If you listen to a professional athlete, they talk about their “sweet spot” when it comes to a particular sport. For them, it’s a certain point on their racket, bat, or club which makes the most effective contact with the ball and delivers the best results. For example, look at Tiger Woods in his prime – he would often talk about hitting the sweet spot on his club when he made his best and most dazzling shots. Or watching Derek Jeter slam a baseball on the sweet spot of his bat and produce some of the most amazing hits to help his team win 5 championships.
Every business owner has their own financial sweet spot in their business; however, their definition of sweet spot is a little different. It means a point where a number of factors come together to create a maximum result. For a practice owner this sweet spot means they are producing something which is creating a maximum profit based upon the outlay of expenses.
I will give you an example of what I mean for private practice owners. Let’s take a veterinary clinic which has 2 doctors and 10 staff, and it is producing $130,000 a month of revenue. Not bad. However, the business has the capacity to deliver $180,000 a month in revenue. That means that there are extra exam rooms not being used, extended hours it could be open, or there is additional staff and doctors which could be added. By pushing to the capacity revenue number of $180,000, the business owner is entering into the financial “sweet spot” of the business.
Why? Because the expense outlay to get to the first $130,000 of revenue is going to be significantly more than the expenses needed to get the next $50,000 of revenue, which is what gets the practice to its max-capacity. While you will see some expenses on that $50,000, a high percentage of it (roughly 40%) would be profit. This is why smart practice owners are always looking for efficiencies, profit centers, and pushing production to the max. They know that the closer they get to capacity, the higher their profit margin goes.
There are 2 main financial numbers every business owner should know:
- Their Monthly Make/Break Number
- Their Facility Capacity Income Goal
The Make/Break Number is the amount of revenue which needs to be produced every month to remain solvent. A basic formula includes income to cover the following:
- Operating expenses (including debt service)
- 10% of gross income that automatically and systematically gets deposited into the owner’s outside bank account
- Business reserves
- Debt acceleration (If there is bad business debt. However, this does not include rental property.)
Most practice owners grossly underestimate how much income they need to bring in each month to cover these necessities. They see item A, their operating expenses, as being their make/break number and that’s it. Many do not include these “buffers” (the other 4 important items!) in their equation. It happens all too often that an owner has a bad month and can’t pay their bills, can’t pay the IRS, or can’t pay their staff, which can result in slowly creeping into bankruptcy. You simply must know the true amount of revenue you need to cover ALL these expenses.
The next important number a practice owner must know is Facility Capacity Income Goal. This is the amount of revenue the business could create at its current facility if it were operating at max-capacity. Each industry and business has its own formula, but ideally you should simply think, “If I had the maximum amount of staff, the maximum amount of customers, and if we were really marketing our services – how much could be produced in the current space I am in?”
Once you get that number, make it a game to get there – set goals and create incentives so you reach the magic number. Then you can expand into another space and start an even bigger game.
The difference between the amount of money you are bringing in now and the actual Facility Capacity Potential Income is your “financial sweet spot.” It represents an enormous amount of financial freedom for you. Your action plan is this:
- Work out your Make/Break Number
- Work out your Facility Capacity Income Goal
Doing these two things will get you on the right path to hitting that sweet spot.
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Advisory Services offered through Econologics Financial Advisors, LLC., A Federally Registered Investment Advisor.