Whether you realize it or not, your business has a report card. Knowing how to read it and regularly reviewing it will empower you to control the performance of your business. Knowledge is power. It’s a cliché because it’s true. The more informed you are about the performance of your business, the better equipped you’ll be to make smart, strategic business decisions.
The report card in this case is your profit and loss statement (P&L), sometimes referred to as an income statement. When I start talking about P&Ls, often people’s eyes glaze over or they tell me “I’m not a numbers person.” The good news is – you don’t have to take a complex accounting course to glean helpful information from your P&L. However, as a business owner it’s important to understand the big picture of what it is: a report that shows the revenues and expenses of the business, and resulting profit or loss, over a specific time period (a month, a quarter, or a year).
Why is that important? And why can’t we just rely on your bank statement to tell us your profitability? Well, for a few reasons. The most important being that the P&L is the linchpin of the strategic planning process.
Step #1: Gather Information
Without a P&L, we either get stuck at Step One and can’t move forward, or we are forced to make some assumptions that may or may not be true, and therefore, compromise the validity of the rest of the process. With quality information from the P&L, you can gather several Key Performance Indicators (KPIs) that can then be compared to recommended benchmarks, including:
- Average Selling Price (by payor types – private pay/insurance/third party administrators)
- Average Margin per Unit
- Gross Profit Percent
- Expenses as a percent of revenue (i.e. advertising, payroll, rent, etc.)
- Net Profit Percent
The analysis of these KPIs will give you an understanding of the financial health of your business above and beyond how much money is in your pocket at the end of the year.
Step #2: Identify Goals
Anyone who has read Stephen Covey’s bestselling book, 7 Habits of Highly Effective People, knows that you should always “begin with the end in mind.” So that means that before we can make a plan, we need to know what we are trying to accomplish. My question to you would be: How much revenue do you want your practice to generate? This is about the time that people switch from the glazed eyes to the dumbfounded look, and I often hear them say “I have no idea what’s even possible.” If you consider yourself to be one of those people, here are some guidelines that I would offer:
- Start with either your current revenue level or break-even point (the point at which you’ve covered all of your expenses and begin making a profit, which we can help you calculate).
- From that number, you should increase your revenue to the next desired level. When considering how much to add, consider either a percent growth rate or define the amount of money by which you need to grow to cover additional expenses. For example, are you looking to:
- Pay off debt?
- Incur capital expenditures for additional staff, locations, or renovations?
- Purchase additional equipment?
- Make personal investments (i.e. child’s college fund, retirement plan, buy a vacation home, etc.)?
When considering these or other factors, don’t just think short term. Whether you’re preparing the business for sale or planning to work in it for many years to come, we recommend identifying one, three, and five-year revenue goals.
As part of this process, CQ’s P&L analysis tools and goal setting procedures will help you to create what we call Pro Forma P&Ls, meaning that they are projections of the future. As a result, you will have a figurative map with a big red star that says “you are here” at point A (current financial status) and pins at points B, C & D, which represent your destinations (financial goals).
Step #3 & #4: Devise Strategies & Implement the Plan
When choosing which strategies to implement, your CQ Account Manager will help you quantify the financial impact of each option so that you can prioritize those that will have the most significant impact on both operational effectiveness and financial performance. Any changes to your processes, procedures, or marketing efforts should move you in the right direction toward achieving the agreed upon goals of your Pro Forma P&L.
Step #5: Track Results
While there are several additional KPIs that are important for measuring progress and evaluating behavior-based performance, the P&L should be prioritized as one of the tracking mechanisms reviewed on a routine basis. As a parent, I pay close attention to my kids’ school report cards. I don’t want to wait until the end of the year to know how they did on any given subject. I want to know as often as possible how they are performing and whether or not there are specific subjects that need special attention to get them up to the scholastic levels where I expect them to be. In order to do so, I’ll either work with them myself or hire a tutor to make sure that they are getting the attention and support that they need and deserve. That way, by the end of the school year there are no surprises from final grades, and I know that I’ve done everything that I can to help them succeed. Why would you treat your business any differently? By reviewing your P&L monthly, you’ll have an indicator of which areas need your attention and focus so that you can either fix it yourself or utilize your CQ Account Manager to help, leaving you with no surprises and the security of knowing that you’ve done everything within your power to attain the goals you set out to accomplish.
Another frequently asked question at this stage: “Is a monthly review really necessary? Wouldn’t quarterly be okay?” Sure, quarterly is better than semi-annually or annually. But if you’re looking at your P&L monthly, and other tracking indicators even more often, then you have the luxury of knowing that you haven’t let too much time pass in case you’ve gone off course. If you wait too long, you may not be able to make up the lost revenue in time to achieve each target as scheduled.
Step #6: Evaluate the Plan
Once you know how well you are tracking toward goal achievement, you can re-evaluate the plan itself: Are your goals still realistic? Is there anything that has thrown a wrench in the plan that requires you to re-evaluate? For example: Are you down a provider unexpectedly? Has your provider mix suddenly shifted due to a windfall of insurance or TPA patients? Did a pandemic strike the entire world and shut down the business for several weeks/months? In times like these, it’s critical to understand the impact on your P&L. You’ll need to re-consider your goals for the year, conduct a cash-flow analysis and catch-up analysis, and revise your business plan accordingly. Don’t worry if you don’t know where to begin with these tasks. That’s why you have a CQ Account Manager.
A healthy P&L is important not only for the business owner, but for all of the stakeholders of the business. That includes the business owner/administrators, the employees, the patients, and by extension, the families of each of those individuals. By focusing on the financial health of your business and ensuring that you’re doing “All The Right Things,” you’re also doing the right thing for those who rely on your business to maintain their quality of life; whether it’s by means of a paycheck, better hearing, or improved communication with a loved one. Many people rely on your business to support them, so make sure that routine review of your P&L is part of your future plan to keep it healthy and thriving.