Increasing Profitability

There are essentially two ways of increasing profitability in a professional practice: cutting costs, and increasing sales. Here is a quiz for you: which increases the bottom-line profit more for a practice, reducing cost of goods by 20%, or increasing sales by 20%? Give yourself a moment to answer the question before reading on.

Here is an example with easy numbers.

If a practice did $100,000 in sales and reduced the cost of goods by 20%, here is the math.
$100,000 in sales, 30% COGS (average number) = $30,000 in COGS. A 20% reduction would be $30,000 * .2 = $6,000. And if the practice is already paying all of the bills, the entire $6,000 falls to the bottom line.

If a practice did $100,000 in sales and increased sales by 20%, that would mean a total of $120,000 in sales, or an additional $20,000. With the same cost of goods number of 30%, that would mean $6,000 would go to additional COGS expense, leaving $14,000 of the incremental sales. Again, if the practice is already paying the bills, the entire $14,000 falls to the bottom line.

As this model shows, increasing top line sales has more than twice the effect on profitability as decreasing cost of goods! This is why it is so important to strive for the best sales performance possible for your practice.