Learning to distinguish between expenses and investments
Does ROI apply to Shannonâ€™s PT practice?
Theresa stared blankly at Shannon. â€œI just donâ€™t understand the question,â€ she said.
â€œIâ€™m asking about the ROI — the return on investment. Like, which of our patients are most profitable. What kind of merchandise gives us the best return on our investment. When we do marketing, what return do we get for each kind of promotion or campaign.â€™
Theresa looked doubtfully at her computer screen. â€œI know what we spend and I know what we take in, and any time we spend less than we take in, I know Iâ€™m happy about it. I donâ€™t think I can break things down the way youâ€™re asking, though.â€
â€œSay I wanted to hire a new technician. Weâ€™d have to think about all the costs of that new technician, compared with the amount of revenue weâ€™d be able to get from being able to handle more patients, right?â€
Theresa warily agreed.
â€œSo weâ€™d have to know exactly how much more money weâ€™d make by bringing in those new patients and exactly how much it would cost to bring on the new technician. Like, if we could bring in another technician for a total of $4,000 a month counting benefits and extra coffee and toilet paper, and we could bring in $5,000 in new revenue by having one more technician on board, our ROI would be $1,000.â€
â€œI know what ROI means,â€ Theresa objected. â€œI just donâ€™t think we have the information to break it down like that. I can tell you what we pay one of our technicians now, but I donâ€™t think I know how many new patients one new technician would allow us to bring in.â€
â€œNot to mention the extra cost of coffee and toilet paper.â€
Theresa laughed. â€œExactly. The amount of time a client takes isnâ€™t consistent — even with one client over time. Even if we imagine that each client pays exactly the same amount each time, we canâ€™t really say that 10 new clients will bring in X amount of revenue, because it depends.â€
â€œThatâ€™s true,â€ Shannon nodded. â€œPlus, just bringing in a new technician doesnâ€™t automatically bring in 10 new clients, even if he or she increases our capacity by that amount.â€
â€œVery true.â€ Theresa frowned at the screen some more. â€œSome of our cases bring in a lot more revenue than others, and some of our technicians have more patients but actually bring in less money. And we also sell a lot of merchandise now, and that income doesnâ€™t necessarily line up with any of the technicians.â€
â€œOr,â€ Shannon suggested, â€œwe donâ€™t keep track of things in a way that shows how it lines up.â€ Â She leaned over the counter to look at the screen, too, but she couldnâ€™t really get any information from the numbers she saw.â€
â€œItâ€™s also hard to figure out how to divvy up the costs,â€ said Theresa. â€œThatâ€™s a big part of ROI, but we donâ€™t really know what the investment is. We canâ€™t just divide up the cost of the coffee among all the technicians. We can say one pound of coffee lasts a week and costs five dollars, and if we have ten people on staff, thatâ€™s 50 cents per person, but really if we only have seven people on staff, weâ€™re probably still going to finish that coffee in a week.â€
Shannonâ€™s head was beginning to hurt. â€œAnd I guess we canâ€™t really divide the cost of coffee among all the clients, because weâ€™ll drink the coffee no matter how many clients we have that week. Iâ€™m confused about this, really. I understand that itâ€™s important, but I donâ€™t know how to figure it out. People talk about fixed costs and variable costs, but where does coffee fit in?â€
Theresa nodded. â€œI know how much it costs to keep the doors open and the lights on every month, and I can use that to figure out how many patients we have to see. But it doesnâ€™t seem to work out in real life. The cost per hour per client always looks like it would be right, but even when weâ€™re busy and have no unusual expenses, I never feel like things are just the way I expect them to be.â€
â€œThis stuff makes me feel like my head is about to explode,â€ Shannon confessed. â€œIt seems as though we ought to be able to say the fixed costs are X number of dollars no matter how many clients we have.â€
â€œI guess thatâ€™s true. The rent, the utilities, and the coffee really donâ€™t depend on how many appointments we have.â€
â€œBut some of our costs must depend on the number of people we see.â€
Shannon and Theresa were both staring at the screen. They fell silent, as though inspiration were about to descend on them.
At last, Theresa shook her head. â€œAs long as I get all the bills paid and payroll covered, Iâ€™m happy.â€
â€œYeah, okay,â€ said Shannon ruefully, â€œbut that doesnâ€™t answer my questions about ROI.â€
â€œMaybe ROI doesnâ€™t apply to us,â€ suggested Theresa. â€œMaybe it works if youâ€™re making widgets in a factory, but once you bring people into the mix, it doesnâ€™t work any more.â€
Does ROI apply to Shannonâ€™s PT practice?
Disclaimer: For HIPAA compliance, all characters appearing in this post are fictitious. Any resemblance to actual persons or actual events is purely coincidental.