Build Practice Value: Have Your Cake and Eat It Too!
You can't have your cake and eat it too. You've heard that expression, right? Said another way, you have choices in life, and oftentimes, to make one choice means that you have to turn your back on another. In business, you have to make similar trade-offs. When you choose to pay down your practice loan or buy new equipment, you do so at the expense of taking home a bigger paycheck.
One place where you can have your cake and eat it too is in the realm of practice value. You see, the more free cash your practice generates (i.e. the bigger you can make your paycheck without endangering the financial health of your practice), the more valuable the practice is to a potential buyer. So what benefits you now (a big paycheck) also benefits you later (a big sales price for your practice).
Let's illustrate how this works in the following example:
This is a very nice practice, but what is it worth? By applying an industry rate of return to the net profits, we can arrive at an amount that approximates what you can expect someone to pay for those profits. If a buyer wanted to achieve a 20% annual rate of return (a fairly standard rate for dental practices), then this practice would sell for $750,000.
So how do we add value in this practice? To a certain extent, we may have an ability to manage our expenses better, and this is a worthwhile pursuit because, in this example, $1 of expense savings adds $5 of practice value. And, of course, a dollar of expense saved is another dollar we can put in our pockets today.
But once we've exhausted our cost-cutting measures, the only other place to look is collections. And this is the place where our greatest improvements can be made.
To a great extent, we run a fixed cost operation. What this means is that, if we are successful in adding dollars to our top line, we can do so without adding a whole lot of additional cost. Yes, our lab fees and dental supplies will go up, but our building rent stays the same, our payroll should remain relatively flat (with the exception of performance-based bonuses), and many of our administrative expenses will stay the same as well.
So how do you get on a path of evaluating your financial performance and making improvements that will pay you more now and later? Here are a few tips:
Review your financial statements - balance sheet, income statement, cash flow statement - monthly…not annually, not quarterly, but monthly!
Compare your financial performance to industry averages. How are we doing compared to everybody else?
Identify trends in collections and expenses with an eye towards increasing the former and minimizing the latter.
Set a minimum cash target that your practice will always retain - one month of overhead is a reasonable expectation.
If you have open-ended debt terms - such as credit cards and bank lines of credit - make a plan for repaying that debt within a specified period of time.
Prepare a multi-year capital expenditures budget so that you aren't making office and equipment upgrades and replacements all in one year.
Identify 2-3 keys to success - for example, minimizing no shows, quicker collections, improved case acceptance, and more referrals from current patients. Make a plan for improving these areas and measure your progress monthly…or even more frequently if it makes sense. Keep it fun!
Following these suggestions will put you on a path of solid financial performance that will reap rewards both now and in the future.