Page 12 - HME Business, March 2019

Provider Strategy
Continued from page 10
Once you have identified the segments, pick the one you most want to sepa- rate first. This is an easier process to manage initially if you have a singular focus. After completing the first separation, the other segments fall into place more quickly. For the purpose of this article, we will zero in on producing a cash retail P&L.
Example: The Cash Retail P&L
We are going to follow the elements of a traditional profit and loss, so we start with sales/revenue. Hopefully, you have an accounting system that will allow you to quickly generate the dollar volume and percentage of sales generated through cash retail.
If it is not completely automated, you can work backward from the more clearly defined segments. Your accounting system likely denotes payer sources and contracts so through the process of elimination you can work toward a non-third-party payer number. You can also use the sales history of non-coded products to ensure you do not miss any cash sales in your analysis.
From sales/revenue, we move on to cost of goods sold (COGS). Again, most accounting software programs will make this isolating this number relatively easy. You can use the sales breakout I described in the previous step to focus in on the landed purchase cost of the products driving the newly formed top line number.
It is important to accurately drill down on this number, because the segment percentage will likely differ from that of the top line sales breakdown. For example, COGS for cash retail will likely be a smaller percentage of the top line than the COGS for the Medicare or private payer insurance segment.
With sales/revenue and COGS complete, you have your first look at the carved-out cash retail gross margin (GM). This is the first opportunity for a quick comparative. How does the cash retail GM measure up against the GM from your HME provider business as a whole? It is likely that the cash retail GM is significantly higher than the blended GM for the entire operation. When you go through this exercise for each segment, the variability in the GM for each division will be a strong indicator of how each segment of your business either contributes to or detracts from your company.
In my opinion, gross margin is the primary metric as it drives so many other metrics and is integral in all decisions. Regarding the cash retail business, it
is important to compare your GM to the market place. Too high and your sell- through will be sluggish. Too low and you are leaving money on the table. This first look at your cash retail GM will tell you a good deal about your pricing and purchasing habits.
Totaling Your Expenses
We have broken out sales and COGS to derive our retail segment’s gross margin, the next step is to dive into the expenses. You will have a line item expense section of your general P&L to serve as your guide. The process is simply to go line by line and determine what portion of each expense can be directly tied to the cash retail business.
In a handful of cases, this can be cut and dry, but most line items will take some work. In many cases, assumptions will be required, and an acceptable starting point is to use the same percentage from the first step’s sales/revenue breakout.
The largest expense for nearly every HME provider business involves people. Salaries, wages, benefits, and taxes generally dominate the expense section of a P&L. This section is also somewhat easy to break out by segment. By separating your team into billers, floor salespeople, outside sales reps, techs, management and warehouse personnel, you can begin to separate the costs associated with each.
Ask yourself, “If I went all cash retail, which employees would I not need any longer?” The cost of those employees should be carved out completely from the new cash retail expense line. Conversely, ask yourself, “If I went straight third-party pay, who would I lose?” The cost for those employees should be
fully loaded into the new expense line. The remaining employees likely wear many hats so using the sales percentage breakdown is a solid starting point.
The next expense line to take your time with is marketing and advertising. This is an important category to try and get as specific as possible because the cash retail segment has dramatically different marketing needs than other segments. The budget for marketing will be higher for cash retail than for the billing side of a business. More planning and thought will be required when building this budget so clearly knowing the separation of the spend is vital to measuring the return on investment of your marketing expenses.
Breaking out the utilities requires a look at your physical location. What percentage of operation is dedicated to billing only? Is the showroom section more heavily focused on cash sales? Costs associated with accreditation, education, contracts, and certain fees are usually quick exclusions from the cash retail side of things, since they are related to funded income. Vehicles, building maintenance, postage, travel, supplies and other expenses simply involve a detailed look at the general ledger.
I recommend a quick first pass to find anything clearly cash retail-specific or not and then apply the sales percentage to the balance remaining.
The Bottom Line
When all the expense line items are adjusted and in place, you can plug them in for your finished cash retail P&L. Your new sales/revenue, COGS, GM, and expense section will reveal a new Net Profit bottom line. How does the cash retail Net Profit compare to the Net Profit of the whole business? What is the cash retail business’ contribution percentage to the company’s total Net Profit? Is it more than the percentage of total sales/revenue?
In addition to the high-level metrics of gross margin and Net Profit, the new P&L allows you to dig deeper when measuring performance. More granular financial metrics such as break even, gross margin return on invest- ment (GMROI), inventory turn times, dollars per square foot, marketing as a percentage of revenue, average ticket, and cost per customer all paint a more detailed picture when viewed through the segment P&L.
Now you have results. The result of these metrics is the ability to make better and more specifically informed decisions about how to run your HME business. The result is to set better goals and better track progress toward their attainment. The result, ultimately, is maximizing your returns with more money staying in your pocket.
Two Challenges
The biggest challenge to taking this detailed approach to managing your busi- ness is finding the time. As I work with HME provider businesses across the country, their stores are always buzzing with activity. Patients and consumers are flowing in and out. Deliveries are being planned, pulled and loaded. Claims are being billed, chased and defended.
Rarely do I find a dealer with more time on his hands than he knows what to do with. Also rare is to find an HME provider whose business is simple and straightforward.
So, when you combine the complexity of each HME provider business
with the lack of time, the challenges of charting a path, setting goals, and measuring progress become massive. But the provider owners, operators and managers who make the time and take the time to meet this challenge, end up driving their two trains better and farther than the rest. n
Michael Scarsella is the national sales director for Middleburg Heights, Ohio-headquartered Compass Health (compasshealthbrands.com), which offers a variety of products to HME providers. With more than 20 years’ experience in the industry, Scarsella regularly works to help the owners and operators of HME businesses understand how they can blend retail sales and third-party payer funded business models. He will co-present “Analyzing Your Business Year After Year,” with VGM Retail’s Maria Markussen on April 16 at this year’s Medtrade Spring (medtrade.com).
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