How to Lower Your Dermatology Practice’s Financial Risk
Updated: Mar 25
Dermatologists are somewhat limited in how many patients they can see in a day–it depends on how many exam rooms they have and how long they spend with each patient. Consequently, minimizing financial risk is an important aspect of any successful practice. Here are a few tips to help you lower your practice’s financial risk and maximize profits while still making the needs of your patients your top priority.
Cash Flow Management
One common financial mistake that many private practices make is confusing “cash flow” with “profit.” Although your yearly profit may be increasing, if you monitor your monthly cash flow carefully enough, you might notice that there are periods of negative cash flow. While this isn’t necessarily anything to panic about, you and your team should be aware of the peaks and valleys of your cash flow to help better manage funds and, ultimately, increase your yearly profit.
Some possible reasons for a negative cash flow could be:
Seasonal changes in patient needs. Many dermatology practices find that the summer months are more profitable than other times of the year, especially in locations where it is not sunny and warm all year-round.
Payment delays. Whether direct from the patient or from insurance companies, it’s possible that your monthly cash flow could end up in the red if payments are coming in late or delayed.
Paying in full for inventory. If you sell skin care products in your office, you may see a dip in cash flow when you first purchase bulk inventory versus how long it takes you to sell that amount of product.
Keeping an eye on the funds that are constantly coming and going from your practice is a key aspect of staying on top of your practice’s finances, as well as finding new ways to maximize your cumulative profit at the end of the year.
To aid in the process of keeping track of your monthly cash flow, your dermatology practice should establish and follow an up-to-date budget. The goal of your budget should be threefold:
To coincide with the strategic plan of your practice, including marketing efforts and short- and long-term goals. For example, if you plan to hire three new employees in the next quarter, be sure that your budget accurately reflects this new expense, as well as the projected revenues that these additional employees will likely generate.
To keep track of money in versus money out. This aspect of your budget will help you make important decisions for your practice based on real numbers, rather than your best guess or a gut inclination.
To increase overall profit. If you suddenly notice that your practice is losing money and you have an accurate budget, it will be much easier to get to the bottom of the financial concern by comparing your revenue and expenses for any given period of time.
Understanding Profitability Ratios
Profitability ratios are specific financial metrics that businesses can use to determine their overall profit by comparing earnings against costs. While there are several different models for determining your practice’s profitability ratio, two of the most common are:
Gross profit ratio: Subtract the cost of goods sold from your revenue. Divide that number by your total revenue. This gives you your practice’s gross margin.
Net profit ratio: Divide net income by revenue to find your net margin.
As you can see, your gross margin does not factor in the expenses of any goods or services sold, while the net margin does. Each of these numbers can be helpful to have on hand in various situations, including when making purchasing decisions.
While your practice may be limited on the number of patients that you are able to see in a day based on how many exam rooms are available to you, there are other ways that you can increase profit and reduce expenses and financial risk. Stay on top of cash flow, budgeting, and profitability ratios to make well-informed financial decisions for your dermatology practice. Stay tuned for more tips!
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