One of the more common missteps I think leaders in business make involves taking a defensive approach to expenses, where you spend more time trying to keep costs down than in finding ways to invest in growth. It's a mistake that can end up having significant costs in the long run.To illustrate what I mean, let's try this thought experiment: Suppose we take an average practice with revenues of $500,000 a year and expenses totaling $300,000. The owner-dentist's net is $200,000 with an overhead that's 60 percent of revenue.
Now let's say that over the next several years, the owner adds new expenses in the form of technology and staff while being careful to ensure that the costs are offset by an increase in revenue to break even. Sounds like a responsible approach to cost management, doesn't it? But fast-forward 10 years and you'll see the problem with this defensive "playing-to-not-lose" approach. Now our practice has overheads totaling $600,000. Revenue has gone up an equal amount to $800,000 and our owner is still taking home $200,000, so there has been no gain.
When you account for inflation there's been a net loss. To make matters worse, even though expenses and revenues increased by an equal dollar amount, the overhead ratio is now 75 percent. There's more money coming through the practice, but a greater percentage is going toward overhead, meaning our dentist is now working harder than ever for the same income.
No wonder dentists who go down this path end up tired and stressed. Their investments in the practice are bringing increases in revenue, but just enough to turn up the speed on the treadmill. They live in fear of needing to take an unscheduled day off, because it means falling farther behind.
The answer is to widen that gap between revenue and expenses to the point where you start to pull ahead, not just keep up. That means understanding that it's the ratios that matter, not the dollar amount. Any growing practice is obviously going to spend more on expenses. It means making spending decisions with an eye toward return, not just breaking even, and it means focusing on strategies for driving growth rather than obsessing about curtailing investments. It means playing to win.
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March 12th, 2014
April 3rd, 2014
April 3rd, 2014