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January, 2011

Reducing Your Practice Overhead

By Eric Huntington, DC

Like many things in life, the proper way to manage overhead is not a rote formula and is certainly not the same for every doctor. There are many things to consider, including your practice goals, income goals, how much time you want to spend in the practice and what services you'd like it to deliver.

It is unwise to overlook any of these considerations, and it is particularly foolhardy to believe that having "low overhead" is the way to stay solvent. That is a trap that can have very serious consequences.

What Is Overhead?

Now, let's look at what overhead really is. Obviously, it is usually a good business decision not to waste money on unnecessary expenses. However, and this is the key thing to always remember: It is your overhead that actually produces income.

Included in overhead is your place of business, your supplies, advertising, staff payroll, and of course, your pay, your time, etc. So, if you continuously reduce practice overhead beyond simply eliminating truly wasteful expenses, you will inevitably contract the practice - and reduce its ability to make income. If this continues, you, the doctor, will be left in the trap of a low-producing clinic , doing everything by yourself for little pay, or go out of business altogether.

How to Make More Money

To make more money, you have three choices: cut waste, increase productivity or add revenue-building overhead.

The first possibility is to cut wasteful expenditures. Considering that this option should be done anyway, regardless of the practice's financial situation. That means we are really only left with two options when it comes to managing overhead for the purpose of increasing profit. The remaining choices are:

A. Increase the productivity of those things that make up your existing overhead.

B. Intelligently select what additions to overhead will generate more income.

It is important to note that these two options are ways to increase income and profits. They have nothing to do with cutting expenses or lowering overhead.

Most owners do not think this way - and they are losing money because of it. They are locked into thinking that cutting costs is the only way to stay ahead.

Evaluate Everything

To determine how you should manage your overhead, you need to evaluate what you want out of the practice - and your life. That could be a huge task, especially if you've never considered it. But you can take a quick look to see if the direction you are headed in is taking you where you want to end up. Ask yourself the following questions:

  • How much time do you want to spend in your practice and what role(s) would you be most happy playing within the clinic (doctor, owner, executive, marketer, etc.)?
  • How much responsibility do you want to take on?
  • Do you want to be responsible for the health of a certain percentage of your community? What is that percentage? How many quality jobs do you want to provide in your community? Is the purpose of your practice centered more on personal benefits you and your family get from practicing, or do you aspire to have a much wider zone of influence?
  • How much income would you like to make? How much income would you like your staff to make?
  • Are you interested in building something in your community that lasts far beyond your retirement?

There are many more questions of this nature you could ask yourself. The answers are never wrong, unless you decide that an answer is wrong for you. These are personal decisions which are completely yours to create. Having answers to these types of questions will help you sort out what kind of overhead you should have in your practice.

It is important to realize that to consider a particular practice overhead as "high" or "low" is a viewpoint that could be different from person to person. For example, most chiropractors would be very uncomfortable with the thought of $40,000 to $50,000 in monthly overhead for a clinic. However, if that same clinic generates $30,000-a-month profit to the owner after expenses and allows them to work a 20-hour work week, it may be desirable.

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