Watch your costs to boost your profits
By Mark E. Battersby

A key step in managing expenses of any chiropractic practice is understanding what things actually cost.

Often wrongly thought of as boring, time-consuming, and less than helpful to the principals in small chiropractic practices, the costing process can have a significant impact on the practice’s bottom line.

WHAT DOES IT COST?

Although the operation’s financial statements, if available, clearly show expenses, they are rarely broken down into specific or categories of services. That is where cost accounting enters the picture.

Cost accounting is the process of allocating your practice’s costs — direct and indirect — associated with attracting new business, selling products, or performing a service. (Direct costs include such things as wages, salaries, benefits, and supplies. Indirect costs are other expenses associated with keeping the operation going.)

Some business people believe if they charge one sum of money and pay a worker a slightly lesser amount, the service is profitable. In reality, however, nothing could be further from the truth.

Even money has a cost, although many people don’t recognize it. Two of these costs are opportunity costs and prompt-payment discounts.

• Opportunity costs. Take, for instance, the cost of using savings or investments to finance needed purchases or to keep the practice going. Removing funds from savings incurs a “lost opportunity” cost.

If those funds were to remain invested or kept in a savings account, they would earn interest or increase in value. If you use this money in the practice, you should consider that lost opportunity cost as a legitimate cost of doing business.

• Prompt-payment discounts. Any practice that offers a “prompt payment” discount incurs a cost. The practice often must pay its bills and workers before it receives payment for services rendered.

Often this means borrowing money. It is up to the principals in the chiropractic practice to decide whether it is more economical to borrow the money necessary to keep the operation going or to offer patients an incentive for paying early.

REDUCING COSTS

Cost accounting includes more than determining the cost of a job or service performed. You should also carefully analyze your costs of doing business and reduce expenses that are out of line.

Begin by comparing this month’s expense figures with last month’s or with the same month last year. Then attempt to determine the reason or reasons for any discrepancies between the figures in different accounting periods and, perhaps, fix the blame for increased costs.

For example: If expenses for supplies represented 2 percent of fees received last year and shot up to 15 percent this year, you should want to know why.

Equally important, the analysis also provides a real insight into the fiscal health of your practice.

Your practice’s financial health has its bearing on much more than the bottom line or profits. It can also affect the cost and availability of financing.

MANAGE YOUR COSTS

How can you better manage the expenses of your practice? Consider these strategies:

1. Accelerate cash inflows. The quicker cash is collected, the quicker it can be spent — or added to the capital available to operate the practice.

2. Improve receivables. Bill early and bill often. Issue invoices promptly and follow up immediately if payments are slow in coming. Also, offer discounts to those who pay bills promptly and require credit checks on all noncash customers.

3. Consider raising prices. Remain competitive.

4. Manage payables. Study the options available. Generally, pay bills as late as possible. If a payment is due in 30 days, do not pay it in 15 days. And, use an electronic funds transfer to make payments on the last day they are due.

Conversely, carefully consider vendors’ offers of discounts for earlier payment.

5. Minimize expenses. Cut down on the practice’s operational expenses and make the most efficient use of every dollar spent.

More specifically, comparison shop. Use the Internet to get the best deals on everything your chiropractic practice needs.

But don’t always focus on the lowest price when choosing suppliers. Sometimes, flexible payment terms can improve cash flow more than a bargain-basement price.

6. Don’t expand until you have the cash. Avoid borrowing to support the expansion cost.

7. Prepare for cash-flow imbalances. Many chiropractic practices experience cash-flow fluctuations throughout the year. By anticipating when income is likely to drop, you can earmark a portion of the operation’s working capital (its reserve) to cover expenses during this period.

8. Seek professional assistance. An accountant or other professional can help manage the practice’s cash flow, especially when it comes to projecting cash flow needs. Many accounting software packages also include modules that can help manage cash flow.

At its most basic, managing the expenses of the practice requires understanding the cost of money.

Managing the expenses of the chiropractic practice also means accounting for costs in order to understand what each service, contract, or job is actually costing. That same cost accounting can also be useful in discovering why costs have been rising.

Columbus sailed without a map, looking for a shortcut to India, and landed in the Caribbean. He died broke.

The chiropractor who sets out to find profits without a map or budget will end up somewhere and may even profit for a while, but it will be as the result of luck, not good money management.

Imagine where you could end up by managing the expenses of your chiropractic 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.

DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.