Issue 3 - March 2004

Finance & Taxes by Mark Battersby
Control costs to control profits

Studies have shown that 80 percent of the income of most businesses usually comes from 20 percent of their customers. Just as every business has a best customer, every chiropractic practice has a best patient.

But how can any chiropractor tell whether his or her best patient is generating a fair share of bottom-line profits? Most importantly, how much does it cost to attract a new patient, provide services to your current patients or reactivate old ones?

Unfortunately, few chiropractors seem to have a realistic basis for their “profit” additions. However, using cost accounting as a tool for improving the bottom-line can answer those questions and help make the practice more profitable.

Cost accounting is defined as the process of allocating all costs associated with generating a sale or performing a service — both direct and indirect. Direct costs include materials, direct labor (wages paid to workers who perform the service), costs paid to others, etc.

Indirect costs include all other costs associated with keeping the practice’s doors open for business.

If you know the total costs associated with the performing services, you can determine which services are the most profitable. Then you and your staff can focus your efforts on those areas instead of ones that offer little or no bottom-line enhancement.

How to start

The starting place to determine if cost cutting will increase profits is to gather and study your records — your financial statements. Those financial statements provide the data needed to prepare a budget, profit and loss statements, break-even calculations and operating ratios. And they tell you about your costs — both direct and indirect.

After reviewing your financial statement, identify the areas in your practice on which you and/or your staff spend time and money. Most costing systems assign a percentage of the practice’s overhead costs to each service offered or patient handled. In other words, all fixed overhead and general expenses are allocated on a basis that ignores a patient who may require an extra amount of handholding or personal attention — or receive an unequal share of the practice’s expenses. This method does not give a clear picture of real costs associated with a patient or a procedure.

ABC’s of accounting

A relatively new cost accounting system provides a solution for this inequality — ABC accounting — activity-based costing.

ABC goes far beyond basic costing, computing the costs attributable to one patient. It can even show you how expensive each of your practice’s non-revenue generating activities is.

The ABC approach calls for mapping all of the practice’s workflows and processes so that each activity that contributes to costs is identified and tracked through the system. To improve efficiency in the support activities, you must be able to identify what specific support activities the practice is performing, describe in detail how it is performing those activities and establish how much it is spending on those activities.

ABC systems ask much different questions than traditional costing systems. For example:

• What activities are being performed by your resources?

• How much does it cost to perform organizational activities and business processes?

• What is needed to perform specific activities and business processes?

• How much of each activity is required to perform a particular service, use a particular piece of equipment or serve a particular patient?

Once you know the true costs of an activity, you can decide if the activity is worth the expense or if costs incurred for it should be reduced (cut). And, when you know the true cost of activities, you can identify areas for potential improvement, such as:

• Negotiating a better lease;

• Renegotiating long-term debt at a better rate;

• Earning discounts by meeting accounts payable deadlines earlier in the payment cycle;

• Reducing time spent on certain activities.

Perhaps most importantly, cost accounting can answer the question: “How much does it cost to open the doors for practice?”

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Editor's note: Go to Bonus Articles on our 50th Anniversary Web page (www.ChiroEco.com/50) to find out "How a budget helps control costs."

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult your professional adviser for any issue related to your practice.