When we last left our story, we had a summary income statement, prepared on a consistent basis that looked like this:
What can we tell from this statement? Not much. Is $300,000 of revenue good for this practice? Given this statement, we really don’t know. We can compare to absolutes (e.g. revenue of $100,000 per month is pretty good). But if the revenue for this quarter represents a drop of $75,000, there are problems to be addressed. To set us up for effective analysis, we need 2 more pieces:
Evaluate expenses as a percentage of revenue
One very simple, effective way to get a feel for how well your practice is performing is to set up a schedule that computes each expense as a percentage of revenue. Quickbooks and all other major accounting packages do this for you when you run certain types of income statements. What you need to do is to be able t compare those percentages to a benchmark to determine if you have a problem that needs to be addressed or an error in the data. For a practice that has been in business for at least a year-and-a-half, here are some benchmarks that we’ve used for a practice charging lower than average to average fees with high than average volume that have proven to be useful time and time again:
Employee costs – 21%
Marketing/advertising – 7% (see our earlier post on the reason for this number)
Rent – 8% *
Clinical supplies – 7%
Lab expense – 2%
Other operating costs – 9%
If you’re practice is just starting up, you can use these percentages as goals to be reached. If you are doing better than these percentages in any area, you can use your own practice’s history to set benchmarks or we can work with you to set them for your own unique situation.
*Having a goal percentage for rent is not really super useful because once you sign the lease, the cost is basically locked in and you don’t have much control over that amount. We set a goal percentage here to give you a simple measure of whether or not the volume in your practice merits the rent being paid.
Other advisors will give you their own set of goals to achieve or you may set your own. The point is to have something against which you can compare your numbers.
Now, the percentages alone do not help us to perform our analysis. For example, we still haven’t answered our initial question about that $300,000 revenue number (it’s always 100% of itself so percentages really don’t help). We need another piece.
History
If we add some previous quarters to our schedule, we can see how we’ve done compared to prior periods. We’d recommend including a total of 5 quarters (including the current one) in your analysis. Why? Because this goes back far enough to include the same quarter of the previous year. This allows us to compare how we did in our business for the most recent quarter against the same quarter of the previous year. Given the seasonality in the business, you get some of your most effective comparisons when you compare periods in which the economic and business environment are the same.
In addition, having 5 quarters worth of information allows us to look at trends. Are employee costs growing? Did our new plan to control supplies cost actually result in a declining trend in supplies cost? And whatever else.
Employing the simplification of data, percentages and history screams for one to have a spreadsheet set up and then just add quarterly information as it becomes available. Or, just have a service suck up your accounting data and post it to the internet for you to view without forcing you to do a lot of legwork. We can do that for you and so can a lot of others.
If we build on our sample using the concepts in this post, our sample financial statements now come out looking like this:
In our next post, we’ll do the actual analysis on these numbers to give you a feel for the full process.
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