‘Give a person enough rope and they will hang themselves.” Interesting theory. I am going to change that saying slightly so it reads, “Give a person enough ROPE, and they will improve their bottom line.” A slight deviation from the original, but I am sure it is more to your liking if you want to improve your bottom line. If you do, let’s see if I can show you the “ROPEs.”
Let me first explain what I mean by “ROPE.” Each letter stands for a word. The “R” is for revenue. The “O” is for overhead. The “P” is for profit. The “E” is for earnings. That’s all there is to it. This formula is key to helping you make a lot more money. Let’s look at the specifics instead of keeping you “tied up in knots.”
The formula is really pretty simple. The goal is to bring more revenue into your office. The demon you must contend with is the expense of operating an office. This expense is commonly referred to as overhead. When you subtract overhead from your revenue, you are left with what? If you said profit, you are correct. (If you said nothing or overdrafts, then you are really in trouble.) Your earnings are the percentage of the gross revenue you get to keep.
You determine profit using simple subtraction. Let me use an example to illustrate what I mean. We will take my favorite doctor, Dr. Crackem Lowe. Dr. Lowe had revenues in his office last year of $100,000. His overhead is running at 50%, or $50,000. This leaves him with a profit of $50,000, and earnings of 50%. He would like to improve his bottom line.
He and his staff started doing a better job of communicating with patients about referrals. He began seeing more new patients, and revenue went up by $20,000 to $120,000. Since these efforts were all internal, they required no additional cash outlay, and his overhead stayed at $50,000. What effect did that have on his profit? His profit went up from $20,000 to $70,000. That one little thing increased his earnings by 40%. In this example, a 20% increase in revenue brought about a 40% increase in earnings. Not bad.
The chiropractor across the street saw this increase in Dr. Lowe’s practice, so he decided to put a plan into action as well. His name is Dr. Hittem High, and his practice is structured similarly to Dr. Lowe’s. Dr. High decided to launch a massive marketing campaign and had good results. He, too, increased his revenue by $20,000, or 20%. Unfortunately, to accomplish this, he had to increase his overhead, which went up to $80,000.
No big deal, he felt, since the patients were coming in the front door. When he took a look at his profit, he was shocked. His revenue was now $120,000, and his overhead was at $80,000, which left him with a profit of only $40,000. This means his earnings went down by 20%. He was floored. How could that be? He had more activity and more patients, but his earnings went down. Dr. High forgot one simple rule: The gross revenue is nice, but it’s the net you get to spend.
How does all this apply to you? You may be able to draw some parallels in your practice if you feel you’re working harder and harder and still not making any money. Each patient who comes into your office has a monetary value. That value is reduced by the amount of overhead it took to get that patient in your office. It would be helpful if you knew what it takes to get a patient into your office. You need to track what marketing ideas are working for you and how effective they are. You may find some of your marketing strategies aren’t really doing the job they should by adding to your bottom line.
By the way, you can increase earnings without increasing revenue. All you have to do is to cut the overhead (see related article, page 18). With gross revenues of $100,000 and overhead of $50,000, the profit is $50,000. Cut the overhead by $10,000 and the profit goes up to $60,000, and the earnings increase by 20%. As we’ve discussed, everyone is always looking at practice gross. The gross may be nice to impress your colleagues, but you can’t take it to the bank. All you can take, and all you can spend, is the net. Never forget that.