• Break-Even Analysis and Why it is Important

    May 5, 2017 | Kevin Kasmar
  • There are numerous metrics a physical therapy business owner should monitor in order to make adjustments that improve top-line revenue and bottom-line profitability. Some of these metrics are more operational in nature:

    • Number of New Patient Referrals
    • Number of Visits
    • Cancellation Percentage
    • Number of Units per Visit

    But if you have contracted with a solid management company that works up your financial statements, you will have the added advantage of numerous financial schedules that blend your operational statistics with your clinic’s financial performance.

    Lowest Common Denominator

    Financial schedules can be made more understandable to the lay person if they

    1. generate meaningful financial data
    2. measure that data against an operational “lowest common denominator”. 

    In the case of a break-even analysis, we use the basic patient visit as the lowest common denominator.

    What we can learn from a Break-Even Analysis?

    In short, you want to know how many patient treatment visits are needed each week or month to cover your clinic’s operating costs.

    For example, let's say 200 patient visits are needed to break-even each month. That means that beginning with the 201st visit, you are taking the entire net revenue for that visit to the bottom line. Armed with a break-even visit number, it is clear, that patients #201, #202 and beyond, deliver almost 100% profit to your clinic’s bottom line. Alternatively, if your total monthly visit count falls short of 200, you know that you are not covering your operating costs that month.

    What is the financial break-even point formula?

    If you have a management company that generates your financial statements, they can calculate your clinic’s break-even. They can:

    1. Review your clinic’s provider mix and reimbursement schedule.
    2. Weigh your monthly net revenues against your clinic’s operating costs.
    3. Derive your financial break-even point on a monthly, or even weekly, basis.

    Note that a clinic’s cost structure is comprised of both fixed costs (e.g. Rent, Salaries and Payroll Taxes) and variable costs (e.g. certain Hourly Payroll, Professional Fees, and Bank Charges). Fixed costs tend to repeat month to month at an amount certain. On the other hand, variable costs can vary in both timing and amount from month to month. So, as these costs might change, so will your clinic’s break-even point.

    Furthermore, your management company can develop “stretch goals” for you as well, by calculating how many visits you would need monthly to reach a goal of 20%, 30% or even 40% net income before taxes on net revenues.

    Uses of Break-even Analysis

    Knowing your clinic’s break-even point can be a huge incentive to your referral marketing efforts, your negotiated fee structure, your cost elements, and more. The break-even point helps you to set goals as a clinic owner. It keeps your finger on the pulse of your clinic’s financial performance.