Article Date: 11/1/2004

Practice Made Perfect
Internal Analysis: It Can Make or Break You

A good businessperson knows that being able to candidly evaluate and understand a practice's weaknesses is a plus. If you know your weaknesses, you can do something about them, but if you don't, then rest assured that your competitors do and are taking advantage of them. (That's why it's important to encourage patient complaints.)

Evaluation basics

Over the years, we've received numerous requests to evaluate the pros and cons of purchasing a particular practice. To perform this evaluation, however, we must perform an analysis of the practice's strengths and weaknesses. We're often surprised to hear the selling doctor claim that no weaknesses exist. This is a huge red flag! The external environment is important; however, the internal environment is essential because it defines the practice's ability to effectively react to the external environment (e.g., competition, managed care and the market for employees).

One of the best business models available to evaluate a practice is the Balanced Scorecard, which views the practice from different complimentary perspectives without letting one outweigh another when evaluating the practice's strengths and weaknesses. The four perspectives are:

1. financial

2. patient

3. operations

4. organizational.

In this first of a two-part series, we'll show you how to analyze your practice's strengths and weaknesses using the Balanced Scorecard approach.

 

Profit & Loss Statement

Revenue 500,000  
Cost of Goods Sold 150,000 30%
Staff Salaries & Benefits 90,000 18%
Occupancy Costs 35,000 7%
Patient Care Costs & Equipment 15,000  3%
Marketing & Promotion 10,000 2%
General Office Overhead 35,000 7%
Practice Net 165,000 33%

 

Reading the situation

Dr. Maxwell (not her real name) was considering buying a practice in the northwest. Using the Balanced Scorecard approach, we first looked at her financials.

From this perspective, we wanted to know whether the practice was growing and profitable. We also wanted to assess the practice's level of financial risk as determined by the condition of its Balance Sheet. "Profit & Loss Statement" (below) shows the practice's Profit and Loss Statement in the Seven Key Expenses format made famous by Dr. Jerry Hayes.

From a profitability perspective, the practice's net was higher than the norm and it seemed in good shape. On the other hand, when we looked at the Balance Sheet, a different picture emerged. (Page 78 contains a condensed version of the seller's Balance Sheet.)

Two things jumped out:.

1. Current liabilities were larger than current assets.

2. The practice had negative equity (liabilities were greater than assets).

When we calculated the current ratio (current assets divided by current liabilities) and the debt-to-assets ratio (total liabilities divided by total assets), the ratios were 0.75 and 1.11, respectively. The current ratio measures the ability of the practice to cover its current liabilities with current assets. Anything less than 1 is a dangerous situation because it could indicate possible insolvency.

A debt-to-assets ratio of 1.11 means that this practice's total liabilities were higher than total assets. In other words, even if the practice sold 100% of its assets, it couldn't pay its debts -- another indication of possible insolvency.

 

Balance Sheet

Current Assets 60,000 33.3%
Fixed Assets 120,000 66.7%
Total Assets 180,000 100%
Current Liabilities 80,000  44.4%
Long-Term Liabilities 120,000 66.7%
Total Liabilities 200,000 111.1%
Total Equity (20,000) -11.1%
Total Liabilities & Equity 180,000 100%

 

Changing perspectives

We then turned to the customer perspective. The acid test for the ongoing success of any practice is the perceived overall value that patients say they're getting. When it comes to patients, it often isn't what you know but how your patients know you and your staff.

A Balanced Scorecard analysis recognizes the value of a loyal patient and that patients alone make it possible for a doctor to earn her livelihood.

From the patient's perspective, was the practice being considered for purchase providing value? If yes, then Dr. Maxwell would have some assurance that its patients would continue to reward it (and the new owner) with their dollars year after year.

Measuring service

We asked the current owner about his service goals (i.e., how he measured the quality of service and what systems he had in place to reward employees for delivering). Unfortunately, he didn't have good answers to these questions, so we turned to the numbers.

For an established practice in a growth market like Dr. Maxwell's, the benchmark percentage for the number of new patient exams is 20% to 30%. Dr. Maxwell's average of 18% suggested that, from the patient's perspective, the practice isn't doing a good job of differentiating itself from the competition. Patients look for an eyecare provider that they perceive as better or best in one or more of the following: quality, fees, service.

Patients judge the quality of the exam and optical product in two basic ways:

1. How well you deliver what you promise

2) How you handle exceptions and problems.

Most practices treat problems like bad colds: They simply treat the symptoms and hope that they go away. But smart practices go that extra mile with patients and show them just how dedicated the practice is to making sure they feel good about being a patient of the practice.

By staying in touch after the examination, or between visits, you can remind them of the fine service you provide. (For example, making a phone call to first-time presbyopes to determine their level of satisfaction with your practice's services.) Similarly, educating your patients is another key to building a quality image.

Leaving a good impression

Even the briefest encounter can make a positive impression. In a rush-rush culture that treats people like cattle, everyone remembers a warm smile and some kind words. Patients, like hearts, go where they feel appreciated.

In today's aggressive environment, excellent patient care is more than a competitive weapon -- it's a survival skill.

Of course, there were many different customer service indicators as well as financial indicators that we evaluated in the practice that Dr. Maxwell was interested in (we only described those that were most important to Dr. Maxwell in this article). For a sample patient satisfaction survey or a more exhaustive list of financial health indicators and how to calculate them and what they mean, please visit www.mblackwell.com or www.donnasuterconsulting.com.

 

Established Patient Growth

Year Revenue from just established patients Growth over prev. year
1999 410,000  
2000 419,000 2.2%
2001 415,000 -1.0%
2002 430,000 3.6%
2003 450,000 4.7%

 

The power of knowledge

Remember, knowledge is power. The more you know, the better you'll be able to compete for patients and quality staff. The end result is professional happiness and profitability.

 

Marilee Blackwell, president, Blackwell Consulting (800-588-9636), and Donna Suter, president, Suter Consulting Group (423-236-5465 or www.donnasuterconsulting.com), team up to offer financial guidance and on-site consulting services designed to increase your gross revenue while significantly improving your net income percentage.

 



Optometric Management, Issue: November 2004