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Clinical Solutions Blog

How to Use Your Monthly Financial Statements as a Benchmark for Success

Posted by Rick Lau on Nov 11, 2015 10:27:19 AM

 

What you don’t measure you can’t manage. And yet, when asked, most clinic owners don’t know their most basic financial numbers or benchmarks for successful private practices. 

So how can you effectively grow your clinic?

The truth is, that majority of clinic owners don’t know how to read financial statements at all - are you shaking your head right now?

Perhaps the only time you read them is at the end of the financial year when the tax man requires you to submit it. You’re not alone, it’s very common.

But knowing the state of your financial affairs is very important. If you knew the difference between an income statement, a balance sheet and shareholder equity, you’d understand your net worth and could potentially save ten of thousands of dollars every year.

Not only that, but you’ll be able to know how your clinic is benchmarking compared to other clinics in your industry. And one of the things many clinic owners forget is to build a business you can sell for millions.

After investing weeks or years into your business, you want to end up with an asset that’s worth something to potential buyers in future - financials can help you do that.

So let’s go over some easy tips to mastering your financials and learning clinic benchmarks in your industry..

Knowing Your Numbers Grows Your Clinic

In my role as founder of Clinic Supplies Canada I am also very fortunate to be able to work with some very sharp physiotherapy and chiropractic business owners in my one on one coaching program, and we always spend time discussing monthly financials and benchmarking.

This is because monthly financials are incredibly important to understanding your business. It’s how I’ve managed to be such a successful healthcare entrepreneur.

Knowing my financials helps me streamline my business and always be working on things I know will be of benefit - meaning I don’t like wasting money on marketing or things that don’t work, and nor should you.

Don’t Allow Your Clinic To Become A Failure

80% of businesses fail within the first 10 years due to these primary reasons:

  • Failure to plan properly at the beginning
  • Failure to monitor financial position
  • Failure to manage cash flow
  • Failure to manage growth
  • Failure to borrow properly
  • Failure to plan for transition

Notice something about most of those failure items?

Most of them are related to poor financial management, which is the single biggest driver of all business failures.

Income Statements and Balance Sheets Simplified

I know it all sounds scary and you don’t like numbers, but it is fairly simple.

Your income statement (also called a profit and loss statement or P & L) represents the profitability of your clinic over a month, quarter, or year.

The 2 primary things to be concerned about are:

  • Gross profit - the amount that remains after direct expenses (COGS cost of goods) are deducted from revenue. In the case of healthcare clinics, COGS is what you pay your clinicians to provide the service or the costs of the products you sell your patient - for example, physiotherapist wages, chiropractor fees, massage therapists fees, cost of orthotics or knee brace etc.
  • Net profit - the amount that remains after general operating costs like rent, supplies, support staff wages etc (are deducted from the gross profit) 

Your balance sheet is a snapshot of your clinic's financial position on a given day, usually calculated at the end of the quarter or year. It is a summary of your company’s assets, liabilities/obligations, and owner’s financial involvement. A business will generally need a balance sheet when applying for loans or grants, submitting taxes, or seeking investors.  

A balance sheet is how a business can verify that all their financial records are in check. There are essentially 3 accounting categories used to keep track of your finances:

Assets - Assets include cash & money in the bank, accounts receivable, product inventory, and any equipment that is of value. 

Liabilities - Liabilities are moneys owed by your clinic including a loan for your business, accounts payable, credit cards payable, or taxes you still owe the goverment. 

Equity - Equity is what you put in or take out of the business. Examples of equity would be opening investments, contributions, owner’s capital or retained earnings. When you re-arrange the accounting equation, Equity = Assets - Liabilities.

The way your finances “balance” is as follows: Assets = Liabilities + Owner’s Equity

 

5 Financial Hacks to Make your Clinic More Profitable

 

1) Hire a bookkeeper

Keeping track of financials is pretty boring and time consuming, so you don’t actually have to do the day to day stuff yourself. Instead, hire a bookkeeper and get them to log everything.

Get them to do your accounts payable and give you monthly financial statements. If you find monthly too much on your brain, you can change your results to quarterly. This will also save you accounting fees because your bookkeeper is doing most of the heaving lifting prior to your year end commitments. To get a bookkeeper on board it should only cost you between 5 to 10 hours per month.

The thing is, if you only look at your statements yearly, it will take you years to change the financial results you’re getting in your business. If you start looking at monthly statements, it will take you months to change your financial results.  

2) Standardize Your Income Statement 

The key is to standarize your income statements so you can easily compare month to month. And when you’re ready to sell your clinic for millions in the future, your books are clean and your potential buyers can easily understand them, putting you a step ahead for acquiring top dollar for your business and retiring to that Greek Island!

Wondering how to sell your clinic for millions?
Check out this handy guide on how to sell your practice

Here are a few key points to help standarize your income statement:

  • Show Total Gross Revenues (total revenues before paying your clinical wages/fees)
  • Show Owner Gross Revenues (most owners don't always pay themselves so this helps to quickly calculate profitability if we paid the owner as a contractor)
  • Separate all the expense write offs that an owner usually has like meals & entertainment, automobile, etc, so you can quickly add this back to measure true profitability

3) Set these accounts in quickbooks or any other accounting software you use:

REVENUE

  • Treatment Revenue
  • Treatment Revenue Owner
  • Product Revenue
  • Rent (collected from contractors)
  • Refunds

COGS

  • Clinical Fees
  • Clinical Wages
  • Cost of Sold Products

EXPENSES

  • Accounting Fees
  • Admin & Support Wages
  • Advertising and Promotion
  • Amortization
  • Automobile
  • Bank Service Charges
  • Computer and Internet
  • Insurance
  • Interest Expense
  • Legal Fees
  • Management Fees
  • Meals and Entertainment
  • Medical Supplies
  • Membership and subscriptions
  • Office Supplies
  • Owner Wages
  • Rent
  • Repairs and Maintenance
  • Telephone
  • Writeoffs

If you’re looking for a good tax accountant that understands the healthcare profession, contact Blair Kennedy. He lives in Toronto and thinks outside the box. I have used blair for over 5 years and he's great with tax strategies and understand healthcare so comes highly recommended.

3) Know Your Benchmarks

Is your clinic making between 18 to 28% profit

Here are benchmarks you should know based on successful multidisciplinary clinics in Canada

  • Clinical Cost to Revenue Ratio = 40% to 50
    • (Clinical Wages + Clinical Fees + Owner wages) / Revenue  
    • For owner wages, approximate paying 50% of "Treatment Revenue Owner"
  • Admin & Support Wages to Revenue Ratio < 10%
  • Rent to Revenue Ratio < 10%
  • Marketing Fees to Revenue Ratio = 5%
  • Other Expenses to Revenue Ratio <7%
  • Profit to Revenue Ratio =  18 to 28%
4) Understand Your Numbers

Assess your financials and work out: Do you have a revenue problem or an expense problem?

Say if you were to add an additional $100,000 in revenue. What would your profit look like?  

Obviously if you pay all your clinical team in wages and as employees, the extra $100,000 in revenue would give you an extra $100,000 in profit assuming you don't need to hire any employees.  

If you pay your clinical contractors 50% of treatment fees, that would only add up to $50K.

How much are you spending on marketing?  

You can’t just leave it to free consultations or Word of Mouth marketing to significantly grow your business. You have to invest both time and money into the business if you want to get more out of it.

Bloomberg Business states there is no definitive amount to spend on massage therapy, physiotherapy or chiropractic marketing, but the minimum should be 5% of revenue and then you can adjust from there based on the size of your market, the cost of media, and your rate of growth.

Once you understand your financials, you’ll know your goals, what’s working, and how much is best to spend on growing your business.

If you’re not growing, your dying. This is a little extreme, but it does remind us of how important growth is to the health of our companies. At Clinic Supplies Canada, we spend 5.5% of our revenue on marketing and our revenue grew by 65% last year. 

5) Measure And Validate Your Business Assumptions

Write down your business assumptions and make changes at your clinic accordingly. Just because you assume something IS, doesn’t mean it really is. You must measure results, so you KNOW.

On the other hand, if your assumptions are correct, it will show up in your financial statements as a positive number, a profit. Business owners that keep things in their head are destined for failure. Whereas, your financial statements will show you everything about how your business is truly operating.

You’ve probably tried crash diets to lose weight and know they don’t work. The same goes for your business - it’s not a fast fix, apply tricks kind of deal. Building a successful and profitable business is based on long term smart investment of time and money.

You need to continuously monitor, manage and control according to a plan. That plan is based on and backed up by the state of your financial statement.

Hopefully this article has given you some inspiration and tips on getting started. It really is worth taking the time to get to know and master those financials. You certainly won’t regret it.

 

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Topics: Clinic Finances

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