Measuring the Value of a Satellite Office
May 2002 Issue
|Randy Schmitke, CPA, MBA|
Have you ever been in a position to ask these questions: Should we keep that satellite office operating? Is it a profitable location? What is its value to us? Should we open a satellite office closer to that referral source? Or in that county?
Managing a business requires many skills. One of them is making good business decisions as to the value of operations and processes. If making these analyses and decisions were simple and easy, everyone in business would be successful. But you and I both know that is not the case. However, along with the "instinctual" or "gut" aspects of analysis and decision-making, there are methods for gathering information to aid you.
The title of this article reveals in two words the concepts that should drive your actions in the decision-making process. Let's explore the words "value"' and "measuring."
A business decision in most situations will offer more than simple financial value for a company. Often there exists strategic or competitive value-even altruistic value-in making a particular decision. Not always is the financial value of an operation or decision in line with the other value that the operation or decision brings with it.
For example, a large referral source approaches you and says that they are establishing a satellite office in the next county and would very much like for you to set up an office in the same complex.
Does this scenario sound familiar?
Although you well know that establishing a satellite office may mean the possible addition of administrative staff, the "stretching" of current clinical staff by adding to their "on the road" time, thus subtracting from their time seeing patients, and the addition of ongoing office expenses and startup expenses, you decide to put the office in anyway. You realize that you need to establish the office to maintain the good business you are getting from this large referral source-and if you don't, the opportunity may be given to a competitor. This satellite office thus has more strategic and competitive value than it has financial value.
Certainly, sometimes it is both logical and good business to make decisions for strategic and competitive purposes, even though you are sacrificing financial value. However, fear often is the driving motivation, rather than a logical analysis of the financial and resource implications. The risks and the rewards of the decision should be properly weighed and measured.
Whenever the "value" of a satellite office is being measured, the scope of the value of the office must be considered.
As an accountant, when I consider the concept of "measuring," I think of detailing the actual projected numbers. "Measuring" does not have the intangible quality of the concept of "value" and is more related to the financial value of a decision rather than its strategic or competitive value.
A simple analysis should be done to evaluate the financial value of an opportunity. Just because you do not have a knack for numbers, or frankly you don't like to look at them, don't dismiss the great value this analysis provides for the decision-making process. Simply set up a projected Profit & Loss (P&L) statement that shows what you think the billings will be from the office and the associated expenses.
When you set up this projected P&L statement, you should consider a few issues you may encounter along the way:
Although you may include the total projected billings of the satellite office in the analysis, you may want to note the amount of additional billings that you will gain by setting up the satellite office. Billings you would have had with or without the satellite office do not add to the value of having the office.
Use approximate percentage averages for contract allowances and write-offs, labor expenses, and fabrication costs. When you have an expense category that you cannot attribute directly to the office, simply allocate a percentage of that expense to the office, based on past experiences. If you expect that only a portion of a staff person's time is going to be directed toward the office, use that estimated percentage multiplied by the full annual cost for application in the analysis.
For example, if your billing staff person tells you that for every dollar you bill out, you collect 85 cents, you know that you should deduct 15 percent (1.00 - .85 = .15) as contract allowances and write-offs from the projected P&L statement of your satellite office. Or, if you know that your CPO, whose total expense to the company is $100,000 (a gross salary of $80,000 multiplied by a factor of 1.25 to account for payroll taxes and benefits), will spend 30 percent of his/her time at the new office, you will calculate a $30,000 clinical labor expense category in the analysis. And finally, if you know that, on average, the total cost of building a device, including technical labor and components, equals about 35 percent, then you would use this average percentage in the analysis.
By deducting the normal expenses of an operation from projected billings, you will be able to better measure the projected financial value of the satellite office.
If you decide to move forward with establishing the office, be sure to use your medical billing and accounting software packages for constant measurement of the financial picture. These software packages are great tools that are often underutilized. Many medical billing packages will allow you to set up different office locations. Having a practitioner note on the super bill at which office the patient was seen will allow the administrative staff to note this in the billing system. Although the claim forms will be generated from one site, the reports will detail the billings from each site.
Consider setting up your general ledger and chart of accounts-simply what accounts are in the accounting system-so that each office has a separate line item. For example, you may have a Rent Expense - Main Office and a Rent Expense - Office #2.
Without question, the age-old philosophy of GIGO-garbage in, garbage out-is very pertinent here. Be conscientious about setting up these systems properly, even seeking consultation on how and why to do it, because the dividends will make it worthwhile down the road. Taking the time to consider "value" and "measurement" is key to pursuing good business decisions. It is worth the time invested in the digging, uncovering, and learning process. However, the process and analysis can always be improved, and often it is more complex, so a good dose of common sense should be used in balancing the scales.
The following is a sample Profit & Loss Statement to offer some structure to creating a financial forecast for evaluating the value of a satellite office. You should note that the numbers used, although reasonable for the industry, have no actual meaning in and of themselves and thus the P&L Statement should only be used as an example of the structure of the statement. As well, the expense categories or other line items are not necessarily all inclusive - you could certainly elect to increase the number and type of expense accounts or delete some of them noted - however, whatever you elect to do, you should be as thorough as possible so as to be all inclusive as to the expenses associated with the satellite office.
A good method of creating the applicable financial forecast for a satellite office is to utilize the percentages from your company's standard Profit & Loss Statement. If your company's standard P&L Statement suggests that the percentage of sales for Cost of Goods Sold is 35% then I would use that same figure for the satellite office. At the same time that you use the information from your current standard company P&L Statement, you should challenge how or why this percentage would be higher or lower for the satellite office.