What You Need to Know About ROI

What You Need to Know About ROI

It is one of the most vital measurements for a practice, and the numbers can determine if it sinks or swims. While most dentists and optometrists have a solid, basic understanding of ROI, many aren’t aware of the subtleties that can transform one minor misstep into a catastrophe.

To recap, ROI stands for Return on Investment. The formula for ROI appears deceptively simple: the gain divided by the cost. This number is crucial because it determines effective planning and budgeting. Here’s a dramatically simplified example: Let’s say you spend $300 for an ad, and the ad only brings $100 worth of business. Obviously, this ad didn’t produce an effective ROI. While this scenario is true at a basic level, there are numerous subtleties that surround the accounting of profitability, and without a trustworthy practice advisor, these devilish details can slip by, creating disastrous results.

Using the example above, let’s say you get 20 new patients from the ad. Each patient gets $100 worth of dental work. That’s a total ROI of $2,000 cash to register as profit. Right? Not quite.

Common mistake

According to Joe Knight of the Harvard Business Review, there are some common mistakes managers make when calculating ROI. The primary mistake is that profit is not the same as cash. So if your practice made a $100,000 profit, it doesn’t mean that you have $100,000 cash to spend. Profit revenue is not calculated in the same manner—patient billing may be counted as revenue, even if the patient hasn’t paid all of his or her bill. Income statements also include depreciation of capital assets, while cash transactions are noted in the cash flow statement.

In other words—returning to the hypothetical example—if the patient’s insurance doesn’t pay for the whole amount this quarter (or worse, defaults on his or her payment) it’s difficult to accurately measure the ROI of the ad. Do not compare the initial (cash) investment to profit when calculating ROI. Always use the cash flow to ensure you are comparing apples to apples. Remember that revenue isn’t measured as a cash number.

Segment your ROI calculations

Do you have more of a profit margin on root canals or on regular checkups? Which procedures receive the best insurance reimbursement? These are all questions you should consider. By segmenting your ROI, you can see where you’re making money. You can then be better informed before promoting a specific service. A practice advisor can not only help you discern these calculations, but he or she can also show you how to improve efficiency of low-performing areas.

A good ROI doesn’t = success

Depending upon your practice’s location, you may be in stiff competition from other local practices. If your ROI is stellar, but your competitors are performing even better, you’re still losing your market share even if you are profitable. Marketing and brand awareness are essential to establish your credibility among clients and the community. Long-term ROI calculations are needed to determine how your brand is doing over time.

Beware of these detractors

Several things can detract from your ROI. This includes:

  • Ineffective marketing campaigns
  • Ignored competition
  • Cumbersome appointment-setting
  • Inaccurate mailing lists
  • Unforeseen costs

Setting a profit margin goal is the easy part. There are a lot of moving pieces when calculating your ROI and many things that can affect it. The best course of action is to start on the right foot with someone who has a solid understanding of the many facets of ROI.

By |2019-09-04T17:57:12-04:00September 3rd, 2015|ROI Measurement, Saving Money In Your Medical Practice|

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