Tracking financial metrics in your practice doesn’t have to be hard, and it doesn’t have to distract from treating patients. In fact, even if you don’t have a systematic way of tracking, you’re probably already doing it informally. For example, you probably have a pretty good idea of your bank account balance, and you likely know how many patients your practice sees on a given day. You know these things because they are crucial to your survival as a business. But with a little effort, you can start monitoring additional, useful metrics that will help you make more strategic business decisions for your practice.
Metrics exist in a hierarchy. Your cash balance is at the top (if you don’t have enough cash to pay your employees and vendors, you’re toast). Tracking the number of ice cubes produced per day? Less effective. But there are plenty of solid metrics in between.
Cash, A/R, and Revenue: The Triad
The faster you can turn revenue into cash, the better. Unfortunately, as cash makes its journey to your bank account, it usually stops to take a rest in Accounts Receivable (A/R). Sometimes it sits there so long that you lose all hope of ever collecting it. So the faster you can convert revenue to cash, the better.
You can calculate how many days it takes A/R to become cash by determining your clinic’s average collection period (ACP). Take your A/R balance and divide it by monthly revenue; then, multiply the result by the number of days in a month. For example, if your practice has $75,000 in A/R and $50,000 in monthly revenue, your average collection period would be 45 days. In other words, on average, it would take A/R 45 days to become cash.
If you’re comfortable with that collection period, great. If not, you may want to reexamine how you’re billing patients. Long average collection periods is one reason many practices are pushing cash payment as an alternative to collecting through insurance. Some find it worthwhile to charge discounted rate if it means avoiding A/R altogether, because the revenue immediately turns into cash.
Customer Acquisition Cost
John Wanamaker said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” That’s as true for you as it is for any other business. But it doesn’t mean you can’t track whether the amount of money you do spend on advertising is reasonable.
One classic metric you can use to assess your marketing budget is customer acquisition cost (CAC). To calculate it, divide your total advertising cost for a one-month period by the number of new patients your clinic received that month. For example, let’s say you spent $900 in advertising and brought in three new patients. Your CAC would be $300 per new patient. If the amount of revenue each patient brings in justifies that CAC, you’re doing fine. If not, you’ll want to retool your marketing strategy.
Gross Margin, Operating Expense, and Net Income
Okay, you’re bringing in revenue and converting it to cash, and you’re acquiring patients with a reasonable CAC. But are you actually making money? This is where your income metrics come in: gross margin, operating expense, and net income.
Gross margin tells you how much is left after paying for the people and things that generate that revenue (i.e., the “cost of revenue”). To calculate your gross margin, start with your total monthly revenue and subtract the cost of your therapists, assistants, therapy supplies, and anything else directly tied to actually providing therapy treatment. For example, if your revenue is $50,000 and your cost of revenue is $30,000, then you have a gross margin of $20,000, which equals 40% of your total revenue.
Your practice’s operating expense represents the cost of overhead. To calculate it, add together the costs of rent, advertising, office staff, non-therapy supplies, and anything else that’s not directly related to caring for patients. You can choose to allocate a percentage of rent to gross margin or simply count it all as overhead.
Net income is what you have left after paying for the cost of revenue and overhead. If you’re the owner, it’s what belongs to you at the end of the day. Ultimately, if you have little to no net income, you won’t last long as a business. And no matter how dedicated you are to making a difference, that passion alone won’t keep your doors open. Don’t forget the famous adage: no margin, no mission.
Put it All Together: Payback
With these simple metrics in hand, you’re ready to be more strategic when it comes to growing your practice. You can determine whether your revenue is where you want it to be for the number of therapists you employ; or, you can figure out whether you need to increase your patient volume to justify hiring another therapist.
For example, let’s take a look at the $300 CAC we calculated earlier. Say the typical patient makes eight visits at $85 per visit. That’s $680 revenue per patient. But remember: there’s a cost to that revenue. With a 40% total gross margin, you can expect a margin of $272 on that patient, which isn’t enough to justify the $300 CAC. But if you tool your marketing strategy (e.g., more referrals and targeted advertising) to get your CAC down to, say, $200, then a $272 margin per patient may be enough to justify the CAC. And if the CAC holds as you spend more on that strategy, then your practice will continue to grow—and profitably.
Tracking metrics doesn’t have to be hard. In fact, if you take the time to track the metrics I discussed above, it can actually save you time and energy down the road, which means you can focus on what you got into therapy to do in the first place: heal people. What could be better than a healthy practice and healthy patients?