They didn’t really address the topic of profitability in chiropractic school. As much as some DCs would like to ignore this sometimes inconvenient fact, chiropractic is still a business. And that means you have to make a profit while practicing it or you don’t get to practice it. 

In this regard, making a profit in business is like golf: It’s simple, but it isn’t always easy. In golf, the objective is simple: Get the ball in the cup by hitting it with golf clubs. The problem is, that’s not really easy to do. Being profitable in chiropractic practice is similar: Generate more revenue than you are spending in overhead and expense. Of course, this is not always easy to accomplish. And, like golf, some people are better at it than others.

The Profit Equation
Like so many other things, profitability is a simple equation: Business revenues minus overhead and other expenses (labor and materials) equal profits. Put more colloquially, profit is what’s left over after the bills are paid.

Most discussions of profitability center on the “overhead” side of the equation. Overhead is defined as the operating expenses of a business, including the costs of rent, utilities, interior improvements, and taxes, exclusive of labor and materials. Labor and materials are also considered expenses, but they are not considered overhead per se.

Do you want a big piece of a small pie or a small piece of a big pie? Of course, you want a big piece of a big pie, but bear with me here. Consider this conundrum. Would you rather make 25% profit on $1 million in annual revenues, 50% profit on $500,000 in annual revenues, or 75% profit on $333,333 annual revenues? In each example, the “what’s left over” is the same: $250.000. The point of this question is that profitability is both a percentage of annual revenues and an absolute amount. 

It would appear that the best choice above would be the highly profitable 75% on $333,333 annual revenues. And it’s true that a highly profitable practice has a lot of advantages: minimum expenses; probably minimum staff and the challenges associated with having a larger staff; a practice less vulnerable to some downturn in business (a big layoff at the largest employer in town or  a new HMO moving in, for example). The doctor has fewer worries about meeting overhead.

Without going into a discussion of what it actually takes to generate a $1 million in gross revenue—and the considerable expenses typically involved—perhaps the $1 million annual revenue contains some expenses that very positively impact the owner-doctor’s life. For example, he may have a couple of associates that spread the workload and probably even allow him  to work a reduced schedule. Or perhaps this doctor is able to vacation more often or for longer periods of time. These are very real benefits of having a higher overhead than the doctor in the first example.

These are the kinds of business decisions the doctor gets to make during his career. These decisions have major impacts on profitability.

A Different Perspective
Here’s a different approach to expenses and overhead that might help you in your challenge to be profitable. Forget for a moment that overhead and expenses are almost the same thing. Suppose that expenses are the daily, weekly, monthly, and yearly costs of being in business. They are things like rent, utilities, office supplies, x-ray film, property, and business and income taxes. Now, for the sake of this exercise, imagine your overhead as a percentage of your total revenues. Expenses are added up and counted. Your overhead is calculated as a percentage.

With this exercise in mind, it should be clear that reducing expenses and reducing overhead are two different things. Reducing expenses involves actually finding expenses you can cut or do without. As a practical matter, once established, expenses are very difficult to reduce. You typically can’t go to your landlord and ask for a reduction in rent simply because you want to reduce overhead. Your employees always want more pay, not less. Utility costs are skyrocketing due to the increasing cost of energy worldwide—a phenomenon far out of the control of an individual DC—so where would you actually begin to cut expenses? The answer is pretty much nowhere.

Increase Revenue
But a relatively simple, straightforward way to decrease overhead is to increase revenue. Increasing revenue involves no cutting of essential or near-essential expenses, no laying off of staff, no letting go of associate doctors who help make the doctor’s life so much easier, and no diminished lifestyle. By increasing your revenue and keeping expenses relatively stable, profitability increases considerably.

For example, if you are generating $500,000 annually and have $400,000 in expenses, increasing revenues by only $100,000 (a 20% increase), and keeping expenses stable, decreases your overhead (percent of gross revenues) by 14% and increases your profitability by a whopping 100%. I’m not just playing mind games. This is hard arithmetic, and the results go into your bank account.

The way to excellent profitability isn’t necessarily low overhead—look no further than corporate America and the massive overheads they carry—it’s high revenues. The higher your revenue, the easier it is to be profitable. There’s a saying in the business world—high revenues cover a multitude of management sins—and it’s true. When revenues are high, it’s easier to choose which expense items can be reduced, or sometimes even increased, to increase profitability. Also, the profit percentage increases as revenues rise and expenses stay reasonably stable. The challenge is, of course, how do you increase revenue? There are three ways:
• get more new patients;
• collect more revenue per patient by increasing the number of times you see a patient or increasing the number of products you sell to a patient; and
• collect more revenue per procedure or product (increase prices).

Of the three ways to increase revenue, two of them—increasing the number of products and services recommended and sold to a patient, and increasing your prices—don’t increase overhead. Often, but not always, acquiring new patients involves increasing overhead—at least until the investment begins to generate more new patients and the collections can begin to pay off in profits.

Pay Yourself Second
You’ve heard the old saying, “Pay yourself first.” But in my experience, this is bad advice. In reality, you should pay yourself second—after you pay your taxes. Not planning for, paying, or anticipating your taxes can be one of the most stressful and even financially devastating problems you can create for yourself. Whatever you do, pay your taxes and stay out of trouble with the IRS. Any tax problems you have will absolutely destroy your ability to either be profitable or enjoy any profit you make.

Should you intentionally keep profits low? Believe it or not, taxes are a compelling reason to keep profits low. Businesses are taxed based on their profits, and sometimes raising your expenses—in the form of compensation and other benefits for the owner-doctor—can minimize taxation on the business. Which brings up another issue: how to structure your chiropractic business entity.

The best ways to do business in chiropractic are to either incorporate or to establish a professional limited liability company. Both entities allow the doctor the maximum flexibility in financial planning and reducing income taxes. This topic requires the advice of professionals in law and accounting.

Another factor that doesn’t necessarily affect the profitability of your business but definitely affects “how much is left” is the doctor’s personal overhead. If a doctor has a very profitable practice, but has a high personal overhead in the form of per-sonal debt, expensive homes, cars, boats, or airplanes,  the practice is essentially a high-overhead practice, because all of the profit goes to service the doctor’s debt rather than to accumulation or some other, more economically efficient application.

Managing overhead and profitability is easy when revenues are high and very difficult when revenues tank. One of the best ways to ensure that you have more money at the end of every month is to avoid obligating you or your business to long-term fixed payments for items such as expensive houses, automobiles, and other such “assets” until revenues can predictably support such purchases, or better yet, you can pay cash for them.

Subject every financial decision you make to a test. Ask if the purchase has the potential to either
• increase new patients,
• increase patient retention, or
• increase products or services per patient.

If the answer is yes, then be sure you’re being honest with yourself. If the answer is no, then ask more questions: Will this decision make my practice or my life truly better in some meaningful way? Will this decision fulfill some real need in my practice or my life?

The point is to be thoughtful when making financial decisions that will affect your ability to make a profit in your business.

In the end, the purpose of any business is profits. If you don’t make profits, you can’t realize all of the dreams you sought to fulfill when you became a chiropractor. And the purpose of life is to fulfill your dreams.

Thomas M. Klapp, DC, practices in Ann Arbor, Mich. Contact him at tomklapp@att.net.