Vol. 11 • Issue 3
• Page 44
Keys to Success
Every audiologist should understand the components of a profit and loss (P&L) statement and review the details monthly to most effectively manage a practice. The numbers, percents and comparisons tell a story, and with a little experience any audiologist can see trends, prepare and respond proactively rather than reactively. Additionally, P&L data is necessary to determine any practice's breakeven fee, to assure fees will cover a practice's financial needs and to decide whether or not participation in third party payer or network contracts will be beneficial for the practice based on financial facts.
The basic components of a P&L include: gross charges (revenue), adjustments, returns, net revenue, expenses, and net profit. Gross charges represent a practice's usual and customary fees. Adjustments represent money that is either written off or not collected, which can include insurance write-offs since third party payers typically do not pay 100 percent of charges; non-payments; retail product discounts and returns; and refunds. Net revenue equals gross charges minus total adjustments. Expenses include all clinical and operational expenditures; personnel costs; cost of goods sold; occupancy costs; interest, depreciation and amortization, etc. Net profit equals net revenue minus all expenses and is typically the number upon which income taxes are based.
In addition to an accurate P&L, some basic business facts must be applied to any breakeven analysis to determine break-even fees.
Patient contact hours will impact a practice's hourly breakeven rate. Fewer hours/days spent on billable services will increase the hourly rate needed to break even. Working 8 hours per weekday, 52 weeks per year, equates to 2,080 work hours per year, which represents one definition of full-time employment. However, few audiologists actually see patients 2,080 hours per year. Thirty patient contact hours per week for 48 weeks per year may be more representative of the typical audiologist's patient schedule and equates to only 1,440 patient contact hours per year.
Paid time off (PTO), including vacation, sick and personal time off, or jury duty, reduce patient contact hours and also increase the breakeven hourly fee. Every audiologist should calculate and know his or her annual patient contact hours since patient contact hours will substantially impact every hourly breakeven fee.
An hourly breakeven fee is not a universal fee that can be applied to all practices and it can vary significantly from practice to practice. It can be calculated including or excluding costs of goods, therefore the principles apply whether or not one bundles professional services into products. Audiologists can
calculate breakeven practice needs using the following formula: net breakeven hourly fee equals annual practice expenses divided by annual patient contact hours.
The net breakeven hourly fee represents the average hourly fee that must be collected to cover all practice expenses including owner's compensation. This fee is typically a very different fee than usual and customary charges. The net breakeven fee represents the lowest fee that can be collected on average to cover practice expenses. If less money is collected, the practice will perform in the red and lose money unless expenses are reduced. If more money is collected without increasing expenses, the practice will make a profit, which can be distributed or spent at the owner's discretion.
The breakeven fee can help determine whether or not one should participate with specific third party payers or network contracts. To grow a practice and generate a profit, one must collect, on average, amounts greater than the breakeven hourly fee; how much more will depend upon the practice owner's specific goals. I often hear, "It is better to accept some money than to lose a patient," but unless there is a very compelling reason to do so, no practice can survive accepting fees for services or products that fall below the practice's breakeven fees. This highlights the importance of calculating, knowing and applying your breakeven fee when deciding whether or not to participate with third party payers.
Kathy Foltner, AuD, is CEO of AuDNet Inc. She also teaches courses in Practice Management and Basic Business at Rush University Medical Center and Salus University. Contact her at firstname.lastname@example.org or 312-593-1787. Visit www.NowiHear.com or www.aud-net.com for more information.