shake your head and realize that if you endure much more of that kind of success, you’ll go broke! So, what should you do?

Let’s start by taking a look at the myriad of possibilities of what might have occurred that resulted in your not having any profit for yourself:

Management Issues:

  • Could you consolidate loans for equipment and/or your practice into just one loan, in order to reduce your monthly loan payment and possibly the interest amount?
  • Can you reduce the amount of inventory the practice maintains?
  • Are you collecting your Accounts Receivables with minimal aging? Do you collect at least 97% of the amounts billed?
  • Do you have any sort of monitoring system that helps you to know at a glance, statistically, who is productive and who isn’t?
  • Do you have written office policies that are known and enforced?
  • Does each position in the office have a fully delineated job description?

To learn the 8 staff-related issues that can plague you and adversely affect your net income read the final half of this article by filling out this form (Highly Recommended).

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Looking Toward the Future: How to Make Your Practice Salable

If you are a practice owner, you should know that, in most cases, getting in is easier than getting out. That is, exiting a practice is often more difficult than building it. Exiting is a process, not an event, that should be planned far in advance of the day you turn the keys over to someone else.

The factors that make your practice salable include a good management team, steady profits, patient/client loyalty, a solid reputation, predictable transferability and much more.

With these factors in mind, let’s look closely at ten vital actions that you should take NOW, so that when the time arrives, you will have developed a truly marketable and valuable practice.

  1. MAINTAIN STRONG REFERRAL SOURCES

Professional relationships add tremendous value to a practice. Do professionals in your community routinely refer their patients/clients to you? If so, are those relationships so strong that you can bridge them over to a new owner?

For example, if you have several professionals who reliably refer a significant number of patients/clients to you, you would want to ensure that those referral sources will continue to send patients/clients to the new owner. Otherwise, your prospective buyer might want to factor in a sale price reduction that takes into account the loss of the projected income represented by those referral sources.

Most professionals will continue to refer to the practice after your departure, as long as they are assured that the clients/patients they refer will receive the same good care that you currently provide them. It is also important for your referral sources to know that the new owner will reciprocate with referrals to them (if that is the type of relationship you currently have).

Maintaining your referral relationships and then transferring them to a new owner during transition will help your patients/clients too. By doing so, you maintain both continuity and quality of care for them, and that fosters tremendous goodwill.

  1. MAINTAIN FACILITIES AND EQUIPMENT

Generally speaking, people are inclined to pay more for something if it looks attractive. The same principle applies when buying a practice. If your facilities are pleasing to the eye, you might be able to command a higher price. While a clean carpet is only just that, it might demonstrate to the buyer that every aspect of your facility and practice is probably well maintained.

Well-maintained, state-of-the-art equipment also speaks well of you. It says that you have a growing practice that is keeping in step with technology.

  1. INCREASE YOUR GROSS SALES

The best indicator of the value of a practice is its cash flow. Your successor will want assurance that he is acquiring a reliable income stream. Now is the time to concentrate on reactivation of old patients/clients, increasing your marketing budget to attract new patients/clients, setting goals for the staff and moving the practice toward maximum productivity.

  1. IMPROVE YOUR BOOKKEEPING RECORDS

Part of selling a practice requires that you develop and present an accurate picture of what you have accomplished. In order to command the best possible price, you must be able to prove that the practice is highly profitable.

Plan to have at least five years’ worth of strong financials as the buyer wants predictability. Have an accountant prepare “compiled statements.” That lends credibility. The practice buyer will want well-maintained, accurate accounting records to help with future planning. Additionally, thorough records can even help you explain a slump period.

  1. DECREASE OVERHEAD EXPENSES

Analyze your payroll, department by department, function by function, employee by employee. If personnel are underutilized, eliminate a job position and reassign its duties to other employees.

Improve your bookkeeping procedures so that you can readily and accurately track your expenses and potentially cut them. Eliminate nonessential monthly expenses, taking care not to hinder expansion activities. Keep a close eye on your discretionary expenditures, such as advertising, travel, new equipment, seminars, utilities, telephone, etc. By decreasing the overhead of the practice, you will consequently improve cash flow and thus be likely to sell your practice for a higher price. You gain a tremendous amount of control by just knowing where your money is coming from and where it is going.

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Cutting down Costs vs. Increasing Production

Pretty much every owner wishes to increase their net income. Factually, there are only two ways to accomplish that: (1) cut back on expenses and (2) increase production. Now, while it is wise to do both, you might be surprised as to which one generates the most profit. Let’s take a look.

We’ll examine a single-doctor practice that is grossing $600,000 per year and we’ll set the following two parameters:

  1. If the practice runs efficiently, it could generate $1,000,000 per year.
  2. In this particular profession, the staff salary is supposed to be 22% of the gross, but is currently running at 26% – 4 percentage points above the conventional norm.

If the executive pared their staff salary expenses down to the norm (i.e., reducing it from 26% to 22%), that would increase profit by $24,000. Not bad.

But what would the profit be if the executive were to focus on expanding the practice up to the $1,000,000 mark? At that higher level, there would be an additional $400,000. Obviously, not all of that is profit. But how much of it is?

To sort this out, you would need to look at the difference between fixed costs and variable costs. Fixed costs are those that remain constant, regardless of the production level. Rent, certain insurances, license fees, etc., are expenses that are the same amount whether the practice produces $1 or $1,000,000 per year.

Variable costs, on the other hand, are costs that vary with production. Depending on the type of practice, the two greatest variable costs are 1) payroll and 2) either inventory or lab/clinical supplies. Combined, they represent anywhere from 40% to 50% of income, depending on the profession. There are a few other variable costs that will increase the percentage slightly; but for the sake of ease of explanation, we’ll focus on just those two costs.

Let’s factor in the fixed and variable costs to this $400,000 increase and see what our profit is. First, the fixed costs have already been paid from the original $600,000 income; you obviously don’t have to pay more rent because you earned an additional $400,000. The same is true of the costs of the annual license fees and probably accounting, legal and other such fixed expenses. Those bills have already been paid.

The only additional expense you incur when you produce an extra $400,000 are the variable costs. We’ve already calculated that the combined fixed and variable costs will be as much as 50% of production; so, producing an additional $400,000 will cost $200,000. The remaining $200,000 is profit.

While the choice may be abundantly clear, let’s take a look at the ramifications of the direction you decide to take and the effect that it could have on both you and your practice. Read the final half of this article by filling out this form.

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How to Guarantee a Satisfactory Retirement Fund

It is never too early in your career to start funding your retirement. You may only be one day out of school, but you should be thinking about and planning out a retirement fund.

We have found from our surveys that an ongoing decline of interest in practice ownership is making it increasingly difficult for practice owners to sell their practices, and this is causing many doctors to work in their practice years after they wanted to leave.

Unfortunately, less and less new graduates want to own a practice. More of them are looking to become associates in a practice, work 35–40 hours a week and start out with full benefits.

As part of my research, I recently spoke to a doctor in Ohio that was at retirement age. He had been in practice for over 38 years and was ready to retire. I asked him if he had adequately funded his retirement, and he told me that he had always thought that when the time came, he would sell his practice and have plenty to retire on. He found out that he was mistaken.

When I talked with him, his practice had been up for sale for over 3 years, and he couldn’t find a buyer. And of course, he was still working as he had not adequately funded his retirement outside of a practice sale. He was counting on the sale of the practice to handle his retirement. He found out, way too late, that such a plan is not always workable.

I’m hearing this story more and more from doctors all over the country.

Here are a few things that you can do to protect yourself from this situation:

  1. Place a portion of your monthly overhead into your retirement fund. Budget this in from the start. Retirement is something that needs to be figured into the overhead so that it is taken care of every month. Treat it as you would an equipment lease, a mortgage or employee salaries. Make it an ongoing expense.
  2. Find a financial planner that can properly advise you on what to do with the money that you set aside each month. Get a professional involved to help you find the best vehicle for your retirement plan.
  3. Own your practice real estate. This is a big one. Real estate is something that you can always fall back on. Even if you can’t find a buyer for your practice, you can sell real estate. If you own the building, and you find someone to buy the practice, you can lease the building to them and make a residual monthly income off the lease and have that extra income.

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12 Steps to Collect Past Due Accounts

Collecting on past due accounts is a function that the Accounts Manager will find herself/himself having to do. Any contact with a patient/client, even under these circumstances, should be kept on a friendly, professional and dignified basis. This will promote respect for the office and its business practices.

Always remember the following points with regard to your patients/clients:

  • Most people have good intentions and want to cooperate with agreements that they have made.
  • Although a person’s account may be overdue, most people still have a good intention to take care of it.
  • Most people prioritize their bills and will first pay those that they feel are most pressing.
  • Most people with past due accounts will pay those bills where someone is actively requesting them to pay.

Bearing in mind the above, your role is to arrange to be one of the creditors that your patients/clients will not delay paying. The following points may be helpful in this regard:

  1. Bill promptly every month.
  2. Ensure that your bills are accurate.
  3. Ensure that you have the original signed financial agreement from your patient/client.
  4. Contact the patient/client as soon as you realize the account has become delinquent.
  5. When you speak with the patient/client, let them know that you believe that they are able to make payment.
  6. Let the patient/client know that you expect to be paid, and refresh their memory on the signed agreement.
  7. Allow the patient/client their self-respect; never back them into a corner, insult or badger the patient/client.
  8. Explain to the patient/client that you want to help him/her work it out so that they can maintain the agreement that they made with your office.
  9. Be prepared to offer some options to the patient/client that they may not have considered.
  10. Be willing to really communicate with the patient/client so that a true understanding and agreement can be reached.
  11. If absolutely necessary, utilize the credit reporting associations. Let the patient/client know that you are planning to do so and that this will go on their credit rating.
  12. As a last resort, utilize the services of a collection agency, and let the patient/client know that you plan to do so.

If you would like more information on collecting past due accounts or any other management topic, fill out the form to your right, and we will be more than happy to assist you. Scroll to top

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