Revenue – Cost = Profit
The above equation seems so simple right? But which part of the equation catches your eye? For many of us, cost is all we see. We look right past revenue and profit and focus of our attention on the unproductive part of this equation.
I talk with a lot of great people every day about their dental practices and what their business needs in order to grow and improve in their market and I am always taken aback by how many of those same people are afraid to change what they are doing and try a different approach mainly because they are afraid of the cost.
- They know their problems
- They know what is needed to fix them
- They have access to the tools to fix them
Yet they refuse to act because of the cost involved!
There are scenarios when cost outweighs benefit – but – we are not talking about repairing an eight-year-old refrigerator – we are talking about improving their livelihood – their business.
I would never make a claim that considering cost is not important, that is not what this blog is about. Rather, I am attempting to point out what seems so obvious to me – which is to say that – cost is only one part of the profit formula.
Irresponsible reckless spending will break anyone but if a person spends wisely and invests money into improvements in efficiency, quality, and production they will reap dividends that will outweigh the costs.
Have you ever had the chance to hire the perfect person but passed because they cost too much? – Ugh…bet you wish you had that decision back.
Here is what ends up happening often – the new hire you chose (the cheaper one) works slower, doesn’t take any initiative, is grumpy, calls off too much – and – because she/he is working at a lower price point they are always on the lookout for a job that pays fifty cents an hour more – and – they will leave your business quicker than a spark jumps off a plug for an extra day off.
There are so many hidden costs involved with poorly performing employees in a dental practice but there is no line on a P&L sheet that directly relays to us the costs of these office inefficiencies. For this you must take a closer look.
If we surround ourselves with cheap we get cheap – Plain and simple.
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Inefficient administrators in a dental practice create a huge set of problems. Re-care falls behind, collections fall behind, insurance submission/recovery fall behind, your schedule is a mess, no one is scheduling for treatment = struggling cash flow.
Employee turnover leaves you short staffed and with a costly hiring-training process. You may even have to spend money to have a consultant (that charges hundreds of dollars per hour) train your low cost new hire (that still doesn’t know what to do).
None of these things show up on the P&L reports. They are hidden behind a lagging revenue stream.
Too often when someone looks at their P&L sheet, the revenue – “is what it is” (people love saying that don’t they J
Revenue is looked at like a fixed number that cannot be changed or manipulated. So, it is no wonder that so many look at cost as “the only” way to try and manipulate the profit margin formula.
On the surface, it seems foreign to people that the answer to not making enough profit might be to spend more money than they already are spending (It can even be a little scary) yet that may be exactly what they need to do.
It is all about spending it in the right areas. Investing to improve your efficiency, quality, and production is money that should ultimately improve your patient’s overall experience with your practice. A patient’s confidence in your practice is a huge factor in their decisions as to whether go forward with a treatment plan, refer your office to a friend, or even to schedule their next re-care appointment.
No matter how well your patients like you (or any of your team members for that matter) they will disappear if your office messes up their account, is rude or short with them, tells them they owe one thing and then tries to collect another, or gives off any vibe that brings the quality of your dentistry into question – they are gone – and – you?
You are writing it off – AGAIN.
Do you work your tail off and wonder why you are not making as much as it feels you should be?
If so take another look at costs and what you can afford to spend money on that might drive up revenue and improve your patient experience. Costs with the potential to improve revenue and patient experience need to be investigated.
Revenue – Cost = Profit
It is simple math really, if revenue increases at a greater rate than cost, that equals = more profit.
If a practice increases their spending in an effort to increase efficiency we expect revenue to increase as the result. If revenue increases more than the cost, the business sees more profit. Increases in profit could be immediate or may take a little time. Hang in there!
Unfortunately too many of us are programmed to stare at the expense portion of the P&L sheet and spend our time hatching schemes to reduce those numbers rather than coming up with new and innovative ways to increase Revenue.
Why?
Because increasing revenue COSTS money.
Some costs should be cut, but never the ones that can affect revenue or patient experience. Haggling over the costs of goods/services that keep the cash flowing or improve your patient experience is dangerous for a business.
There are so many examples of this all around us but I will share one of my favorites here.
A young couple in New England bought a small successful restaurant. This particular restaurant was famous for – you guessed it – clam chowder. It had regional and statewide acclaim as being among the best that New England had to offer.
As a condition of the sale the departing owners shared the recipe with the new owners.
The new owners settled in and enjoyed the continued success of the restaurant for the first year or so and then they decided that they wanted to increase their profit – which every business should strive for.
Instead of investing in expansion, marketing, a food trucks, or product line for consumer grocery sale the new owners became obsessed with cutting cost to increase profit.
They decided that they could cut costs by decreasing the amount of clams and cream in the chowder they produced, by reducing staff, and by cutting back on marketing. All the costs they reduced would then end up on the profit line of their P&L report.
Together they added up the amount of reduced cost and increased profit:
Per bowl, per day, per month, per year!
This plan showed itself to be a success initially. The profit went up as revenue held firm and costs went down – however – by the end of the 3rd and into the 4thmonth of their scheme the profit returned to its original position.
By month 5 into their new chowder experiment they had their worst month since they had taken over. Month 6 was worse yet.
The couple decided that they needed to immediately return to the original recipe that they had inherited with the business, staff back up to improve customer experience and renew the marketing strategy that they had previously employed – but the damage could not be undone – their customers no longer trusted their product or their service and after months of struggle they had to close their doors.
The moral of the story is that cutting the costs of the wrong things can inadvertently cut the revenue stream altogether – and – that if your customers/patients lose confidence in your product you can never get them back. – Powerful stuff
In closing remember, there is more than one variable in the profit margin formula. Don’t be afraid to invest, innovate, and spend money to increase efficiency, quality, and production.
It costs money to increase revenue, but when the revenue stream outgains the additional costs – you’re going to profit!