Monte Zwang
Is this the year you want to take your practice to the “next level”?
Many business owners and health practitioners have their eyes on the “next level,” but they don’t know what that is or how to get there. It’s important to know that the “next level” means different things to different people, and there is no standard definition of its meaning. The “next level” is not a mystical place that businesses are magically transported to. In the next four issues of NDNR, we will introduce you to the “next level” and a process for getting there.
Step one of defining the “next level” is defining the vitality of your business.
The Know is in the Now
Think about your business as it exists right now – what is working? What needs to change? What would you never change? Essentially, take a good look at your financial figures. Before you can move to the next level, you need to define your current level. Take your time, and take a hard look at your sales volume. Has it increased this year? If sales revenue increased, was it a comfortable level, and can you do more?
If you evaluate and understand your revenue, you will know whether it has long-term growth potential. Sales revenue is defined as goods or services provided for which you are entitled compensation. If you are the sole generator of that revenue, your growth potential is limited to the number of hours you can work and what you can charge for your services. If those same revenues can be generated by someone other than or in addition to you, your business or practice has the opportunity to grow. Many opportunities exist for increasing sales revenue, such as product sales, teaching fees, honorariums and referral fees. Getting to the next level requires that you create a clear image of the type and amount of sales revenue you want next year compared to the revenue you earned this year.
After defining the type of sales you want, you must be confident that the sales revenue you are generating is profitable. There is a direct cost to producing sales: Materials, labor, payroll taxes and subcontractors are direct costs that fluctuate with the amount of sales you produce, and are called Cost of Sales Expenses, Variable Costs or Direct Costs. This is where I turn you into accountants and financial strategists. Total Sales minus Cost of Sales Expenses (Variable Costs or Direct Costs) equals Gross Profit Margin. If your total sales equal $100 and your Cost of Sales Expenses equal $60, your Gross Profit Margin is $40 (or 40%). Understanding what your Gross Profit Margin was last year and what you want it to be next year is imperative toward moving your practice to the next level. Knowing your Gross Profit Margin allows you to determine your financial break-even point. This is important if getting to the next level means you want to make money.
Next is taking a look at overhead. Overhead Expenses are fixed or administrative expenses. These expenses do not fluctuate with sales, and include items such as rent, insurance, advertising, dues, education, auto, professional fees and utilities. Perhaps lowering your Overhead Expenses is your definition of the next level.
Overhead Expenses are paid from Gross Profit Margin. Gross Profit Margin minus Overhead equals Net Profit. Maybe increasing your Net Profit is on your agenda for next year. Getting to the next level requires a clear understanding of the expenses that must be paid to operate your practice, and how much Net Profit (profitability) you want to have after they are paid. If your Gross Profit Margin is $40 and your Overhead Expenses are $30, your Net Profit is $10. Congratulations, you are profitable, and you have a Net Profit of 10%. Is that good? Yes. Is it good enough? That depends on your industry and your definition of the “next level.”
Plans for Growth
If the next level means gaining control of your company’s finances, you will need systems and tools to control costs, manage profitability and anticipate cash flow issues. Once a business is profitable, growing requires an operational plan, marketing plan and financial plan. This growth could require a change in management, production procedures and additional sales staff. Almost certainly, this move to the next level will require money, and as the potential borrower, it is up to you to know how much money you need and when you will need it.
This column has introduced some accounting fundamentals. More importantly, getting to the “next level” requires understanding of your current situation and clarity regarding where you are heading.
Next Month: The Cost of Risk.
Monte Zwang is a principal of Wellness Capital Management, providing cash flow and financial strategies to businesses in the wellness industry. Monte has been a consultant for more than 25 years, teaching entrepreneurs and company leaders in health care, real estate, food and beverage, day spas, resorts and hotels, and retail industries the strategies of cash flow management. For more information, visit www.WellnessCapital.com,
