Many practices assume their ancillaries are profitable, yet often lack the systems needed to conduct a proper analysis. Here are five tips for analyzing if ancillaries are yielding promised profits.
1. Set up ancillaries as cost centers on the Profit and Loss (P&L) Statement.
The first step in analyzing the profitability of an ancillary is developing a mechanism to track revenue and expenses. Creating cost centers on the P&L is the most comprehensive approach. Regardless of the accounting system you use, creating cost centers should be a relatively straight forward process. For example, in Quickbooks, the use of a “class” is synonymous with a cost center. Set up cost centers for each ancillary (i.e. lab, DME, MRI, CT, EMG, allergy, audiology, satellite office, etc.). The goal is to create a P&L for each ancillary to analyze profit.
Quickbooks has a P&L by Class report that shows cost centers side by side and sums to the practice total. This is a good tool to see how the cost center(s) fit into the “big picture.” An example of a P&L by class is as follows:
|Main Office||MRI||DME||EMG||Satellite Office 1||Satellite Office 2||Total|
2. Allocate expenses to the costs centers.
The biggest challenge many practices face is properly allocating expenses to the cost centers. For example, medical supplies are received at the main office. Doctors and staff take needed medical supplies with them when they travel to a satellite office. The medical supply expenses are residing on the books at the main office and have not been allocated to the satellite office.
To analyze the profitability of ancillaries, an accurate accounting of expenses must occur. The easiest way to accomplish this is to set up different accounts or sub-accounts with the vendors so that invoices are clearly identified to the appropriate cost center. Otherwise, invoices will need to be segregated in the accounting system to the appropriate cost center. Often the person or team in accounts payable does not have the necessary information to make the allocation.
When it’s not feasible to separate orders based on cost center, a computerized inventory system is advised so that when supplies are received at one location and then used at another cost center, those supplies are accounted for properly.
Staff allocation is another expense to consider. When a staff member works in one location only, it’s easy to assign that staff member to their respective cost center. But what happens when a medical assistant works three days a week in the main office, one day a week in satellite two and works every other week in satellite three? Is there a mechanism in place to allocate his or her salary to the respective cost centers? Most time tracking systems allow staff to “clock in” to different departments, which is the most straightforward allocation method. Otherwise, it’s a manual allocation or an estimated allocation based on history. The most important takeaway is to develop some type of time allocation for staff to the different cost centers.