Gross collections – expenses = income
Income equation tells it all
By David G. Foster, DC

We have all read articles on how to build a chiropractic practice, including “silver bullet” ideas on how to build your practice. All of these tactics help increase a practice’s gross collections (the first part of the income equation, gross collections – expenses = income) and are of great interest and value.

But let’s look at the second and equally important component of the income equation — expenses. The principle couldn’t be easier: Lowering your expenses elevates your income. However, controlling expenses is one aspect of running an office that eludes many chiropractors.

Chiropractors must expand their minds and direct some of their talents from the practice of chiropractic to the business of chiropractic. Developing business sense means recognizing that income is not only a function of how much money you make, but also of how much you save.

COST-CUTTING FUNDAMENTALS

When you evaluate an expense, be thorough and compare apples to apples. Considering the cost of one item or promotional idea is easy; gathering information on the alternatives requires more effort. Once you gather and review the information on all available options, your choices are usually obvious.

Awareness of price is also important. Every dollar you save in expenses is a dollar added to your income. Almost everyone incurs a number of the following monthly expenses. Evaluating these critically for the possibility of reducing them may give you a significant return on your investment:

• Office supplies. Make a list of the most commonly used consumables: paper, toner, printer cartridges, file folders, paper towels, etc. Make a grid with at least three or four suppliers across the top and your supply list at the left. Fill in the grid with each supplier’s prices. You will then have a clear picture of which supplier is most competitive.

The time spent gathering this information is well worth the return. If you (or a staff member) invest just one hour a month collecting this information and you save $1,000 per year, the return on investment is significant. Then, when one supplier offers a sale on a loss leader, you can take advantage of the sale without overbuying.

• Phone service. Telephone companies seem to prey on customers who do not analyze their bills. I have found hundreds of mistakes in my phone bills over the years and, not surprisingly, they are never in my favor. Through experience, I have learned how to comb through the bill and identify the mistake quickly.

Analyzing a phone bill is no different from analyzing insurance EOBs (explanation of benefits) to assure proper payment. If you find this task tedious, look at it as a sport. Both the financial return and the emotional satisfaction of “winning” make it worthwhile.

• Insurance. Not all insurance companies are equal. Do not evaluate insurance by premium alone. When it comes to business liability, malpractice, or disability insurance, the financial strength of the company should be more valued than lower premiums. Choose an insurer rated secure by at least three of the five ratings companies: A.M. Best, Fitch Ratings, Moody’s Investors Services, Standard & Poor’s, and Weiss Ratings. Once again, use a grid to compare companies with varying coverage options.

• Banking. Use the grid structure to compare several banks’ services and fees. Banks charge a variety of fees. Some are obvious, some hidden. Some banks charge fees based on the number of deposits or number of checks written per month. In this case, it is worthwhile to put forth the effort and calculate how many deposits you make and checks you write in an average month.

Certain programs may fit your historical pattern, but their policies can be confusing — and always to the bank’s advantage. Know your needs. Ascertain all the policies and fees — obvious and hidden. Then, make a decision on a bank.

• Credit cards. Evaluate them the same as you evaluate banks. The two most important variables in credit cards are annual fee and interest rate. Introductory interest rates will always increase, so be cautious of these. Be on the lookout for hidden fees here, too. A good rule of thumb when using credit is, if you can’t afford to pay for it now, don’t buy it.

EFFICIENT OPERATIONS

Now that you know the fundamentals of reducing costs, let us examine expenses from a managerial perspective — by department, such as billing and collections, marketing and staff. Evaluating the profitability of each department takes expense evaluation to a higher level. The costs you reveal may not only be the obvious financial ones, but the not-so-obvious intangibles as well.

• Billing and collections. One of the most important rules of thumb in managing expenses is to utilize numerical facts, not emotions. Allow the numbers to confirm or disprove your emotions. This is never more important than when evaluating your billing department.

Determine your in-house billing costs and compare them to the cost of outsourcing the fun-ction. The in-house costs include staff, taxes, insurance, phone, software and postage. Add in the intangibles, such as demands on employees and the negative energy associated with dealing with insurance companies.

Your returns are usually easy to compare. In most cases, they are simply the total amount of collections from insurance claims.

You may find, as I did, that outsourcing collections is a better value than collecting in-house. Trust the numerical analysis and resist the emotional attachment of keeping your in-house billing department.

• Marketing. To evaluate a marketing program or event, apply the income equation.

The question to ask is, “What will be my return on investment?” Always use past performance to predict future results.

For example: If a promotion costs $5,000 and you usually convert 50 percent of all new patients to long-term wellness care and each new patient yields $2,000 per year, your breakeven is five new patients.

Note: your goal is not five new patients. Your goal has to achieve two or three times your investment, or 10 to 15 new patients.

The ability to analyze an expense or to project the feasibility of a marketing promotion accurately requires practice. Always strive for making a profit.

• Staff. Staff is typically your largest expense, and unfortunately, its profitability is the most difficult to calculate. Yet, staff does add to profitability, because they directly affect patient retention, billings and collections.

Hire individuals with the right attributes and skills for the job. Provide professional development through chiropractic seminars, training courses and in-house goal-setting and achievement programs. When you do these things, your staff will improve in value to your practice.

I urge my colleagues to continue to improve themselves and their practices, not only with technical skills, clinical skills and practice expansion, but also with solid business acumen. In an environment in which the healthcare dollar is increasingly more difficult to put into the net income column, chiropractors must analyze their expense items in the income equation. If you watch your pennies, the dollars will take care of themselves.

David G. Foster, DC, co-owns and operates six chiropractic practices (www.familychiropracticcenters.info) and employs eight chiropractic associates. He consults with chiropractors in a wide area of legal, financial and strategic issues. He can be reached at 800-908-3040 or at chirodave@aol.com.