You can’t manage what you can’t measure, this has been one of our key messages ever since we launched Business Health in 2000. And while a lot has happened since then, this message hasn’t changed – it simply makes good business sense in our view to know your key metrics, track them over time and to know how you compare in the marketplace.
So, in an effort to contribute we thought we’d share with you our latest analysis of the key financial data provided by 300+ Australian practices – in a series of communications over the next couple of months. Hopefully, these will help you to paint a picture of your business – pretty or not. And, armed with this knowledge, we hope you’ll gain some insight and a few pointers towards a stronger, more sustainable practice. (<<Click here to receive a consolidated pdf copy of all communications – to be issued in December>>)
The following are marketplace averages. Factors such as the practice’s business model, development phase, size and location will impact your practice’s numbers.
Practice Management by the Numbers 6: Practice profitability
Marketplace average: 28.2%
This is the ultimate measure in our view. Is the business achieving an acceptable level of profit to repay the effort, time and risk invested by its owners? This is also perhaps the most difficult to benchmark – an acceptable level of profit in one practice may not be so in another.
However, to help owners get a sense of ‘best practice’ and allow them to compare results to the marketplace, we calculate a ‘notional’ level of practice profitability which assumes a salary of $100,000 for each working owner. To determine your number:
Revenue – expenses (allowing $100,000 per working owner) / revenue
= notional profitability %
If your % is lower
There could be good reason for this. Perhaps you’re in start-up mode or, while well-established, you’ve recently been through significant change. Or maybe you’re scaling up with an eye to the future?
Once you’ve decided on where your business is positioned (a good dose of realism and objectivity is required), if there are no mitigating factors and you’re not satisfied with your notional profitability %, you may need to:
- Review your current business model. Some of the key metrics mentioned in previous issues will provide a few clues – start with staffing, efficiency and productivity.
- Review your revenue flows over the past three or so years. Has it been steadily growing, remaining static or declining? What have been the drivers?
- The biggest expense items for most practices are; salaries, licensee fee, technology and rent. When was the last time you thought about the cost:benefit of each? Does outsourcing provide another option?
If your % is higher
A somewhat comforting position to be in for sure. But it shouldn’t signal that you can afford to take the foot off the accelerator… in a marketplace as challenged and disrupted as ours, things won’t stay the same forever. And there will remain threats and opportunities.
- Are you continuing to invest in your business, setting aside some funds for ‘r + d’ perhaps?
- With many predictions of an economic downturn into early next year, have you created a surplus fund to perhaps buffer you against any potential downside?
- How about funding for your future plans? As our recent Future Ready VIII analysis showed:- succession remains a major industry wide issue, and with external financing not always available, perhaps funds should be set aside for vendor financing or employee share acquisition programs.
The bottom line
This is the one metric that every business owner focuses on, and rightly so. As to what the ‘right’ figure is for your business will depend on; your business model, at what stage of development it’s at and your own expectations. Nevertheless, surely it’s important to have an understanding of what others in the marketplace are achieving?
If you’d like to discuss in a little more detail and discover how your own business stacks up (and what you can perhaps do as a result), let us know <<click here>>.
Yours in best practice,
The team at Business Health.