Tuesday, October 18, 2011

Evaluating Profitability

I think that the last post about office efficiency is such an important topic, that I will be going back to it again in a future post. Honestly, there is so much to say, that an entire blog could be dedicated to efficiency alone. But, for now, we’ll mix things up a bit and talk about evaluating parts of a business that are not profitable.

Rule: Evaluate operations and eliminate anything that's not profitable. 

For this topic, I have a great example. When I was consulting, I assessed a medical practice. It was an urgent care clinic open from 7am to 10pm. The practice was in serious trouble financially and had to improve profitability or it would have to close. The clinic could not meet payroll and even was way behind on rent... it was a really bad situation. Anyway, during my assessment I found some major problems. First their billing was a mess - but that is a big topic for later.

Next, the practice was losing money because of their office hours. As an urgent care clinic the owners felt it was appropriate to have extended hours. However, the costs were not justified. During a two month period, the practice had only 3 patients after 9:00 pm. So that translated to 30 hours per month, paying a full staff, including a nurse, a front desk person, a doctor, and an x-ray tech, to sit around and get paid to do nothing. In addition to staff, the practice was paying 30 extra hours per month for electricity to keep the equipment running and the lights on.

The next major problem was x-ray. Again, the owner wanted a full service urgent care facility. He believed that he could mimic an emergency room but do it better. With x-rays, the practice was renting equipment and had 2 full time x-ray techs. However, they rarely did any x-rays. Maintaining the equipment and the staff was killing the practice.

Often business owners, management, etc. have an image in their mind of the perfect business, as this one did. He wanted the perfect, full service, urgent care facility. A dream is great, but if it is not profitable you have to let it go. Before losing money on a new product that no one wants or will use, research whether it will be valuable to the business’s bottom line. If, like many small businesses, you make a mistake and begin something that is not valuable - stop it. The most important thing is to be aware. It took me only a few hours to find out why the practice was failing. Unfortunately, they had already lost a ton of money by the time I came in to make recommendations. That lost money is gone, spent, not coming back. Such assessments should be an ongoing managerial process to guarantee ongoing profitability.

The assessment is quite simple, compare how much money you are making to how much you are spending. Remember to think about all aspects of cost including staff (don’t forget vacation, benefits, workers comp) and the less obvious expenses like keeping the lights on for an extra hour per day. Such financial assessments can get quite complicated, if you are assessing of the value of previously purchased equipment, you will be spreading the cost over the expected life of the equipment, considering depreciation as well as anticipated maintenance costs. Don’t complicate an initial assessment. Before jumping in to the heavy duty accounting - just look for obvious sources of loss with a simple comparative analysis of costs compared to profit.


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