Labor and inventory are the two biggest cost areas of most practices. Most practices do a poor job of managing both. Their financials reveal this fact. They make decent money by paying themselves a wage, but their business doesn’t make profit, and thus it is worth very little.
To grow your profitability, and therefore, to grow the value of your business, focus on managing labor and inventory very well. Your practice is valued based upon its profitability. Improve your profitability, and you will improve the value of your business.
Most of the healthiest practices have a combined total of labor and inventory (Cost of Professional Services) as a percent of revenue equal to 60% or less. Labor should be less than 40% of revenue. COPS should be less than 20% of revenue.
If your combined total of labor and COPS as a percent of revenue is greater than 60%, you are bleeding profits and practice value. For every 5% of revenue over 60% that these items make up, your practice is bleeding (losing) $50,000 for every $1 million in annual revenue. And for each $50,000 in lost profit, you are losing approximately $250,000 to $350,000 in practice value.
Stop the bleeding and manage labor and inventory to get them under 60% of revenue!
