By Rebecca St. Andrie

Financial health. It’s as important as your physical health. But sometimes it seems like keeping track of your business’s financial health is as hard as dropping those last 10 pounds.

For all their good intentions, many O&P practitioners are guilty of neglecting their business’s financial health. Clinicians who wouldn’t bat an eye at hearing terms like “proprioception” or “plagiocephaly” get vague when asked to define “receivables” or “net worth.” They know the business can make payroll. Isn’t that enough? Maybe––but maybe not.

Make more money
Our point is this: knowing how to diagnose your business’s financial health gives you, the owner, the tools and confidence to know how your business can survive tough times or Medicare’s next rate cuts.

That’s why a group of business leaders, working with AOPA and Industry Insights, have developed the Business Optimization Analysis Tool (or B.O.A.T.). The B.O.A.T. gives you a quick picture of your business’s financial shape, so you can see if you need to cut costs, or whether you might make more money by changing your product mix.

This article aims to give you a taste of the benefits understanding your business’s health can bring. We talked to several of those involved with the B.O.A.T. to hear how they saw eight of the basic terms and figures involved in the B.O.A.T., and how each could benefit your business.

1. Net sales. Net sales is your business’s paycheck. It equals your total billing for all your products and services minus all “credits”—returned items, for instance, or anything that Medicare or a third party payer rejects as not covered. It’s a measure of the actual money you should have coming in.

If you keep track of net sales, you’ll be able to see whether you’re on track to make your budget for the year, not just for the month.  By comparing it to last year’s numbers, you can determine if your net sales are growing. When taken in combination with the next number, it will also show you how productive your business is in turning these sales into profit.

2. Operating profit. Is your business living beyond its means? Operating profit is net sales minus expenses. But besides being another basic measure of the success of your business, operating profit also is your key source of cash to invest in the business.

So, operating profit should be the first thing you look at to start examining the true health of your business.

“It’s a measure of productivity,” says Tom Kirk, president and CEO of Hanger Orthopedic Group in Bethesda, Md. “Am I operating efficiently in managing my labor and materials costs? Are my administrative and selling costs at the right level relative to the revenue they produce? What percentage of my net sales am I writing off as bad debt?”

If your operating profit is shrinking while your net sales are staying the same or growing, you’ve now got a better idea of where your business’s problems are. If you want to get new equipment, hire another person, or put some money away for tough times, operating profit lets you know how much money you have to do that.

3. Number of employees. Seven? Three? Twenty-one? Who cares? Number of employees seems like a fairly straightforward, uninformative number—until you put it in context.

Divide your net sales by number of employees, and you can compare the net sales per employee to other, similar businesses. The B.O.A.T. tool is designed so that you can compare these figures to industry benchmarks.

“Then you can look at cost per employee and say, “The industry‘s cost is $67,000 per employee, and mine is $66,000. I’m paying them the right amount, but they’re not productive enough in getting sales into the business,’” explains Kirk.

Those comparisons may also show you which employees are having the largest impact on your profit. Anita Liberman-Lampear, administrative director at the University of Michigan Orthotic & Prosthetic Center, explains, “You need to look not just at the number of employees but what role they play in the company. What positions are expendable if you must cut back, and what jobs require additional staffing?”

4. Sales per practitioner. A variation on the above figure—dividing net sales by number of practitioners—will give you sales per practitioner. In the past, AOPA’s Operating Performance and Compensation reports have shown that a good performance in this area is one of the key elements to making an O&P business financially successful. The B.O.A.T. can show you how your business compares to your competitors, or to the leaders in the industry.

So how do you know if a 5 percent difference between you and your closest competitor is negligible or crucial? Here is where the B.O.A.T., with its collection of data from around the country, will be helpful. Comparing your statistics to those across the industry should show you where your business falls in the range.

If you see a problem, having all your business data in one place can help you diagnose its root cause. Several of the people on the B.O.A.T. committee suggested ways they might go about analyzing the results.

“If someone is not meeting those goals, then [you may] have a personnel issue to deal with. If someone is exceeding those goals, you should also be sure of what is working well for them. Are they billing legitimately? What are some [of their] ideas that you could share with other employees?” says Liberman-Lampear.

For instance, product mix can affect sales per practitioner. “A good prosthetics practitioner may generate $750,000 a year in revenue and a good orthotics practitioner may generate $400,000 to $450,000 on average,” says Kirk. The mix of payers may also be causing a difference. If all those are the same, then look at marketing and sales expenses or reworking costs.

The point is that instead of telling your employees “Just work harder!” you may be able to offer a specific solution, such as “Let’s change our product mix.”

5. Patient billable events. Practitioners know that the work they do pays off when they reach a patient billable event—the point at which they deliver goods or services that they are allowed to bill for. Tracking the number of these events lets you see how profitably your business’s time is being spent.

6. Employee turnover. “You can really see the impact of high turnover on a practice,” says Kirk. “Their [statistics] in terms of performance—sales generation, cost control and their ability to bill and collect—are usually a lot lower.”

High employee turnover—even in non-practitioner jobs such as office staff—leads to lower sales and slower collections. Your downturn in sales and profits may be better corrected by focusing on turnover. While many in O&P are entrepreneurial, you may also have to ask yourself if you are a bad boss or making bad hires. (See “Hiring from the Hip,” O&P Almanac, February 2008.)

“There’s a tremendous cost to turnover,” says Kirk. “I don’t think we as an industry appreciate the cost.”

7. Accounts receivable. This number equals the amount others owe you. Take what you’ve billed minus what you’ve collected, and you have accounts receivable. Liberman-Lampear stresses the importance of checking how accounts receivable is aging. “Are your billing submissions correct all the time to avoid costly rebills to collect what you are owed?” she asks.

The answer can affect your day-to-day cash flow (See “Manage the Cash Flow Challenge,” O&P Almanac, December 2006). “If [a bill] ages by half a year, generally, your ability to collect on it is reduced by half,” says Kirk.

8. Collections. Collections is often expressed as a percentage—the amount of money you bring in divided by the amount you bill. Others describe it as the amount of bad debt you’ve decided you can’t collect on. In any case, since it represents work done for no money, this is one number you should watch like a hawk.

“You want to make sure that you’re at least 95 percent on collections. If you’re not that high, you’re leaving a lot of money on the table,” says Kirk.

Got the basics?
Now that you’ve got some of the basic terms down, make a resolution today to learn more about your business’s financial health. You wouldn’t put an AFO on a patient without asking for details about his symptoms and daily activities. So it makes sense that improving your business’s financial health would include looking at the details of its day-to-day life. AOPA will continue to publish articles explaining the basics of financial health. If you have a question, send it to us at almanac@AOPAnet.org.

Rebecca St. Andrie is managing editor of the O&P Almanac.