Million Dollar mistakes in business!
"Don't ever let your business get ahead of the financial side of your business. ACCOUNTING. ACCOUNTING. ACCOUNTING. Know your numbers."
Tilman J Fertitta
My step son Billy has inspired several of my blogs!
He phoned me last night to ask about buying some stock. We discussed how I value companies (P/E, averages, cash flow, value of brand, etc). As usual, I like to give analogies - since he is a farmer, I would say that the equities he was considering had a nice dividend. In a sense it was like buying a nice piece of land that generated relatively secure profit without having to do much. In this case, it's a bank stock "TD" and with the low value the dividend is almost 7% of the stock price. Even if the value of the stock didn't go up, this long established brand would likely continue to be profitable and stick a 7% return on his investment into his account every few months. Safe investment, and smart when you are starting out.
It's even better when I am speaking with you and you give me your own analogy. Billy mentioned it's like the price of Diesel for his farm went down .25/L - it would mean $50,000 of extra cash flow for his farm. Or if the price of Canola went up $1 a bushel - that's $200,000. Billy has learned to run the books for his large family farm. He understands the value of his team, and invests in them. He understands the value of efficient equipment - and runs numbers on production and results all the time.
Billy will succeed, because he knows his numbers! Good businessman!
NOT knowing your numbers can be a MULTI MILLION dollar mistake.
Do you TRULY understand your numbers?
How many businesses have enough profit margin they don't have to worry about the rent and team getting paid? The cash flow and profit is high enough in most service oriented businesses, but in particular with professional care there is a 99% chance the business will make enough to keep the doors open. Service the loans. Pay employees.
There is enough demand for the product that the marketing budget could be limited. We are a business that charges for services - meaning as long as you are working - there is a bill being generated, and the fees are structured to be profitable.
A coalition of businesses and payers that sets the prices based on "average" and supposedly does the "costing" for you. A fee "guideline" in Canada is common, backed by benefit providers dependent on region. By law, this is only a SUGGESTED guideline - but most of us follow this pretty closely.
The issue can arise if you provide a service that is above and beyond average? Your costs are perhaps HIGHER than the "average" - or perhaps you have discovered a way to provide some of these services, like "clear aligners" at less than the "market rate"....
How do you know if you don't know your numbers??
Practice analysis garners an average of $90,000
A Practice Analysis is a valuable report on the health of your practice. If you don't take the time to analyze your standard of care versus your actual production - you don't know your numbers.
A practice analysis will direct you to solutions that align with your goals for production, team and profit.
According to Henry Schein the average practice analysis identifies over $100,000 per year of potential.
The analysis is based on your standard of care - how often do you ask patients to come in for recare? Get Xrays? Panoramics?
The analysis is based on your procedures - are you confident that you have billed correctly according to your standard of care? An analysis of each and every procedure code - perhaps you follow a higher standard and your patients may benefit from a premium version of something you do well - and charge accordingly. Cosmetic dentistry? One appointment visits? Less traumatic injections, or perhaps using lasers?
The analysis is based on your procedures and technology. What would it look like if you incorporated a Cad Cam into your practice versus your standard of care?
I GUARANTEE YOU if you take the time to explore a practice analysis, there is hidden potential in every practice....and every dollar of revenue offers two benefits...
#1 - more cash flow for growth, team, education, expansion of services or personal benefit.
#2 - a Multi fold increase in the value of your business (which you can leverage)
A dollar to your bottom line is worth a BIG MULTIPLE to your business value!
Why in the world would you wait until you are ready to retire to "ramp up" the production and make the office look more "saleable"?
As a seasoned Evaluator - I watch for these things. Part of the reason I want to see 3 years of financials is so I can watch for CONSISTENT GROWTH. Not sudden spikes. I look at the condition of the practice, analyze the patient base, the types of procedures being performed, the demographic and the competition. How the team functions. Do you have long committed and trained team?
THESE THINGS ARE ALL NUMBERS TOO!!
The important part to know is if you were able to INCREASE YOUR GROSS by $100,000 a year - your business value will ALSO increase in value by a market value. Currently I have seen up to 7X EBITDA paid. Depending on what is left over for profit in the example above - this can be SIGNIFICANT! If HALF the extra revenue generated goes straight to the bottom line - the business could be worth $350,000 MORE as an example.
KNOWING YOUR NUMBERS MATTER!
Key Performance Indicators
What numbers should you know?
#1 PRODUCTION - I put this one first because we bill for time in this business. It's the most important number to know. Not only knowing this - but what impact efficiency with production has on your bottom line. (TIMEfactors). This alone is the reason that our business is so strong, has such strong values, and is the number one most miss understood number...
If you know your business - you can tell me what the average production per patient is (and what you are doing to increase this production) THIS IS TIMEFACTORS! If you are really good you can break this down by each provider within the clinic. How much does your hygiene produce per hour. How can you increase this while maintaining your standard of care?
If you know your business - you will know if you are a "single tooth" producer or comprehensive by your numbers. THIS IS TIMEFACTORS!
#2 COLLECTIONS - Once you have produced the product, you MUST get paid for it or it didn't matter! Do you direct bill insurance, or collect payment as services are rendered. It's extremely important to understand that you can't keep producing if the money isn't coming in the door quickly. Every day without the cash, is still an expense. How do you compare to others and what is your goal? Get this under control!
#3 - Profit - We HYPER focus on this! It's the end result of production less overhead and the result is the cash flow. What is in the bank account after everyone else is paid? PROFIT will keep the doors open, and allow the business to grow. There MUST be profit in the BUSINESS (meaning it can't all just go home or the business will never grow).
#4 - EXPENSES. Do you understand FIXED COSTS versus VARIABLE COSTS? How about CAPEX? You know the rent is fixed. The supplies are variable. You budget according to GROWTH IN PRODUCTION! If you want your restaurant to GROW don't restrict the amount or quality of the ingredients you use to create those amazing dishes! If you want to RESTRICT GROWTH start buying lesser quality products.
If you want your business to grow - you need to understand CAPEX! Capital expenditures - if you invest in that equipment what is the depreciation versus the additional revenue and profit. THIS IS TIMEFACTORS!
If you know your business...you can tell me what your supply overhead is compared to your gross production.
If you know your business....you can tell me how adding that piece of equipment increased your production and profit.
If you know your business...you can tell me how much it costs you to do an endo. A typical class II. A baker can tell me the cost of a loaf of bread - including all ingredients and labour. They make a price based on costs and what they expect to profit.
If you know your business...you can tell me your cost of team. Percentage of production, and even better if you know how much they MAKE for you by the hour too! Who is your most productive team member and how can you duplicate this?
#5 - New Patients This is a number almost everyone seems to know, and it's important - but I think we put too much emphasis on this. It's not just NEW PATIENTS coming in but how many you RETAIN! If you keep GROWING by 40 patients a month - then after 10 years you SHOULD HAVE 4800 regular patients and before you retire 14,400 patients. This actually DOES HAPPEN for some offices! Those people know their numbers!
Is your net gain ahead of your loss, and do you have a plan for these numbers? Room to grow? Strategy?
If you know your business...you can tell me your NET GROWTH new patients versus retained patients. If you aren't continuing to grow - where are those other patients going? What is your strategy?
#6 - Case Acceptance Rate - Everyone tells me that 90% of their patients accept the treatment plan. Analysis generally shows it is 10-15% less. The patient MAY HAVE said yes when you left the chair side, but didn't actually book the treatment. Clinics with more comprehensive treatment plans may have a lower acceptance rate, yet still have fantastic numbers. High acceptance rate is just a KPI that identifies opportunity for improvement.
Who wants 100% acceptance rate of just 100 people next year that are all relatives and it's only for a hygiene appointment?
If you know your business...you can tell me your case acceptance rate
#7 TIMEfactors - I put this a little bigger, a form of self promotion for an idea that is FREE!! It's almost a religion to me in the KPI thing. It's relative to everything we do.
This is a labour driven business - the more production we can do by the hour, fixed costs stay the same. As long as the variable cost is reasonable (which means doing the math).
TIMEfactor offices understand the value of quadrant dentistry. Same day crown appointments. Intra oral cameras. Patient educations. Recall systems.
TIMEfactors offices know how to evaluate the products and techniques that will compliment their business, increase production and drive down expenses.
If you know your business...you can explain TIMEfactors
(If you tell me #1 Good for patient and #2 good for business I will give you an elbow bump!)
The corporations and business men want your business!
If it wasn't a conflict of interest - I would buy and invest in almost EVERY SINGLE ONE of the offices I currently work with! Most of these businesses are well structured and have worked closely enough that I know they understand their numbers.
I don't have any offices over 5 years old that aren't expanding, or have outgrown their facilities.
I'm proud to be a team member and look forward to many more years together. Business values will continue to rise modestly (depending on interest rates) and well structured businesses will continue to grow.
Please go get an analysis! Get to know your KPI! Learn TIMEfactors....