Question & Answer

Monday, March 31, 2003

The ABCs of ABC

ARLINGTON, Texas - As a business consultant who spends about 15% of his time working with healthcare companies, Tom Pryor is practiced in spelling out the benefits of ABC (activities based costing). So in a recent interview, that’s what HME News asked him to do. Here’s what he said:

HME News: You said you’d be remiss if you didn’t tell DMEs to give ABC a try. Why is that?

Pryor: The DME and home healthcare industry has done a wonderful job of helping others, and now it’s time to itself. The time is right for HMEs to be proactive. Without activity based costing, how are you going to get a grasp on where you are making money and where you are not or do you have any waste? Assuming national competitive bidding comes to fruition, how are you going to bid effectively without knowledge as to what your services costs?”

HME: Despited the claimed benefits, ABC doesn’t seem popular with HMEs.

Pryor: A few have benefited from activities based costing but the key there is few. Those who have benefited realize there are some common threads: All the overhead is not consumed equally by every product, service or customer. And as a result, the traditional gross margin of a P&L implies to the reader that everything below gross margin applies equally. By using activity based costing, companies will learn that resources are consumed unequally. A business owner needs to know that to decide what he wants to do more of and what he wants to do less of.

HME: What’s the best allocation of resources.

Pryor: Not all strategies are the same. But if growth is one of the key objectives, we like to see the predominant amount of resources going to selling and marketing costs while minimizing procurement and collections costs. They also need to keep at a low costs, say 10%, business sustaining cost such - activities that keep the business open but don’t create sales or provide a service, such as payroll activities. HME