What do you think is the number one mistake practice owners make? Not charging enough, working too little, working too much, too few employees, too many employees??
In truth, all of these can be a problem but the NUMBER ONE MISTAKE practice owners make is not knowing the breakeven point of their business. Do you know exactly how much revenue the business has to produce each month to pay the bills? The breakeven point occurs when the business is neither making nor losing money. In other words Revenue = total expenses. Of course the goal of every business should be to make a profit over and above the breakeven point.
I was talking with a new business owner recently who had fulfilled her dream and opened a restaurant. The business had grown faster than expected and she was struggling to keep up. She had hired several new employees to maintain a good service culture and the increased expenses had forced her to take out a loan to cover expenses. She wasn’t able to pay herself but she was quite certain that when business increased, she would be able to pay back the loan and start taking a nice salary. However, she really had no idea how much revenue she needed to operate the business and to generate enough excess cash to pay back her debts and to be able to pay herself a salary.
Unfortunately, this is not an uncommon scenario in new and even established businesses. We are so busy working and trying to attract new customers that we lose track of how much revenue we need to generate each week or month or even day to keep the doors open. We hire a new employee and don’t take the time to calculate the additional revenue needed to pay that salary. Suddenly, we find ourselves working more and more hours and at the end of the month, we don’t have the extra cash we that we thought we would have.
I remember the turning point many years ago in my business life when I realized that my patient care coordinator made more than I did. Sure there are perks I wasn’t counting that business owners can take advantage of, but I knew I should have a bigger “take home” than what I had. That’s when I decided that my focus had to be on tracking my numbers and knowing what it took to run a profitable business. It’s not much fun to work your butt off and then not to have enough money to pay yourself a salary that your education and experience and the work load deserves.
There are a number of ways to determine the breakeven point for a business and your CPA can certainly help with that. A CPA typically provides profit and loss statements every month or at least every quarter that actually tell you whether you are generating enough revenue to pay all of your expenses or you can certainly produce these yourself through QuickBooks.
One simple formula for calculating the breakeven point of a business uses fixed costs and gross profit margin. Fixed costs exist regardless of how much revenue is generated. They include expenses like rent, employee wages, utilities, insurance, telephone, internet – bills that exist and have to be paid each and every month. Cost of goods is certainly a big factor in determining profit margin in a hearing healthcare practice as most practices derive significant revenue from hearing aid sales and services. The cost of goods is determined as – Unit cost/Selling price = Cost of goods sold and the goal should be to keep the cost of goods less than 35% when using a bundled model of pricing. If the cost of goods is higher than 35% then you will need to either raise prices or negotiate better pricing to reduce the cost of goods.
A break-even analysis is essential in establishing pricing of hearing aids and also the price for services delivered. When you know exactly how much revenue the business needs to generate to break even, it’s easier to set long term goals. For example, if you want to expand your business and move into a larger space with higher rent, you can determine how much more you need to sell to cover new fixed costs. If you know how many units you need to sell or how much money you need to generate to break even, it can serve as a powerful motivational tool for you and your team. Setting a goal of what the business needs to produce makes hitting a target so much easier.
There are many great resources and sample worksheets available on the internet to help calculate the breakeven point for a business.
Working harder and not being able to pay yourself what you believe you are worth is not very satisfying. Take some time this week to find out the break even for your practice. The payoff will be worth it.