Following on from looking at practice revenue in Part 1, this month we focus on the other side of the ledger, practice expenses.
At the risk of stating the obvious, increasing your profit can be done in two ways, by:
1.Increasing revenue, and/or
What might not be obvious is how to analyse practice expenditure. It is important to understand a few of the basics, which in turn will assist in determining the appropriate actions to take.
In the practice environment, expenses can largely be divided into two categories:
- Fixed: Expenses that do not fluctuate with the amount of services provided by the practice and are typically predicable, for example rent, insurance and practice manager remuneration.
- Variable: Expenses that fluctuate with the amount of activity within a practice, such as casual nurses wages, overtime and medical supplies.
In reality the vast majority of expenses in a practice are fixed, but the term ‘fixed’ can be a little misleading. All expenses can eventually be modified if required, it is just that fixed expenses typically take longer to influence. For example, if you wanted to reduce your rental expenses by taking less space you would most often need to refer to the renewal date in your lease to then renegotiate with your landlord.
Furthermore, just because they are fixed in nature does not mean that you cannot critically assess each one as to its ‘performance’ in terms of contribution to the bottom line, whether positive or negative.
One way of determining the appropriateness of your expenses is by comparing them to patient fees (or total income). The results can then be compared to prior period for context or against known industry benchmarks.
From the benchmarking exercise that William Buck undertook across Australia with our clients in assessing some GP practice benchmarks, we noted the following as some examples of typical practice expenses express as a percentage of patient fees across the sample of practices assessed:
|Expense||% of patient fees|
|Non-Doctor Remuneration||16 – 19%|
|Rent||4 – 6%|
|Medical Supplies||2 – 2.5%|
|Other Overheads||5 – 7%|
|Net Profit||2 – 7.5%|
Of course, any comparison to a benchmark must be approached with caution and should be considered alongside factors specifically relevant to your practice (e.g. bulk-billing, DWS, service mix). It is important to ensure that you have the right context in which to review your expenses and be aware that the examples above will be skewed by the amount of activity within a practice.
For example, if your ‘normal’ usage of consulting rooms is 80% but you conduct an exercise when the usage is only 60% it will show that the expense is a higher percentage of your total income, but in reality the expense in terms of dollar amount has not increased. While this does not diminish the importance of assessing those expenses, it is important that you try and link the assessment between your current and usual level of efficiency.
Having an understanding of your expenses will also help you assess opportunities to earn further income. For example, having a basis on which to calculate the cost of providing a consulting room per session will assist in making decisions about offering rooms to other potential non-GP users (e.g. Allied Health).
This may also lead to the practice developing some ‘rules of thumb’ to ensure that the practice manager can manage available resources as productively as possible. Furthermore, by understanding expenses from a ‘cost of room’ perspective it will assist in service fee price setting, which is the main profit driver in any practice.
Invariably there will be some expenses that require a different approach in determining their value. While most expenses incurred in the course of operation a practice can generally be linked to patient fees, it may be that the more telling comparison for some expenditure is against some other, more specific income item.
For example, if your practice utilises practice nurses then the cost of providing these nurses (e.g. remuneration, on-costs and vehicle costs) should be compared directly to the income items to which they relate (e.g. fees received and PNIP payments). This will provide a far more insightful comparison than that achieved generally. Typically, most practices have a number of these types of ‘direct’ expenses that are better assessed individually as opposed to collectively.
Finally, it is important to ensure that whatever actions are taken in relation to the above are consistent with your strategy.
If you need assistance with reviewing your revenue to assess your practice performance or any other financial matter, please feel free to contact Tom Laundy, Health Services Director at William Buck on (08) 8409 4333 or by email firstname.lastname@example.org.
Click Here to read part 1 – Revenue
Click Here to read Part 3 – Practice Value
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation.