Saturday, November 30, 2002

Profitability: Know thy costs

Q: With reimbursement pressures, I know I need to have a good handle on the profitability of my various product lines. Any suggestions?

A: It's now more important than ever to have accurate information on the financial performance of the segments of your business. To do this analysis, you need to be able to accurately segregate two items by product line: "real" revenue and "real" costs.

Revenue. This is the net amount generated from each segment. It needs to be after all adjustments. This requires that you track your revenues and adjustments by product line, rather than by combining all revenues and adjustments into single-line items. You may be doing this already, or if not, you can hopefully use your billing system to generate the required data.

Costs. There are two categories of costs: product costs and what I'll call overhead costs. Product costs include purchases, freight-in, depreciation of rental equipment and rental equipment maintenance. These are typically identified through available financial reports. Overhead costs include all other direct and indirect operating expenses. An effective method that can be used to accumulate and allocate overhead costs is activity based costing (ABC). ABC is a comprehensive approach to looking at your company based on the activities that are carried out within each department and then assigning related costs to each of the activities. The end result is a database of company activities and costs.

While there are additional factors to consider, once you've gathered these breakdowns, you can look at your winners and losers.

Don Clayback is v.p. of networks for The MED Group. Reach him at 716-835-1728.