David J. Norris, MD

All business owners should know their break-even point. If you don’t, then you’re likely shooting from the hip as you attempt to “manage” your business. 

The break-even point is a simple concept. It’s the productivity point where the revenue earned equals the expenses incurred. Those expenses include both the fixed and variable costs. When productivity is above the break-even point, a profit is earned. When productivity is below it, a loss is incurred.  

There are two ways you can look at the break-even point: the revenue needed or the productivity level needed. You might be asking yourself, “Why bother?

It might be a little challenging to arrive at your cost and revenue functions but calculating this will give you great insight into your practice’s financial health. 

previous column, I wrote about understanding the different costs of doing business. 

 We looked at how you can determine your fixed and variable costs using a graph. With your revenue calculation in hand, you can plot both your cost formula and your revenue formula. That graph allows you to determine your break-even point by identifying the point where the two lines intersect. 

Shift your productivity levels to the left where the red line is above the green line, and you’re losing money. Move productivity to the right where the green line is above the red line, and you’re earning a profit. 

Using this simple yet effective visual method, you can approximate your practice’s break-even point. In this example, it appears the break-even point is about 150 patient visits per month. 

Not a fan of making graphs? No problem. The break-even point can also be calculated using simple algebra. All you need to determine your break-even point is your cost and revenue equations. Simply set the revenue and cost equations equal to each other and solve for the volume. The final equation looks like this: 

The final number represents the number of patient visits you will need each month to break-even. See more patients, and you will be earning a profit. See fewer patients, and you’re in for a loss. 

Determining your break-even point is the fastest way to learn if your charges or expected volume will cover the costs of your services. If they don’t, then you know where to focus your efforts. Here are four things to consider if you find yourself near the break-even point. 

Go back to all of your payers and renegotiate for higher rates. Identify your lowest-paying payers and negotiate for a rate that matches or is close to your highest-paying payers. Another fruitful exercise is to do some market research see if you are charging below the prevailing market rate, then negotiate to be on track with your peers. 

How well are you scheduling your day? Is your clinic at capacity, or do you have downtime? Look for ways to increase the patient traffic in your clinic. Start with existing patients. Do you send out regular reminders for preventive or follow-up appointments? Do you have extended hours at nights or on the weekend? Do you offer same-day appointments? If so, make sure your patients know about these convenient service offerings. If you’re not already accepting new patients, do so-and make sure to alert providers so they can update database of in-network providers. You might also consider marketing your practice, increasing your marketing efforts, or trying new marketing techniques to draw patients into your practice. Educational videos and social media are a great low-cost place to start.

Fixed costs have a significant effect on your break-even point. Do what you can to drive down your fixed costs. Renegotiate your existing contracts with your vendors, such as your office lease or other medical services. Create a robust accounting system for accounts payable and accounts receivable to make sure you’re managing your bills properly, and the invoices you receive match what you are expecting to owe. 

Look for ways to reduce your variable costs, too. This may mean staff reductions, outsourcing, cheaper alternatives or substitutes for goods or services, or switching vendors. Your variable costs won’t have as great an impact as the fixed costs on the break-even point, but it’s still important regularly review them to ensure they are in-line with market prices. If not, adjust accordingly so you can start saving.

Caring for your financial well-being is an important, yet often overlooked, aspect of practice management. You need to make sure you aren’t worried about your practice’s finances while seeing patients. If you are, then you’re not helping anyone, least of all your patients who depend on you for life-giving treatment and advice. 

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Kan. He is the author of 

The Financially Intelligent Physician: What They Didn’t Teach You in Medical School

and a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.

Articles

Knowing your break-even point will help you plan for the future.

Determine your break-even point

It’s unfortunate, but even in today’s era of two-factor authentication and hyper-alert security, we still hear stories of physicians being defrauded by their employees. To help protect yourself from financial fraud, consider adopting these five approaches in your practice.

The most common place for fraud to occur is in the back office of small businesses where only one person handles the cash and books. Train more than one person on the cash conversion cycle. Rotate people through the various processes, too, so that no single person operates in a silo. When multiple people know the process, they can check each other’s work for mistakes and anomalies. Cross-training employees helps to create an open and transparent environment. It also reduces the chance of theft by assuring no one person wields too much power. Ultimately, it would be best if you also knew the process, so you can be an effective leader and fiscally responsible business owner.

Make sure you receive and regularly review financial statements. Spend time with your office manager or accountant to understand what each line item represents. If they cannot wholly explain each line item, then it might be time for a new accountant or an external audit. Refer back to past reports to see how the numbers compare. Ask questions if you see a line item growing, but it makes little sense. 

Budgeting is more than planning for the future. A budget can also be a tool to detect fraud. Compare your productivity reports with the income statements to see how they measure up. Do the cash receipts match the productivity reports from a few weeks or months ago? Do the expenses stand in line with the productivity reports? If the cash coming into your practice isn’t in line with your budgeted forecast model, alarm bells should be ringing. The same alarms should sound if expenses are above the forecast model.

Understand the effects of timing on your cash flow.

Most small businesses use the cash-basis accounting method rather than the accrual method because of the ease and simplicity of the accounting system. With a cash-basis system, cash is recorded or booked when the money comes into the business and when it leaves.

However, with an accrual system, revenue is booked when it is earned, not received. Also, with an accrual system, the expenses are booked at the same time as the revenue because of what is called the matching principle. In a cash-basis system, revenues and expenses become uncoupled.

When you examine the income statement of a business using a cash-basis accounting system, what you see is the cash that was earned weeks before that has now been received and recorded. The expenses associated with the revenue generating activity were paid a long time. If you aren’t aware of the uncoupling effect of the accounting method in your practice, it can become easier for someone to “slip in” some expenses or skim a little off the revenue top. 

Always, always, always do a thorough background check on all your employees, particularly those who handle your money. The background check should review both criminal and financial records. It doesn’t matter if the candidate is a family member of one of your partners: Always conduct a thorough background check, preferably using a reputable third party.

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Kan. He is the author of 

The Financially Intelligent Physician: What They Didn’t Teach You in Medical School 

and a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.

Follow these simple tips to detect-and prevent-financial fraud in your medical practice. 

How to stop theft in your back office 

I have discovered physicians, regardless of their years of experience, share a common misunderstanding about the costs of doing business. 

There are two broad types of costs: fixed or variable. Learning how to distinguish those costs-and monitor them individually-will help you better control them. 

Fixed costs are those costs that do not change with the activity of your practice. These costs occur just because you are in business. Whether you see one or one 1,000 patients in a month, these costs do not vary. Fixed costs also usually do not change during a specified time period. For example, your rental rate is determined by a square-foot price. Your rent is fixed from month to month for the term of your lease. Other examples of fixed costs include medical malpractice insurance and health insurance. Depending upon your contract, your electronic health record (EHR) system might also be a fixed cost.  

Variable costs are costs that change with the activity level of your clinic. These costs rise as the activity of the clinic rise and decline as the activity of the clinic decline. An example of a variable cost would be the hourly cost of nurses in your clinic. If they work more hours during the busy time of the year, your costs will be higher because the nurses are working more. During the slow season, your costs will decline following the activity level of your clinic. Other variable costs include utilities, transcription services, and medical supplies.

There are many ways to determine your costs. The first is a reliable and accurate accounting system. You, your office manager, and your accountant can work together to install a comprehensive accounting system. It might be expensive up front, but it should make tracking costs easier for you.

The second, more budget friendly, option is to use a program such as Excel or other spreadsheet program. You will need copies of your cost or expense reports and the productivity reports for the same time periods. Collect a few months and then plot your costs as a function of activity. Next, create a scatter plot and then add a trend line to the graph. This will give you an equation that will estimate your costs as a function of activity in the form of y=mx+b. In this formula, 

In the example below, we see our fixed costs are $7,168.30. This means it costs us $7,100 each month just to stay in business. Our variable costs are $53.44 per patient we see. When we see more patients, our total costs will rise.

It’s not an exact representation of your costs, but it’s an excellent place to start. The critical thing to realize is that fixed costs do not change with the activity of your practice, so always account and budget for these known costs. Variable costs will rise and fall in line with the productivity level of your practice. If you know the average revenue per patient encounter at your clinic, you can use the fixed and variable costs to project your net income and know if you will to need to plan to use a line of credit or not. 

Budgeting and forecasting cash flow issues is not the only reason to identify the fixed and variable costs in your practice. You need to know this information if you want to expand your practice with either a new service line, extended hours of operation, or even new location.

This cost information can also guide the decision for whether you can allow physicians to go part time. A common problem with having part-time practitioners in your practice is how to assign the costs fairly. The method above is a reasonable method in determining how to divide the costs of the practice between full-time and part-time physicians. It is more accurate than if you were to spread the costs evenly between full- and part-time physicians.

In a following article, we will examine how to use this costing information with revenue data to determine our breakeven point.

 and a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.

Understanding the kinds of costs, and tracking them, will help you better manage your practice’s finances. 

The costs of doing business

Cash is the lifeblood of your practice. Recognizing how much money you have and where it is going is key to the survival of any business. It doesn't matter if you're running a multi-specialty clinic or a lemonade stand. The ability to predict and deal with cash shortfalls is critical to your practice’s longevity. Your understanding begins with three important financial reports.

 is the first report you will want to examine. This report shows the cash generated from your practice’s core business operations. Avoid focusing on the bottom-line figure, the net income. Instead, take time to review every line item on the income statement. A thorough review will provide a greater understanding of how your business works.

is the second report you will want to review regularly. This report shows what you own, what you owe, and the difference between the two. Watch your assets and liabilities closely. Look for changes in either and investigate to make sure they make sense.

. This report shows how cash moves throughout the company. It’s helpful for identifying cash sinkholes and revealing sources of cash you might not be aware of. Remember, the money you borrow doesn’t appear on the income statement, but it appears on the balance sheet and the cash flow statement.

Most physicians I work with are familiar with the income statement. They know this report shows how much money they have earned, paid, and have left at the end of the day. What physicians rarely realize, however, is this report only shows you cash from the core operations of your business. The balance sheet is a mystery to most, and many have never heard of the cash flow statement.

It’s important to always follow the money, so invest time now learning how the business works to help the business run better in the future.

Using data on the financial report, we can gain insight into any cash flow problem that might be lurking around the corner. Just as ratios and other metrics can help with the diagnosis and monitoring of a disease and its therapy in clinical care, financial metrics and ratios can help physician owners determine the health of their businesses.                                                                               

Following and trending metrics will reveal the cash position of your business and warn you about potential troubles should a hiccup arise in your cash receipts. Here are four tools that will help you identify when you might be running low on cash.

is a simple calculation that gives you an idea of your cash cushion. Working capital is calculated by subtracting the current liabilities from the current assets, both of which are found on the balance sheet. This remainder represents how much you have to fall back on if your practice’s cash flow is halted. A larger number means you have a thicker cushion while a smaller one suggests you might want to establish a line of credit. A negative number means you’re in trouble and might be living on a line of credit.

 is the net collections minus the cost of the services provided and the associated overhead. This shows you how well your core business functions earn revenue in excess of their expenses. Considering this metric is one Wall Street investors use to determine the value of a company, it should be one you use, too.

 is similar to working capital as it is an indicator of your ability to pay your bills on time. It’s calculated by dividing the current assets by the current liabilities. These figures are found on the balance sheet. A ratio that is greater than 1.0 is desired, but it should ideally be closer to 2.0. A larger number means you have more capital available.

 uses numbers from both the income statement and the balance sheet. The operating income is divided by the current liabilities and yields a number that is hopefully greater than 1.0. This ratio tells you whether the core functions of your business are bringing in enough cash to cover your bills. If it is below 1.0, you are not earning enough money to pay your liabilities.

 and a frequent speaker on physician finances. Read more about David at 

How to make sense of the dollars and cents at a physician practice.

Author | David J. Norris, MD

Articles

Determine your break-even point

How to stop theft in your back office

The costs of doing business

How to diagnose cash flow problems in your practice