PTPN Insights

How to calculate your cost of doing business: A Q&A with Michael Weinper, PTPN CEO and President, part 2.

May 22nd, 2013 |

How to calculate your cost of doing business. We recently sat down with PTPN CEO and President Michael Weinper, PT, DPT, M.P.H., to discuss calculating the cost of doing business. Michael is also the owner of Progressive Physical Therapy, a private practice with four locations in Southern California. In part 1, published two weeks ago, we discussed why you should know the cost of doing business in your clinic. Today’s post looks at how to calculate your cost of doing business.



What is the most important cost that an owner of a clinic should know?
You need to know the basic cost per visit you need to cover in order to stay in business. The basic cost could be defined as taking all of your expenses that you have in a year, and dividing them by the number of visits during the year. This is crude, but it’s also very easy to calculate. It can be done by any period of time — week, month or year.

Your cost per visit can vary month-to-month, and it will, because if you treat more patients while your other expenses (labor, rent, etc.) stay constant, your cost per visit will go down during that month. On the other hand, if you have fewer visits, your cost per visit will go up.

Are there “hidden” costs that an owner might be more likely to overlook when calculating total costs?
The simplest way to look at all costs is to look at your profit/loss statement, which should be generated every month. You need to be cognizant of that on a monthly basis. Be sure to include expenses that occur once a year, as well as things that are quarterly or monthly, including:

  • Advertising
  • Network or professional association dues
  • Medical or office supplies
  • Employee benefits, like CE costs
  • Accounting fees
  • Utilities
  • Infrequent insurance costs (workers’ comp, malpractice, liability/fire/theft)

You should also be looking at your cash flow analysis: money in, or income, minus money out, or expenses, equals profit or loss.

Also, consider depreciation. It’s not a real number, but it should show up on your profit/loss statement. It’s an expense, reflecting the reduction of the value of your equipment and tenant improvements. They’re worth less and less every month. The IRS publishes a schedule of how to calculate depreciation; you can download it here.

Do I need to calculate revenue per visit as well?
Yes, you also need to look at revenue, or income, per period, and divide that by number of visits, to see if your income per visit exceeds your cost per visit. To be sustainable in the long haul, your average income per visit has to be more than your cost per visit, or you’re losing money.

For example, let’s say you had 500 visits, and your income for that month was $50,000. To calculate what you took in per visit, divide the income by the number of visits, or $50,000 divided by 500, for $100 per visit. As long as your expenses are lower than that $100/visit, then you’re in OK shape, as your income exceeds your expenses and you’re making a profit.

This is why you need to calculate these figures not only monthly, but also quarterly, and certainly on an annualized basis, in order to look for trends. If you start to see your income per visit slipping and your expenses going up, or if there’s a crossover where your expenses begin to exceed your income, then you have to take action. That’s one of the key reasons for measuring these metrics, to be able to know where you stand.

What about budgeting?
Great question! Every small business should have an annual budget, created before the beginning of the year, with projected expenses and income. It has the added benefit of giving you a goal for profitability. Your budget is a road map that should be reviewed monthly to see how your practice is doing vs. your earlier prediction. Without it, a practice is just rambling along down the road hoping not to drive off it. A budget can tell you if you are meeting your expense and income projections, spending too much money for your income, and/or whether you can afford to spend more during the year on unexpected opportunities.

What is the best way to track all of these numbers?
You can keep these in a spreadsheet, where it automatically populates a graph that would illustrate your up and down trends month to month.

Are there other ways I should be comparing these numbers?
Consider tracking your revenue per payer source, to see if a particular contract or payer is affecting your bottom line negatively. I look at the mix of patients we see within a particular month to see where they are coming from; in other words, how many patients and how much revenue I’m getting from each source. You have to look at your revenue by payer to make sure that you’re not weighting your practice with payers that are reimbursing you less than your cost of business, thereby dragging down your profitability.

Some practices take low-paying contracts to give their therapists something to do (better than having them idle) because they have “excess capacity.” That means that their full-time therapists don’t currently have a full-time patient load, but the practice has a full-time expense. That may work out in the short term, but beware of your schedules filling up with these “excess capacity” patients and crowding out better paying ones over the long term. This is another reason to track revenue by payer source carefully.

Have more questions about how to measure your clinic’s fiscal health? Michael offers a two-part course on financial management through online education provider EDUCATA at www.educata.com. PTPN and PTPN Nexus members get a special course rate; log in at www.ptpn.com/provider/index.php to learn more on our Preferred Vendors page.

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