The Most Important Number on your Financial Statements

In a prior post, I talked about the three elements of useful financial statements – timeliness, accuracy, and context – and how the absence of any of these elements may hinder your ability to judge the financial performance of your practice. However, even the best set of financial statements includes 20 or more account balances, all of which vary in importance. How do you avoid swimming in a sea of numbers and succumbing to paralysis by analysis? Focus on the number that matters!

Many practice owners like to focus on keeping overhead as low as possible. This is a worthwhile exercise, but only to a certain extent. The two largest expenses – your people and your space – are relatively fixed, and making major changes in these two areas are transformational decisions that should not be taken lightly. While you can make some headway with the remainder of your expenses (clinical and administrative expenses), don’t expect to get rich that way.

Over the long term, the number that truly matters the most to your practice performance is revenue. Incremental improvements to your marketing plan, scheduling and case management will produce far greater results than even the most impactful savings in practice expenses.

Here is an example:

If you have a practice that generates $700,000 in patient fees and has a 60% overhead rate, how might a 10% increase in patient fees increase the practice’s bottom line? Of the 60% overhead, your staff should be 27% and your real estate should be 8% – both of those costs are relatively fixed. So assuming the remaining 25% of overhead (clinical and administrative costs) increases with collections, the bottom line would be positively affected as follows:

Revenue increase                      $ 70,000
Overhead increase (25%)           $ 17,500
Income increase                       $ 52,500

There is no expense that you can trim that will create the same positive impact as a revenue increase. When determining what number should grab your attention when analyzing your practice financials, start with revenue!