Strength in Numbers: Assessing Your Financial Position

Change is looming. With a new year underway, industry growth predicted, and another US interest rate hike, it is essential to assess where your business stands financially.

Today’s challenging economic market notwithstanding, the future looks bright for the aesthetic industry. According to the US Future of Aesthetics 2022 Allergan report, continued industry growth is imminent to the tune of an estimated 23 million nonsurgical injectable treatments and 14.6 million body procedures by 2025.¹

With that in mind, now is an ideal time to ensure your financial house is in order. That means looking at your financial statements to ensure that your ratios and ranges are in line and healthy. By reviewing your financial position, you can learn how well your organization is running, how it compares to others, and where opportunities for improvement exist. This information can help you successfully navigate the market today and in the future.

FINANCIAL STATEMENTS AND PROPER ALLOCATIONS

Your financial statements are only as insightful as you—or your accountant—make them (see Two Key Financial Statements). I have seen the most meticulous and detailed profit and loss (P&L) statements and the most vague and incomplete ones. For any financial report to be useful and effective, it must be structured, well organized, and easy to interpret. Meeting these criteria depends on how you set up and categorize revenues and expenses and how you account for moving those monies. Following are two ways to categorize certain items in key financial reports.

No. 1: P&L Statement

This report, also known as the income statement, shows where money comes in and goes out of a practice (see Income Statement Terminology). With the event season’s having just concluded and more aesthetic practices offering memberships/tiers/beauty banks, it is prudent to appropriate and categorize these monies properly. For example, if you hosted a successful VIP event or offer a monthly membership and received a nice little jump to your P&L figures, these monies should be categorized as a liability (what you owe) on the balance sheet until the services or procedures have been performed.

No. 2: Balance Sheet

The balance sheet details what the company owns and owes. The distinction can be nuanced, especially when practices make large inventory purchases—such as injectables or retail products—for various reasons (eg, promotions and threshold/tiers). To allocate these monies appropriately, remember that a product purchase is a reduction in cash but that, once you have it to use, the product becomes a practice asset (what you own) and should be listed as such on the balance sheet. If your inventory is not listed on your balance sheet, your assets are understated.

KEY PERFORMANCE INDICATORS

By pulling certain figures from your financial statements, you can calculate key performance indicators (KPIs) for your business. These data points allow you to draw internal comparisons over time to identify improvements and downturns as well as make external comparisons (ie, against others in the industry). Based on my experience as a practice consultant, here are three categories of KPIs that you can calculate and analyze.

Category No. 1: Productivity Ratios

Revenue per full-time equivalent provider. Many P&L statements depict total practice revenue, which is a macroperspective. For a more comprehensive understanding of the practice, analyze the revenue that every full-time equivalent provider generates. Most practice management software will allow you to run reports that isolate providers and show their total revenue generated. From there, you can compare your full-time providers—typically 1,600 hours per year for a physician and 2,080 hours for all others—to each other.

Revenue per encounter. Another KPI that looks at a provider’s productivity and efficiency is the revenue rate per encounter or revenue rate per hour. This is a clean-cut way of analyzing provider performance. An average physician should generate approximately $1,000 per hour, whereas the revenue rate of midlevel providers varies greatly.

Retail sales. Ideally, your retail sales revenue should be approximately 7% to 13% of your total revenue. For example, a provider or practice generating $2 million should have approximately $200,000 in retail sales (Table).

Category No. 2: Efficiency Ratios

Overhead ratio (total expenses ÷ total revenue). In 2022, my division’s focus was squarely on the power of patient retention. It has been reported that a 2% increase in retention may yield as much as a 10% decrease in overhead costs.²

Operating income margin. These margins generally range from 20% to 40%, depending on specialty, meaning that, for every dollar you bring into your practice, you ideally should be retaining 20 to 40 cents in the practice.

Rent margin. Your rent should be approximately 2% to 6% of your total revenue. For example, a provider or practice generating $2 million each year could spend approximately $80,000 in rent.

Category No. 3: Balance Sheet Ratios

Current ratio (current assets ÷ current liabilities). This ratio should be around 2:1 at minimum. In other words, you have $2 in assets to cover every $1 of debt. An ideal ratio is closer to 5:1.

Debt-to-equity ratio (total debts ÷ total shareholders’ equity). This ratio benchmarks at around 5:1. Too high a debt-to-equity ratio suggests that the practice is financing a significant amount of potential growth through borrowing.

Once you know your KPIs, you can compare your performance against that of industry peers. When asked what they wished they had access to earlier in their careers, several clients said having better financial plans and benchmarks.

Luckily, there are many resources to help you compare your ratios to industry averages. These include the Allergan and BSM benchmark database. Databases compile data from practices across the country and calculate averages for the 10th, 25th, median, 75th, and 90th percentiles.

Depending on where your practice falls in those percentiles, you can get a sense if it is above, on par with, or below the industry median. From there, you can investigate why your practice’s figures differ from industry standards and determine what, if any, potential changes are necessary.

ADDING IT ALL UP

The data highlighted in this article can help you make informed, strategic decisions for your business. Financial data can either confirm that your practice is doing well or indicate where efforts to improve are necessary. This is invaluable information as you navigate the changing, growing aesthetics market.

1. Allergan Aesthetics publishes ‘The Future of Aesthetics’ global trends report. August 30, 2022. Accessed January 16, 2023. news.abbvie.com/news/press-releases/allergan-aesthetics-publishes-the-future-aesthetics-global-trends-report.htm

2. Niehaus M. The high cost of low customer retention. Instore. June 24, 2015. Accessed January 16, 2023. instoredoes.com/the-high-cost-of-low-customer-retention