The costs of doing business

December 6, 2018

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

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

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

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.

Determining your costs

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, 

  • y represents your total costs, 

  • x represents the level of activity, 

  • m represents your variable costs, and

  • b represents be your fixed costs. 

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.

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.