The following is an article I wrote for MGI South Queensland. MGI is a global consulting and accounting firm.
Despite a reputation for being some of the best paid professions in Australia, there is no guarantee that medical and dental practices will make money. In fact, one survey showed that 20% of medical practices make losses.1 Having worked with many medical and dental practices, both general and specialist, here are 10 ways we think practice owners can improve their profitability.
Practice
1. Do you have to do it?
Leverage is the name of the game. The effective use of nurses and administration staff is a key area where practices should look to improve their profitability. This is also an area where there is a great deal of difference between practices. For general medical practices, we think clients should aim for one administrative staff (other than the practice manager) per 2 GPs and 1 nurse between 4 to 5 GPs.2 On average, non-GP staff cost is 23% of gross patients, but the top 20% manage to operate on just under 15%. For dental practices, the average is 30% (this includes dental assistants and hygienists) but some manage under 20%!
2. Are they coming back?
One of the biggest challenges for the doctors and dentists we work with is getting patients to come back. Many practices have invested time and money in setting up systems to remind patients to come back for a check-up. For us accountants, there’s Big Brother (the tax office) with a stick that “reminds” everyone when it’s tax season. Getting high reappointment rate at your practice, however, requires a lot more work than an automated reminder. The benefits are significant though. Analysis of dental practices show the biggest difference between practices that make $500k in patient fees and those than make $1m is reappointments for regular check-ups. And we all know it is a lot more expensive to get a new patient to pay you a visit than an existing one.
The key to getting patients to come back is to have you, the practitioner, explain to your patient why it’s important to come back for a check-up. I know, I know, the pressure to move onto the next appointment can sometimes be immense. But hear me out. Your patients are there because they trust you with what they value the most, their own bodies. So you are by far the best placed person to explain to them the importance of regular check-ups. Only when you take the time to explain, will they perceive enough value in the regular check-up to warrant them to come back. So by all means investing in automated reminders, but also take time to explain to your patients the benefits of regular check-ups (e.g. overall health benefits, avoiding emergency appointments, early detection of issues, I’m sure you know them way better than I do).
3. Would you like fries with that?
This iconic phrase of McDonald’s has now become synonymous with up-selling. Whilst many of us may be reluctant, being able to up-sell is an essential skill for any business owner. There are many businesses that depend on the up-sell to make a buck. You know the ones I’m talking about: a free book that leads to an offer about another (a cheap book). You are then offered a (slightly more expensive) course, which leads to a seminar which up-sells to a $20k “mastermind” workshop.
Applying a similar strategy for our dentist friends, you could offer say, a free tooth clean in your marketing. Remember the most expensive sale is the first sale. It is worth investing some time to get them in the door. Once they are in, you know what to do: depending on what they need, subtly offer them whitening, filling, cosmetics, crown etc. Work your way up the value chain for your practice. And don’t forget the previous point, make sure they come back and measure your reappointment rate.
4. Beware of benchmarking!
This might rile some of my fellow accountants up a little. If your accountant is worth their salt they would have sent you some industry benchmarks for your practice. And we are all for benchmarking (call us if you’d like to benchmark your practice against your peers). It is an easy way to access where you are compared to your peers. The idea is that you can get the most bang for buck for your efforts in the areas with large dollar impact and where you are most behind.
Be warned, there is a trap with benchmarking: you need someone experienced with the numbers to figure out what the numbers are saying that you should do.
Back to medical practices. To give an example, according to a recent survey, the industry average of gross patient fees for a GP is approximately $400k. The top 20% generated over $590k per annum. The same survey says 60% of those fees are bulk-billed. But the top 20% bulk bill 91% of the fees. On the surface, increasing bulk-billing percentage might seem like a valid strategy. However, there’s actually no definitive link between bulking billing and the profitability of the practice. As the saying goes, Sales is Vanity, Profit is Sanity and Cash is Reality. If it doesn’t turn into profit and cash in your pocket, all you are doing is stressing yourself out with increased activity. Don’t get me wrong, I’m not saying increasing your bulk-billing percentage is never a good idea. This will depend on a number of factors, not least the demographics of surrounding suburbs. What I’m saying is that it is worth bearing in mind that often practices that only or mostly bulk bill will have lower profit margins than private practices. As a result, there’s often a lot more pressure put on the doctors of bulk billing practices to have shorter appointments, something not necessarily the best for patient care. But it may be necessary for practice survival.
A better metric to measure, in our opinion, is how well the consulting rooms are utilised. One study found the average consulting room usage is 49.3%. This means half the time the practice is open, nothing’s happening in those rooms! The best practices manage 75.1% on average.
Beware of benchmarks and make sure your accountant understands the drivers of profitability in your practice.
Financials
5. Focus on the North Star Metric
If you’ve ever been to a business awards night, you’ll hear stories of astronomical growth and heroic tales of overcoming obstacles to conquer the world. If you ever read the financial press, you’ll read about the insane profits the big banks make. Amidst the glamour, glitz, shock and awe, rarely will you hear the rational (accountant) voice that everyone’s forgetting what matters the most – return on investment. It is not cheap to start and run a practice (something our dentist friends understand the most I suspect). How do you know if you’ve made enough money to compensate the time and effort as well as the risks you’ve taken? Our answer, measure, measure and always measure your return on investment. More specifically, measure Return on Capital Employed which is the most important measure of financial performance for any business. Not just for the business, the same principle applies to every marketing campaign and buying new practice equipment.
6. How much does the alternative cost me?
Running a business is about making decisions, big and small, day in and day out. One of the questions asked when making decisions is: how much is it going to cost me? What is often not asked, though, is: what does the alternative cost? It is worth comparing the costs and benefits of alternatives.
For example, some practitioners prefer to hire casual staff rather than permanent staff. It is rare though, for the practitioner to how work out the costs of benefits of employing casual versus permanent staff. The comparison it not straight-forward. A permanent staff member is entitled to leave (annual, personal and long service) whilst a casual staff isn’t. But a casual staff member gets an uplift in pay (typically 25% under most of the relevant awards) to compensate for this. Whilst this depends on the practice and the roles filled by those staff, it is often the case that the practice may save money by replacing casual staff by permanent staff. This might come as a surprise to some and it is worth thinking about how you’ve structured staffing.
7. I didn’t make any money so why do I need to pay tax? Watch the cash.
When we present financial statements to clients, it is not unusual to see clients say that whilst they understand they’ve made a profit, it doesn’t feel like it and no one wants to pay tax when they don’t have the cash.
Cash flow management is often an overlooked area in business. For our practice clients, we see this issue most often with our orthodontist clients, although it is an area that needs monitoring by all. DentiCare is great in getting patients over the line to getting treatment, but spreading receipt for patient fees over two to three years will put strain on your cash flow. It is therefore important to befriend your bank manager and your accountant (yes accountants need friends too) to:
- Monitor and forecast when you might need help with cash flow
- Warn your bank manager so they are not taken by surprise.
Early detection and warning is crucial. After all, there is only one reason why businesses go broke – running out of cash.
Strategy
8. Don’t forget your most valuable asset
Being some of the best paid professions in Australia, the vast majority of medical/dental practices are profitable.You’re no doubt inundated with requests to invest your hard-earned money in all sorts of investments: bonds, TDs, shares, property, precious metals, Bitcoins etc. etc.
You may or may not have thought about what your most valuable asset (other than your home) – your practice, is worth. Especially given the recent trend in consolidators buying practices, this is becoming something at the forefront of more practitioners’ mind.
Practice valuation is not a simple exercise but it doesn’t have to cost an arm and a leg either. If you want to know how much your practice is worth, download our business valuation guide or come and talk to us. If you aren’t happy with the current value of your practice, a good place to start is to re-read this piece and start implementing some changes. By all means come and talk to us if you want help.
9. Get advice
Doctors and dentists are some of the busiest people. Pressure of back-to-back appointments often makes it difficult for you to take time out to seek advice from other professionals who can help you. In order to grow your wealth, getting the structuring of investments right can protect your assets as well as potentially saving you hundreds of thousands in tax. Working on your business is just as important as working in your business. So when your professional advisors want to meet for a meeting, say yes! A good professional will be accommodating of your schedule.
Read the story of how we’ve helped a orthodontist throughout his entrepreneurial journey.
10. What is your end game? Visions of the not-too-distant future.
What does your life look like in 5, 10 or 20 years’ time? Where will you live? What will you do? What does family life look like? What does your social life look like? What will give your life meaning?
“Begin with the end in mind”, says Stephen Covey in his brilliant book, ‘Seven habits of highly effective people‘. When you are in the midst of things, it’s easy to miss the forest for the trees. Be sure to take some time out to plan what your future will look like. You’ll find this will inform what you should be doing now and what changes you might want to make to get there.
Footnotes:
1. As compared to if that practitioner was in a job rather than owning a business.
2. All full time equivalents.
Blue Ocean 