Where Am I Losing My Revenues?
It could look like you are making very good revenues but could be that all your profits are coming only from your pharmacy and lab and the rest is just redundant. You might be wondering where you are losing all those revenues? Ever wondered so? Let’s learn some finances !!!
Have you heard of the concept of “LEVERAGE”?. Although Financial leverage refers to taking debts to meet bigger expenses, here we refer to OPERATIONAL LEVERAGE, where we speak on the role of fixed costs as a lever in profitability.
Just coz you spent money in building the hospital, or just coz you have a good patient load doesn’t necessarily make you a good administrator. Entrepreneurship is a quality coupled with good knowledge of running a business. By quality, I mean the ability to delegate & extract work from the employees in the most efficient manner, not just assigning responsibilities. The knowledge is multi-factorial. I don’t intend to mean one needs to have an MBA to be knowledgeable.
Any expense(here we talk from the perspective of healthcare) has two portions; fixed costs and variable costs. Fixed costs refer to the electricity(although it’s partly variable), salaries, EMIs, rentals if any, depreciation of capital expenses, etc. The variable costs would include professional fees for surgeries, part-time staff, incentives, costs of consumables, drugs, etc.
When all the revenues and expenses are bundled together , it may look quite profitable, however the understanding of operational profit should exclude the pharmacy and laboratory profits.Operational profitability is what ones needs to achieve.And to achieve this , a good knowledge of fixed and variable costs is very important.
Let’s consider an example. Your hospital does 50 surgeries a month. Amongst the different costs, the professional fees for anesthesia are a major one. This will be a variable expense if it’s paid on a case-case basis(Eg:5000/case) or fixed if paid as a salary(Eg:2 lacs/month). What will you choose? The volumes will be the key to understand. If you have a higher volume of cases consistently, keeping them full-time on a fixed salary will be more profitable compared to the fee-for-service model and vice versa. There could be many examples like these.
With increasing revenue, with more fixed cost component(Operational leverage), the profits tend to increase multifold, as the fixed cost would almost remain the same, making the additional revenue directly convert to profits. However, one has to be very careful as the reverse is also true.
Learn to LEVER your fixed costs appropriately.