The practice of business—how do you measure up?
In an increasingly competitive, outcome driven industry, the practice of business measurement has never been more important for physiotherapy practice owners and managers, writes Tom Laundy, director of health services and business advisory at William Buck.
At a recent APA seminar in Adelaide, I discussed the key drivers in physiotherapy and the importance of measuring performance. An increase in health consciousness, private health insurance and an ageing population are contributing to growth in the industry. However, at practice level, many practice owners and managers aren’t measuring critical elements that realise sustainable growth. When measuring up, here are three questions to answer as part of your practice treatment plan.
How do you ensure you don’t just buy a job?
A key point of confusion is owner remuneration—many owners aren’t distinguishing between their salary and profits. In my experience, there’s
a common misconception that the owner–manager shouldn’t pay themselves a wage for non-clinical work. This is misleading for the practice because you are potentially overstating its value.
Many times, owner–managers believe they are making profits; however the profits aren’t noticeably different to what they would be if that person was paying themselves a ‘market’ salary and then assessing what was left. While I acknowledge that it is easier to quantify remuneration for clinical work, some thought should be given to what cost the practice would incur to pay someone else to undertake the non-clinical (principally practice management) tasks currently undertaken by the owner.
By not deducting a cost for all ‘human’ inputs into the practice the outcome can be one of false security as shown by the example for an identical practice (see Table).
In business, investors expect to see a rate of return commensurate with the investment made and the associated risks assumed. The same theory should apply in physiotherapy practices. The Table demonstrates this potential overstatement by delineating between return from individual effort and return on investment. As shown, the value differential is $390 000, which is three times the owner’s salary of $130 000. When you don’t account for owner salary, you create an ‘expectation gap’ that may limit your opportunities in the market and potentially base important strategic decisions on misleading information.
One of the main benefits of a physiotherapy practice is a consistent fixed cost structure with low capital intensity, meaning that increases in revenue will lead to economies of scale and larger profit margins. It should be noted that the aim of investing in your practice isn’t to just buy a job, but to also derive a return on investment, which is what drives saleable practice value. Don’t make the mistake of blurring the lines on profit measurement.
The fact is, you should be remunerated for your efforts as an individual practitioner and if you’re a practice owner, this cost forms part of operating your practice and should be remunerated.
Do you prepare budgets with the big picture in mind?
The key to practice success is measuring performance, and it should be inherently linked to all business functions. So where do you start? Measuring performance requires a budget, and to have a budget requires starting and aligning with a strategic plan. Strategies are plans to achieve goals, they don’t need to be complex and should be a fluid document. Your strategy should be linked to the commercial realities of the industry.
Questions to ask include what are the strengths and weaknesses of your own practice and what are the external opportunities and threats? What is your key selling proposition and how can it be leveraged? What are your critical success factors?
This is where strategic linkage helps; it is the linking of objectives to your strategy to employ in the pursuit of those outcomes. To show you how strategic linkage works in the overall measures of your practice, I will provide you with an example of the process.
First, research. The William Buck benchmarking report 2016 found that diversification was one of the best ways to achieve growth. Yet, 14 per cent of physiotherapists don’t want to diversify their product/service mix. Research shows that overall, physiotherapists are reliant on building their own traditional revenue streams rather than diversifying the range of services they offer, or who they offer them to—limiting their options.
If you look at macro-economic trends, there is an emerging market for physiotherapists in aged care. Based on this research, from a strategic linkage perspective, diversifying your services into aged care could make sense. From here, you could adopt your vision to become the market leader in geriatric physiotherapy services in your chosen locations. Your objective may be to add 25 per cent to market share through contract arrangements with aged care facilities, representing 350 new active patient acquisitions within 12 months. Now you have designed your strategy, assess what corporate platform you will use to achieve this and how your budget will get you there. In this case your corporate platform focus would be marketing and business development. Other areas in the corporate platform include finance, operations, innovation, and human resources.
You can’t assess how you’re tracking if you don’t have a budget or target in mind. In our experience, not many practices prepare good budgets, making it difficult to determine which measurements to focus on. A solid budget provides some level of fiscal responsibility in a set time and aids decision-making. The best budgeting is realistic and considers seasonal trends, known leave of key personnel, working days, profit and cash flow and correct baselines. The important part of budgeting to remember is that it is a discipline and it helps set the mark. It also allows for enhanced reporting on the score-keeping element of the accounting function.
The biggest question that needs answering next is what key performance indicators (KPIs) do I measure to ensure my practice runs correctly and gives me feedback as to how successful I am in pursuit of my strategy? The KPIs that you choose should be linked to your strategy. Are you confident that you’re measuring the right indicators for your practice? Don’t get caught up in measuring those without impact. While benchmarking— the process of evaluating the quality of one’s business by comparison with industry peers—is a critical measurement, you need to remember the nuances of your own practice compared to others.
In my experience, the best practice owners are consistently using a combination of financial and non-financial measurements including patient management systems, accounting platforms, financial statements, management reports, budgets/forecasts, anecdotal evidence, enquiry, tax returns, valuation calculation, dashboard/scorecard reports and benchmarking data.
Financial indicators include profit, revenue per consulting room, budget variance and gross margin. While these are critical measurements, non- financial indicators give the best, real-time practice health-check. These are typically derived from practice software that tracks booking and medical information and can be crafted into non-financial measures including patient visit average, re-booked patients, patient satisfaction score, internal processes mapped and improved, new services and all calls answered/diverted.
So, how do you measure up? The overall outlook for physiotherapy practices is positive. It’s the practice of business and how well you leverage the commercial environment as well as the tools you employ to continually monitor your performance that will ultimately drive your success forward.
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