Every year at your annual check-up, your doctor probably recommends routine lab work to ensure you’re in good health. Just like your doctor, you should be routinely checking your financials to monitor the health of your practice.
If your lab work comes back and reveals you have a high white blood count, low hemoglobin, or high cholesterol, you probably know that this is bad news and that you’re going to have to make some adjustments to your lifestyle.
But what should you be looking for in your financial data?
Overall, your financials will obviously tell you a lot about your practice, however, analyzing even just a handful of numbers and doing some simple math will provide plenty of insights. Key Performance Indicators (KPIs) are the specific measures we use to determine the health of a practice. We then compare your practice KPIs to the “benchmarks” or “industry averages” to identify any successes, concerns, or areas for improvement.
1. The Math
I know math can be scary for some people. Not everyone is a numbers nerd like me. However, math is the language of business and I’m going to help simplify it for you. Here are a few of the most important numbers you want to identify and understand what they mean:
Income/Sales – The amount made on selling products or services
Cost of Goods (COGS) – The amount it costs the practice for the items sold or services rendered
Operating Expenses – All costs associated with running the practice
Now we’re ready to calculate some KPIs:
Income – COGS = Gross Revenue ($)
Income ÷ Gross Revenue = Gross Profit Margin (%)
COGS ÷ Gross Revenue = COGS Margin (%)
Gross Revenue – Operating Expenses = Net Income ($)
Net Income ÷ Gross Revenue = Net Profit Margin (%)
Operating Expenses can be further broken down to show the percentage spent on specific items like payroll, marketing, or rent. Talk to your Account Manager about getting a Monthly Financial Analysis for this level of detail.
2. The Measure
Time to compare your answers to industry benchmarks! We find the most successful and profitable practices have KPIs in these healthy ranges:
Gross Profit Margin = 60-65%
COGS Margin = 35-40%
Net Profit Margin = 10%-15%
Remember to check your work: Gross Profit Margin % + COGS Margin % = 100%!
3. The Interpretation
Now that the math is done and you’ve compared the numbers, it’s time to read the results. Obviously, the benchmark ranges are the sweet spot, but let’s define what it means to be outside those ranges.
Above Average is GOOD when its…
Gross Profit Margin – You are more profitable than the industry average
Net Profit Margin – After expenses are paid, your practice has a healthy bottom line
Below Average is GOOD when its…
COGS Margin – Your prices are set well; you realize a healthy profit on each sale
Gross Profit Margin and COGS Margin have an inverse relationship. If you find that ether is outside the ranges described above, a Pricing Analysis from CQ Partners can identify areas where small adjustments could be beneficial.
Congratulations, you just analyzed your financials!
This is a great start in understanding what your numbers are telling you and identifying potential areas for improvement. By continuing to regularly track and analyze metrics such as Opportunity Creation, Unit Sales, Third Party Attendance, and Closure Rates, you can make the necessary adjustments to help more patients and increase revenue.
For a deeper dive into your practice’s finances, talk to your Account Manager about taking advantage of Consult Tracking. Our business analysts are industry pros when it comes to providing actionable business intelligence—from breakeven and territory analyses to compensation plans and monthly tracking reports. CQ Partners also has several tools that can help you track your finances, including Wake Up Call and the Pro Forma tool, which you can access anytime via Navigator.
Start evaluating the financial health of your practice today!