Can My Business Survive at Reduced Capacity? For How Long?



So you have decided to re-open post-COVID. You have your PPE and an email to your database letting them know about reduced volume and increased sanitation practices between patients. The question becomes: can your business really survive with this reduced income? For how long?


Another way to ask this question is this: what is my company's break-even point (BEP)?


A BEP is the amount of money you need to generate in sales in order to cover your expenses. If you aren’t hitting your BEP, you are losing money every month the business is open. If you know the BEP, you will know at the end of every month if you lost money and if so, how much. This is essential to determining whether it is worthwhile to re-open, and if you should remain open going forward. This is also the data you ned to determine if a loan is a good idea, and if so, how much you should borrow at this time.


Even if you are sure you are solvent and don't require a loan, this post is worth a read. If you become comfortable with the formula I am presenting here, you can use this data to make models of what would happen if, say, you raised the price of an acupuncture session by $10 but lost 20% of your patients because of it, or if you paid that new associate more, or less, or even opened that second location. This formula is an essential building block of a data-driven business.


So without further adieu...


A typical break-even calculation looks like this (don’t worry about the math, I will walk you through it):


Q = F / (P − V)


In our case, Q is the quantity of sessions we need to sell in order to break even - this is the number we are after.


F is the fixed expenses of the business per month (more on that in a minute).


P is the price per acupuncture session.


V is the variable expenses per session (more on that in two minutes).



How to calculate fixed expense


A fixed expense is one that does not change based on the number of patients you see. Rent, internet and utilities are good examples of fixed expense. If you keep books, calculating your fixed expense will be as easy as running a profit and loss report (P/L). Review the total operating expense for 2019, isolate the fixed expenses, and add them together. Divide that number by 12 for an average monthly fixed expense.


Accounting for the salary paid to your acupuncturists (yourself included) can get confusing. For our purposes, if you pay acupuncturists on salary or hourly and that rate is not affected by how many patients the acupuncturist treats, consider that a fixed expense. For everyone else, it’s variable. If you have a minimum salary you personally must make in order for this business to be worth continuing, that minimum salary should also be considered in your fixed expenses.


If you do not keep your books (in Quickbooks, for example), here is a list of typical fixed expenses. Fill in the dollar amounts with real numbers from your clinic’s bank statements. As you go through the bank statements, look for anything else that may be considered a fixed expense that is not on this list. This is kind of tedious, but it’s necessary.


Cell Phone

Internet

Landline

Loan repayment - here is where you add the monthly repayment for you possible new loan

Marketing/advertising

Payroll for fixed salary employees or hourly employees with a set schedule

Rent

Scheduling system/Point of Sale (I’ve used Mindbody, Square and Jane for example)

Utilities


So now let’s make an example company and say that when the owner added up all the fixed expenses per month she gets $25,000. Your clinic’s number can be much higher or lower than that, it really depends on your setup and location.



How to calculate price per session


Let’s go back to our equation:


Q = F / (P - V)


We know Q is the number we are trying to calculate. We know F is our fixed costs and we are using $25,000 as an example number. So we can say Q = 25,000 / (P - V).


P is the price per session. On its face this is simple - whatever you charge for a session is P. However, it’s important to factor for the following:


  1. Alternate pricing for intro sessions (could be a discount, could be an added admin fee)

  2. Groupon, and all the other million “deal” sites if you use them

  3. Insurance reimbursement (net after any biller fees)

  4. Any other deals you may have out there that impact your price per session


In some ways, it’s more useful to think of P as the amount of money you receive per session on average, not the “price.” Because of this, I recommend you go straight to your corporate business account and use the monthly deposits as your gross income number. Take every month’s deposits from last year and get an average gross income per month. Then divide that number by the number of sessions performed per month. Even if you sell herbs/supplements, this will work for our current purposes assuming that a similar percent of total patients will be buying herbs and supplements in the future.


One note here: If you received loan money in the time period you are reviewing, be sure to delete this from your gross income number. Only use money that was generated by normal operating of your business!


Ok - back to the equation. Let’s say in our example we went through everything and we grossed $30,000 per month on average from an average of 100 sessions per month. 30,000/100 = 100. So in our example, P = 100. Now we have:


Q = 25,000 / (100-V)


Our final hurdle is V.




How to calculate variable expense per session


Variable expenses per session are all the costs that are dependent on the number of sessions performed. There can be a lot of variable costs depending on your set up. Like fixed costs, the best bet is to go through a month-to-month P/L and look through your expenses to see what qualifies. If you don’t have this P/L info handy, here is a list of common variable costs:


Clinic supplies - remember to include needles, etc. and the new PPE expenses

Laundry

Lotions, rubs, tinctures, etc. used in treatment

Table paper if you use it

Wages (anyone who gets paid per session goes here)


My suggestion if you are not keeping good books is to go through your corporate bank statements for every month in 2019. Highlight anything that qualifies as a variable expense for each month (again, tedious, but this is your punishment for not keeping good books ;0). Then, for each month add up the highlighted transactions.


Whichever way you get the monthly variable expense number, add each month’s variable expenses and divide the sum by twelve to get an average. Then divide that average by the number of sessions performed per month and voila - we have V!


In our example, let’s say the average variable costs per month worked out to be $3,000. Our clinic owner got this number by adding together each month's variable expense for 2019 and then dividing the sum by 12.


Turns out our example clinic was performing 300 sessions per month on average in 2019, so her variable cost per session is $10. That's the average monthly variable expense ($3,000) divided by the number of sessions per month (10). 300 sessions per month may be very high for your business, I am using round numbers to keep the example easy.


So now we put it all together and we get our break-even number:

Q = F / (P - V)


Q = 25000 / (100 - 10)


Q = 25000 / 90


Q = 277.77


And there you have it. You can’t see .77 of a person so we’ll round to 278 and say that our example business owner needs to do 278 sessions per month to break even. That’s 65 a week. If you are a solo practitioner and that number gives you a heart palpitation... relax! This was based on a pretty high monthly expense of over $25,000. Your number could be far lower than this example. This example clinic owner was seeing 300 sessions per month before COVID, so this shows her the amount of reduced volume she can handle. It isn’t much.


Once you have your BEP you know week over week how close you are to returning to profitability. More importantly, if you are not hitting this number week over week, we can start to use the difference between your current income and the BEP to develop SMART goals for an ad campaign. This is the first suggestion I have for using the SBA or EIDL money. I’ll write another post to explain these concepts in more detail soon.



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