Revenue - The Most Important Number on Your Profit & Loss
As a CPA and business advisor to dental practices, I am often called to diagnose the cause of financial underperformance. Common themes emerge as these conversations unfold:
“I am working harder every year.”
“Everybody in my office gets a raise every year except me.”
“Our health insurance goes up 10% or more every year.”
“Just when I think I am getting ahead, something always pulls be back. Last year, the AC went out, this year I have to buy a new server.”
“These compliance costs are out of control!”
Does this sound familiar? Of course, because no one is immune to the rising cost of everything. However, most practices manage expenses reasonably well but pay far less attention to the most important number on their P & L’s…revenue.
Why Is Revenue So Important?
Two reasons: First, if you take the position that the biggest numbers matter most – a fairly noncontroversial statement – then revenue ought to grab your attention before any other number on your P & L.
Second, you can exert more control over revenue than any expense item. And that is a good thing, because if you can maximize revenue, then that will have a far greater impact on your financial success than any expense cut.
Understanding Fixed and Variable Expenses
One key to understanding the power of revenue is to also understand the distinction between fixed and variable expenses. A fixed expense is one that fluctuates very little or not at all from month to month. Office rent is an example. You pay the same rent every month regardless of whether you see zero patients or 500.
A variable expense is an expense that ebbs and flows with production, for example, dental supplies.
Why do fixed and variable expenses matter? As you review a listing of your common expenses, you will discover that most of these expenses are fixed. Once your revenue has paid for these expenses for the month, then a significant portion of your “excess” revenue goes straight to the bottom line. Here is how that looks:
In this illustration, revenue increases $25,000 per month over a three-month period. Fixed expenses are the same each month – variable expenses are 20% of revenue. Once the revenue covers the fixed expenses, 80% of the “excess” revenue goes to net income. No amount of cost-cutting comes close to the impact on profits as increasing revenue.
Tips of Driving Revenue
Revenue drivers vary depending on the nature of your practice. However, there are several common considerations that should guide your actions:
How do patients find you? Are you referral-based? Does a spiffy website and strong social media presence matter? Once you figure out what drives patient volume, you can game plan about how to get better in those areas.
To what extent are you able to control pricing? Depending on your specialty, you may have very little ability to set your pricing or a great deal of latitude in this area. If you are a fee for service provider, try to raise prices every year, even if just incrementally. If you have not raised prices in a while, research the market to determine if you are “in market” or out of step. If you are at the top of your game, don’t be afraid to ask for a premium.
If you are predominantly insurance-based, analyze your fees by provider. You may be able to trim a few lower-margin providers to free up slots for more higher-margin patients.
Set production targets for you and your team and monitor your performance regularly. You are more likely to improve in the areas that you target and measure.