Financial statement week has now extended into 2 ½ weeks of action, but it is an important enough topic (with still a lot more to go) that merit the extra time. Today, we show how we applied the knowledge gleaned from part 1, part 2 and part 3 of our series to solve some issues with an actual practice a few years ago (some of the numbers and the quarters contemplated have been changed somewhat, but the overall feel remains the same).
As always, we hope that the information here proves beneficial to you and the situations shown here might apply in some way to your practice, of if they don’t, at least get the juices flowing on potential solutions to issues that your practice may be facing.
To our case study bureau
DATELINE – Washington, DC
The situation – A one office, combination orthodontic practice and dental practice rested in a high traffic portion of our nation's capital. The doctor’s 5 quarter summary income statement looked like the one below. Annual revenue was around $1.35 million with operating income of $168,000. Most of that operating income was going to the bank for repayment on construction loans and to a part-time associate brought in to help with the patient load. Despite working very hard, the doctor enjoyed very little income. As always, when looking at a financial statement, we started with operating income and then worked our way into the individual expense line items.
Problem: Marketing expenses were out of whack. Not only did marketing expense run as high as 13% of revenue (not necessarily the main concern), but also the greatest marketing spending came in the weakest demand quarters – the 2nd and 4th. Fourth quarter spending was abnormally high because of a holiday promotion that produced nothing (see our post on seasonality). Second quarter spending grew as the result of a spring time offer that didn’t result in very much demand. At least, that was his guess because the practice did not monitor the results of their advertising programs. Spending dropped in the third quarter because the doctor and staff took vacations during that time.
Solution: Given the size of a market like Washington, DC, the high-than-normal expenses as a percentage of revenue were not of great a concern (but still a concern) as the spending being out-of-whack with demand. Holiday promotions were canceled and spending was rearranged to correspond with demand. More significantly, a strong monitoring system was put in place to see how ads were doing.
Now, the monitoring system doesn’t have to be anything fancy, involved or expensive. Someone just needs to track results. You can have certain large scale ads marked with a promotion code that the patient recalls to get some sort of benefit (discount, entry in a drawing, etc.). Despite its pitfalls when you are in front of the patient with multiple promotions, asking the patient how they heard about the practice can, by and large, prove beneficial as well. No monitoring system is absolutely perfect, but the point is not to be perfect. You want to have useful, actionable information and if there are some errors at the margins, so be it. After a period of time, collect the results and examine them to see what works. With the monitoring system in place, we were able to cull the advertising types down to the select few that produced the best results. This also enabled us to bring total cost down as a percentage of revenue.
The practice had also made a material investment in yellow page advertising. While we are certain that yellow page advertising works well for some practices out there, we simply do not advocate it, especially with the overwhelming presence of this thing called the internet. In this case, yellow pages were cut down to a bare minimum.
The problem: Other operating costs ran anywhere from 14-18% of revenue when we would expect costs to be half of that amount. Two major expenses jumped out as the culprits. First, the practice had an accounting firm handling all of the payables, reconciliation, statement preparation and other functions from the receipt of initial paperwork through tax preparation – all at a billable rate of $125 per hour. Second, the company had a consulting firm on board that collected fees on an hourly basis. Since the firm’s performance was not tied to the ultimate profitability or performance of the enterprise, the consultant had no incentive to keep costs down and reduce billing. As we discussed previously, the doctor is the last to get paid, not the consulting firm. The bills kept rolling in and profit keep getting dinged as a result.
There were some other smaller items like shipping, the fact that no one seemed to care about keeping the air conditioning at a reasonable temperature (the practice paid its own utility bills) and office supplies numerous enough to open a Staples franchise. If someone couldn’t immediately find something as simple as a pen, a whole new box got ordered.
The solution: First, we went at the issue of the accountants. We are people who recognize the importance, skill and value of the members of the accounting profession, but $125 an hour to make sure that the phone bill was entered and paid on time? The cost greatly exceeds the value of the service. Tying in to some of the employee cost issues that we’ll discuss in our next post, we took some of the mundane, simple tasks and set the office up with bill.com for payables management and Quickbooks (obviously, there are lots of ways to handle this and this is just one). Some receivables processes were returned to the practice as well. The CPA firm was retained, but with a different role.
The doctor did not want to terminate the consulting firm and we do not want to disparage the importance, skill and value of the members of the consulting profession. But something had to be worked out where the consultant was pulling on the same end of the rope as the practice. Instead of the hourly rate, the consultant’s performance was tied closer to the bottom line performance of the practice (in accordance with the local laws and regulations). As the last person to get paid, the doctor was certainly interested in the profitability of the practice and we wanted the consulting firm to feel the same way too. And if you are wondering why we were brought in when a consulting firm was already present, this particular firm had a new patient focus while we tend to embrace full practice issues.
For the other items, a simple solution was put in place. The office manager was offered a $100 monthly bonus for making sure that the utility bill dropped by 20% compared to the prior 12 month average. She was offered another bonus to make sure that office supplies cost fell. The next day, the office supplies went into a locked cabinet, ordering privileges were restricted and a locked box was placed over the thermostat. Even though cash would have to be paid out, the amount paid would be far less than the savings. We’re not suggesting that you can implement an incentive for every single little thing in the practice, but it’s funny how incentives work when tied to exactly the thing you want to control.
In our next post, we’ll describe how we tackled supplies and employee costs. Keep it locked in to www.MyPracticeEngine.com to find out how!
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