What is the profitability of my Practice?
How can I determine the profitability of my healthcare practice?
This is a common question healthcare practitioners often ask. Understanding the financial health of your practice can be complex, as it involves various factors beyond simply looking at your revenue and expenses. Let’s explore how you can assess the profitability of your healthcare practice more effectively.
Firstly, it’s essential to consider any startup costs that were incurred when establishing your practice. Whether you financed these costs through an initial investment or a loan, it’s crucial to account for their repayment in your profitability analysis. Loan payments are considered as part of your expenses.
To calculate your profitability, you can use the formula: [Revenue – Expenses = Profit]. Revenue refers to the income generated from your services, which may include immediate payments from point-of-sale transactions, payments received on a schedule or from a medical aid. However, it’s important to remember that not all income may be immediately attributed to your practice. For instance, if you’re a healthcare provider, you may be waiting for payments from medical scheme reimbursements or other delayed payment sources. Therefore, it’s crucial to evaluate profitability in both the short and long term by examining monthly and yearly income statements. This helps you understand if your current work will generate income in the future.
Expenses encompass the costs associated with running your practice. This includes the cost of providing services, labour, and overhead expenses. Overhead expenses comprise rent or bond repayments, utilities, equipment rental and repair, and insurance. Some expenses remain fixed month to month, while others increase as your practice grows, such as salaries with the hiring of additional staff. Conversely, certain expenses may decrease as your practice expands, such as per-unit cost reductions for ordering medicines or consumables in larger quantities. Ensuring your expense report is updated regularly will ensure accuracy in your profitability calculations.
Another crucial aspect in determining profitability is the cost of goods sold (COGS), which can be calculated as [Revenue – Cost = Profit]. COGS includes the costs associated with labour, materials, and overhead. Once you determine your COGS, you can calculate your profit margin. It’s essential for your profit margin to be sufficient to cover expenses. If your profit margin is low, you may need to focus on increasing patient volumes. If you notice a decreasing profit margin over time, it may be necessary to consider raising prices or reducing costs.
There are several strategies to enhance the profitability of your healthcare practice. Identifying and prioritising patients who bring in the most profit is one approach. Calculating the profit margin on an account-by-account basis can help you understand which patients contribute the most to your practice’s financial success. Devote your time and resources to nurturing these accounts. Additionally, look for opportunities to reduce expenses. Negotiating better interest terms with lenders can help reduce loan payments, while actively seeking favorable deals from vendors can lower your overhead costs. Regularly review and renegotiate contracts as your practice grows. Implementing small changes can bring your practice closer to profitability faster than you may anticipate.
If you have any further questions or need guidance specific to your healthcare practice, please don’t hesitate to reach out. We’re here to support your journey towards financial success.