Profit centers as a performance measure

By Loretta M. Tubiello-Harr, CPA

Profit centers are measurement tools used by many different industries. They are a means by which management of a company can analyze revenues and related expenses generated by a profit unit. A profit unit can be a product, a line of business or a person. In using profit centers, management can determine easily whether the profit unit is meeting its own direct expenses and how much it is contributing to the company overhead.

In multiple doctor medical practices, setting up the recordkeeping system to reflect each doctor as her own profit center will give insight into the expenses each doctor is absorbing against revenue directly generated by her. Keep in mind this works for a two-doctor practice as well as a larger practice. The data generated from this exercise gives management another tool in evaluating performance for salary adjustments, bonuses and promotions.

In order to develop a profit center, it is important to have software that gives you the ability to run the numbers in different formats. Most current software packages have this capability in one form or another. The typical canned software accounting packages used by medical practices are Peachtree, QuickBooks and Creative Solutions.

For Peachtree users, the simplest way to establish profit centers is to use department coding, whereby each doctor is considered a department. In order to do this, an extension of the account code would have to be established. For instance, using malpractice insurance as an example, if your account code for malpractice insurance in your system is #4050 and you have three doctors that will be set up as profit centers, the accounts would appear as follows: #4050-000 – Malpractice Insurance, #4050-001 – Malpractice Insurance Doctor A, #4050-002 – Malpractice Insurance Doctor B, #4050-003 – Malpractice Insurance Doctor C. In essence, each account code you have now on your system for both the income and expense categories will multiply by the number of profit centers you identify.

For QuickBooks users, you can do as presented in the Peachtree example above, or you have two other options, one of which is to set up Classes, whereby each doctor is set up as a different Class. Under this option, your account codes as already generated by your system now can still be used without adding any additional sub-coding as presented above. The second additional option is to set up each doctor as a Job. Again, you can continue to use your original account codes as you could with the Classes. This option also generates a nice report, however, Jobs do not close from year to year in QuickBooks. In order to generate the proper report an extra step to customize the dates you want presented would have to be done.

The author’s recommendation is to use Classes for the set up in QuickBooks.

For Creative Solutions users, the simplest approach would be to do the same account/sub-account grouping as identified in the Peachtree example.

Each one of the software packages presented above has the capability of a more sophisticated set up, but this could only be done within practices that have at their disposal a systems expert or a bookkeeper with advanced knowledge of customizing the software. Typically, this in not the case. Therefore, this article as presented will not delve into these options.

Once you have determined your software capabilities, begin coding the information into your recordkeeping system as follows:

* Allocate the revenues by doctor.

* Identify and allocate the direct expenses associated with the doctor, such as her own Salary, Malpractice Insurance, Fringe Benefits, Conferences and Seminars, Vehicle Expense, Meals and Entertainment, Refunds to Patients, Refunds to Insurance, Travel and Lodging, Licenses, Dues and Fees, etc.

* Determine an allocation method for overhead or indirect expenses and allocate those by doctor within the software system.

Direct expenses can even go so far as allocating medical supplies used directly by a specialist in the practice, such as vaccines that may not be used by anyone else. If staff positions are more directly related to one doctor over another, this too can be allocated as direct expense to a particular doctor.

The indirect expenses can be allocated in different ways that best suit the needs of the individual medical practice. Some recommended options would be to allocate them based on percent of gross revenues generated by doctor, or percent of cash receipts generated by doctor, or percent of number of patients seen by doctor, or percent of occupancy space used by doctor or merely dividing equally among the number of doctors. If you are dividing equally among the doctors, you will need to make an adjustment for any part-time doctors on staff. This will eliminate any unfairness in allocation to the part-time doctor.

Some practices do not allocate the indirect expenses in the software system, but will use an Excel spreadsheet to do the calculation at the end of the month or any other period you are using for analysis purposes. The reasoning for this is due to the amount of manual calculation the bookkeeper has to do as she is entering the indirect expenses in the system. For instance, if the office supplies have to be allocated among three doctors, the bookkeeper would need to manually divide the invoice by three, then enter it into the software program allocating it to the three doctors as three different entries. This can get cumbersome for a practice with several doctors. The Excel spreadsheet allows you to preset the formulas. Once you enter the totals, Excel will automatically allocate the expense based on the formulas set up.

If you choose to enter the indirect expenses directly into the software system, each of the packages identified above has the ability to set up a default distribution for recurring expenses with identical dollar amounts each month. You can tell the system every time you bring up a particular vendor that it will be for a particular total amount with the distributions automatically preset, also. This will assist the bookkeeper in not having to do the manual allocation for at least those expenses. Some examples of this type of expense would be Lease Payments, Rent and Depreciation.

Some examples of indirect expenses are Building Rent, Depreciation, Equipment Leasing, Interest Expense, Legal and Accounting Fees, Office Supplies, Medical Waste Disposal, Pension Expense, Staff Payroll, Payroll Taxes and Related Expenses, Telephone and Utilities.

A recommended time frame to generate your profit and loss statement by profit center would be monthly. From this information, you can perform “what if” scenarios, by massaging the information such as “What if Doctor A saw two more patients per day, which would generate $X? How much would that change her contribution to the bottom line?”

“What if” scenarios can also be performed with the expense line items.

Profit center management will allow you to establish future strategies that were not available to you in the past.

Loretta M. Tubiello-Harr, CPA, CVA is Principal In Charge of the Allentown office of Parente Randolph, LLC.