Divide and prosper
You can manage your revenue and costs effectively by using key ratios to monitor them. But to carry out a ratio analysis you need the basic financial data, including the level of activity. If you have already calculated your breakeven level then you already have this data.
The ratios to use include the following:
• Efficiency. By dividing the profit figure by the turnover figure, you can get an indication of how much effort you have to put in to deliver your actual income. This should be very revealing. The opposite ends of the spectrum might be described as ‘busy fools’, where a lot of activity generates a small profit, to the ‘idle rich’, where relatively little input generates large profits. This is also known as the profitability ratio and you can use it to compare your performance with that of other, similar practices.
• Hourly running costs. By dividing the overheads and costs by the number of available earning hours, you can get a better understanding of what it costs you each hour to run the practice. Hourly running costs can be calculated for major practice expenses such as staff salaries, rent and so on or, ideally, by grouping such expenses into fixed and variable overheads. By calculating these costs in terms of variable and fixed costs per hour, it will show what you must earn as a bare minimum just to break even.
• Hourly profit and loss. If you show your hourly running costs as a pie chart, it will help your understanding of hourly performance. You may be able to translate this visually as a clock and see what stage in each hour you start to make money. In the pie chart shown, it can be seen that, until just after 35 minutes past the hour, all the activity is consumed in paying overheads, costs and the laboratory. Only after that time is profit generated. Alternatively, if the chart represents the eight hours of a working day, you can see that the practice begins to make profit only after the first five hours.
To improve these ratios, you can use others such as key expenses (materials, associate, lab fees and so on) as a percentage of revenue and compare them with industry averages to work out if these costs are out of control.
This will enable you to focus your efforts on costs that need particular attention. You may not be able to reduce all your costs, since some may be at their optimal level, so it is important to identify the ones to focus on.
In managing revenue, the hourly profit and loss ratio will help you identify your minimum hourly income. This figure can then be used to set the ideal hourly target. Once you have set this target, you need to look at factors such as the practice fee list, occupancy rates and so on, with a view to improving the hourly income. Although private practice owners have greater control over the practice’s hourly income, NHS practice owners will not be able to alter it since their annual income is set in the contract.
But to maximise their hourly income, NHS practice owners could look at areas such as available earning hours. These could be planned out to accommodate the optimal number of patients per hour. This takes tighter scheduling of appointments, enabling the practice owner to cut down idle time between appointments and possibly reduce the available earning hours. This in turn will enable NHS practice owners to reduce certain variable costs that can be directly attributed to available earning hours or, in other words, surgery opening times.