If you’re still with us, you’ve gone through part 1 and part 2 of the process to get ready to analyze your financial statements. Now, we are ready to get down to the hardcore analysis part to find what the numbers are telling us. Let’s take one more look at our sample statements.
Here’s one way to break them down. There’s no magic to the order in which you do these things, but going through each of the pieces we describe here will put you well on your way to identifying problem areas and putting a solution in place.
Evaluate percentages
If we look at the percentages in our sample practices versus our goal percentages, a couple of things jump out at us. First, employee costs for the third quarter of 2013 were 33.3% of revenue. That is substantially higher than our 21% goal percentage. If we were able to cut employee costs down to 21% of revenue, that would save us $36,000 per quarter, or $144,000 per year. That’s $144,000 per year to you, the doctor to keep or spend for your own personal use. We’ll mark that down to investigate further. For what to do with high employee costs, check out our podcast on the subject.
In addition to employee costs, marketing expense, at 8.3% of revenue runs higher than our 7% goal. Now, that’s not out of control and may be explainable by some of the factors we discussed in developing a marketing plan. Plus, it is the high-demand third quarter so putting some extra dollars into advertising during this time is fully expected. Just make sure you are comfortable with that number before moving along.
Clinical supplies at 10% of revenue also runs higher than our expectations. Are the shelves overflowing with supplies that you may not use for the next couple of years? Are there adequate controls on purchasing? Are you locked into a bad contract? Are you using cost saving measures like the MPE Purchasing Collective (yes, shameless pitch there, but a useful tool).
Compare quarters on an apples-to-apples basis
In other words, if you want to compare a quarter to another time period, the best one is usually the same quarter of the prior year (unless the practice is relatively new in which the same quarter of the prior year doesn’t exist or is very small – in that case, use the immediately prior quarter as a comparison).
Note the fallacy of comparing results from the first quarter against the fourth quarter (the lowest demand quarter of the year). If we just looked at revenue and profit for those two periods, we’d incorrectly conclude that things were growing fabulously when the results were, in fact, relatively flat to down when comparing the full periods.
You should always note the revenue comparison and trend in revenue. After all, this is your top line number and the ultimate restrictor on your total profit. If you have revenue of $50,000 in quarter, profit can only be a maximum of $50,000. If revenue is $300,000, your profit ceiling is clearly much higher. Revenue is either growing, shrinking or remaining flat. When you note what revenue is doing, you always want to mark down your plan for it – even if it is just to stand pat with your existing plan.
In our example, revenue has fallen from $319,000 in the second quarter of 2012 to $300,000 in the third quarter of 2013, a drop of almost 6%. In about 99% of circumstances, declining revenue is not a positive development so you will definitely want to address that area. We do a lot on marketing and revenue growth on the site, but feel free to ask us about your own particular situation.
Given a decline in revenue –very potentially caused by a decline in patient volume—any increase in expense should cause concern. Employee costs are up 10% while marketing and other operating costs are up slightly. If we’re spending more on marketing, but revenue is going down, alarm bells should be going off in your head. You want to make sure that your marketing plan is effective. Other operating costs could relate to the relatively fixed cost nature of the practice.
And jumps from a quarter to quarter comparison could simply be anomalies. That’s why you need to combine that analysis with an evaluation of trends.
Evaluate trends
Employee costs have steadily moved upward from $91,000 in the third quarter of 2012 to $100,000 in the third quarter of 2013. That’s an increase of almost 10%. Now, also consider that revenue has fallen over the same period. And throw into the mix the fact that we’ve see undesirable results in all 3 areas of our analysis when it comes to employee costs. Employee costs need to be red-circled, triple-starred and in bold when deciding what to evaluate.
Even though other operating costs appear to be relatively flat, they are trending higher in general. If our practice consists largely of fixed cost, I want to know why that cost is higher.
Sum everything up
From our analysis, we need to look more closely at the following
1. Employee costs – The percentage is too high, it is growing in the face of declining revenue, it is higher than it was in the same quarter of last year and it is our largest cost. This needs some focus.
2. Revenue – Revenue has fallen even though we put more dollars into marketing when comparing the third quarter of 2012 to the third quarter of 2013. Our marketing plan and the reasons for the revenue decline need further investigation.
3. Clinical supplies – Even though it is down a bit from the third quarter of 2012, it is still running at 10% of revenue. Will the trend continue? Do we need to make other changes?
Now, you’ve taken a sheet full of numbers and boiled it down to 3 key questions to be answered. Yes, there are other issues in there, but these are the big items. You obviously cannot solve all of the problems right away so it makes sense to focus on the major ones while keeping an eye on the others to make sure that they don’t mushroom.
Clearly, businesses are built on evaluating financial results, investigating problem areas and offering solutions to those problems. We, are of course, happy to do that for you –usually at no charge-- while providing all of the nondisclosure guarantees that make you feel comfortable. Or, you may just want to talk to someone as you do this analysis yourself. Either way, feel free to contact us.
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