Calculating (and Overcoming) Your Real Cost for Business
Something that I deal with quite often, are providers and business owners not knowing their Break Even Point (BEP). All for-profit businesses should know their own BEP, and use it as a gauge for profit and loss. This number could be a target number of sales, or transactions, that translates into a dollar amount. This number provides the base measure of financial success or short-comings that gives you peace or concern about your practice's success.
The BEP is the moment in time or "point" when your costs of the business meet the revenue of the business. Therefore, anything above that point is profit, while anything below that same point is a loss. The BEP is an economic standard in business.
So why don't more providers know this data point? Well, most providers were never trained in business. They are excellent in their skills as a medical provider but were never exposed to understanding profit and loss statements, let alone managing those finances.
Well, where do you start in understanding your BEP? Start backwards!!! First, and most importantly, is ask yourself how much you want to make as a provider. To me, it doesn't matter how much. My point is that you start with yourself. In your business, you should be the first one paid and the last one fired. Once you have that number, start listing all items that you pay for on a monthly basis (if there are annual costs, such as malpractice, determine the monthly equivalent and use that number). Here is an example of monthly costs:
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Each practice will have variances in costs and line items. The idea is to be as detailed as possible - tracking all your expenses wether fixed or variable.
If you are totally at a loss but have a CPA, that individual should be able to provide you with some general starting points.
Once you have all your costs itemized, total all the amounts to get your overall monthly cost. Divide that number by the days you’re open in a given month (make sure to deduct for holidays). The resulting number is your BEP. That is the daily dollar amount you must generate, in sales and services, in order to ensure you break even.
For example, if you’re overall monthly costs are $50k and you’re open 20 days a month, your BEP is $2,500 per day. If you generate $2,000 on Monday you’re $500 short (loss) of your BEP. If on the following day you generate $3,000 in sales, you’ve surpassed your BEP by $500 in profit. Averaging the two days, you’re on target for your BEP. This quick indicator can gauge your financial health on a daily basis, eliminating the guessing game.
A quick disclaimer. This approach to BEP is very basic. There are other facets to consider and other more complex versions. Yet this basic exercise will start the process and provide you simple data point.
A BEP is not only the heartbeat of your overall business, but you can also use this approach to evaluate services you plan on adding to the practice. The next time you're at a medical conference and you're presented with a new contraption that "will change your practice" take a moment to think about BEP. At what point will this potential purchase start to make you money? Many vendors may provide you that information but always question the assumptions in their equation and do your own numbers. Consider things such as time in training, marketing costs, costs in financing, if paying cash is this investment a better return than another contraption? Don't be a chump and come home with something you have no idea when it starts making money. (A nice bottle of wine with your spouse is a better investment.)
Determining your BEP can be a lengthy process. Plan on having many rewrites and additions as you think about where your money is going. However, it is an essential element to your financial success. Further, the peace of knowing that you are on the path towards financial success is life-changing. And affording yourself the opportunity to make informed changes along the way is priceless.
Keep your head up, your eyes focused on the goal and never stop moving forward!