What do you think is the number one mistake practice owners make? Not charging enough, working too little, working too much, too few employees, too many employees??
In truth, all of these can be a problem but the NUMBER ONE MISTAKE practice owners make is not knowing the breakeven point of their business. The breakeven point occurs when the business is neither making nor losing money. In other words Revenue = total expenses.
I was talking with a new business owner recently who had fulfilled her dream and opened a restaurant. The business had grown faster than expected and she was struggling to keep up. She had hired several new employees to maintain a good service culture and the increased expenses had forced her to take out a loan to cover expenses. She wasn’t able to pay herself but she was quite certain that when business increased, she would be able to pay back the loan and start taking a nice salary. However, she really had no idea how much revenue she needed to operate the business and to generate enough excess cash to pay back her debts and to be able to pay herself a salary.
Unfortunately, this is not an uncommon scenario in new and even established businesses. We are so busy working and trying to attract new customers that we lose track of how much revenue we need to generate each week or month or even day to keep the doors open. We hire a new employee and don’t take the time to calculate the additional revenue needed to pay that salary. Suddenly, we find ourselves working more and more hours and at the end of the month, we don’t have the extra cash we that we thought we would have.
I remember the turning point many years ago in my business life when I realized that my patient care coordinator made more than I did. Sure there are perks I wasn’t counting that business owners can take advantage of, but I knew I should have a bigger “take home” than what I had. That’s when I decided that my focus had to be on tracking my numbers and knowing what it took to run a profitable business. It’s not much fun to work your butt off and then not to have enough money to pay yourself a salary that your education and experience and the work load deserves.
There are a number of ways to determine the breakeven point for a business and your CPA can certainly help. One simple formula uses fixed costs and gross profit margin to determine the breakeven point. Fixed costs exist regardless of how much revenue is generated. They include expenses like rent, employee wages, utilities, insurance, telephone, internet – bills that exist and have to be paid each and every month. Cost of goods is certainly a big factor in determining profit margin. Cost of good is determined as – Unit cost/Selling price = Cost of good sold. There are many great resources and sample worksheets available on the internet to help calculate the breakeven for a business.
Working harder and not being able to pay yourself what you believe you are worth is not very satisfying. Take some time this week to find out the break even for your practice. The payoff will be worth it.