Profit-margin analysis: a valuable tool to bring your medical practice profits to the next level
Profit-margin analysis is an extremely useful tool that allows you to understand whether your medical practice is financially healthy. It can be used to maximise profits, reduce costs and work more efficiently.
How often do you find yourself thinking that you’re working insane hours and you’re not earning enough for all the risks associated with the medical and healthcare profession? Or you see your income growing yearly but the practice investments are eating away at your returns? Does that sound familiar?
WHAT IS PROFIT-MARGIN ANALYSIS?
Profit-margin analysis can be seen as part of the business analysis that helps businesses and medical practices to monitor the efficiency of profit centres. A profit centre could be your practice laser room, the OR, a medical machine or any other treatment or service that is a source of income for your healthcare practice. Margin analysis is often overlooked by doctors and healthcare professionals whose attention is often focused on the income that a new investment can produce. But the real question should be not how much money can I make but how much profit the new machine can generate. Remember that higher incomes don’t necessarily mean higher profits.
The profit-margin analysis provides the value of the contribution margin, which is the percentage of sales left after all costs are paid. In fact, it gives a precise idea on how much sales are contributing to generate profit.
HOW DOES THE MARGIN ANALYSIS WORK?
After defining all the processes involved in a profit centre and its incomes and costs, the Gross Profit Margin (GPM) can be determined. The GPM provides information on how labor, material and other direct costs are affecting sales. Moving forward the Operating Profit Margin (OPM) can be calculated to see whether sales, marketing costs, admin costs and other fixed costs are excessively eroding your earnings. Key elements to conduct a successful profit-margin analysis are:
- the price of the treatment/service and the current price used by competitors in your market
- the number of times the treatment/service is performed over a certain period
- the direct costs necessary to provide the treatment/service such as the material, the labor or fees to use a medical machine
- the fixed costs the practice incurs into regardless of how many treatments are performed, like the rent and the leasing
- the objectives which are relevant in the future to determine the course of action needed to change the current situation
WHAT ARE THE BENEFITS OF THE PROFIT-MARGIN ANALYSIS?
Profit-margin analysis is a very precise tool to measure whether your clinic or healthcare practice is doing well financially. If monitored consistently for every business unit or profit centre it allows you to have your finger on the pulse of the situation. Profit-margin analysis can come in handy in many scenarios such as:
- the decision to change your pricing
- resell a specific machine or device
- changing suppliers
- save on operative costs
- a better use of the internal resources