No really, double profits, finally take a vacation, increase business value and more.
This year we've been working with nursing agencies to help them fill nursing shifts. What we learned about agencies surprised us! While there is a high demand for supplemental nursing, agencies are seeing their margins continuing to deteriorate. What this means for these agencies is, even with high demand, agency owners are working more hours and seeing less profit. The good news is that after working with these agencies on their technology for a few months, many of these agencies saw that their margins improve. With some agencies doubling their profit margins. If you think you could live with doubling your profits we'll try to explain how we did it for these agencies and how you could improve yours as well.
First let's make sure we are on the same page when we are talking about margins. In business there are three main types of margins that you are probably tracking.
- Operational costs – These are the costs associated with how the company makes money. In the case of nursing agencies these costs include: Nursing payroll, insurances, taxes, etc.
- Overhead costs – These are required business costs that are not directly billable to the customer. These costs includes: office rental, client sales, recruiting fees, telephones, owner & employees salary, VMS fees and VMS scraping software costs, etc.
- Profit Margin – In this simple example, this is earnings or the cost sales, but before taxes.
In addition, let's review the concept of business value. Business Value is what your company is worth if you tried to sell it, or take out a bank loan of some type on the value of the company. A quick down and dirty estimate of business value (BV) is your profit margin times an industry multiplier.
(Note: This is not an article on business valuation, but for discussion purposes we can say the business, is worth the Margin times a multiplier (The multiplier is based on the value of the company if the owner was sick and unable to work. How likely is it that would the business continue to function with the same margins? If no, the multiplier is 0. If yes for 1 year, a multiplier of 1. If two years then say a multiplier of 2. BV = Profit Margin X Multiplier.))
Now, let's say you are a small agency, filling an average of 12 shifts a day. In the industry, then before costs, the company will be grossing about 1 million dollars per year in gross Income. But what would the profit margin be? Again, using industry standards (your numbers may be higher), we can assume Operational costs = 70% and Overhead costs = 27% of Gross Income.
- Total Yearly gross income = $1,000,000
- Operational costs = 70% = $700,000
- Overhead = 27% = $270,000
- Profit = 3% = $30,000
Assuming a multiplier of 2 the BV (the amount you could sell your business for) would be $60,000 dollars. (BV = Profit ($30,000) X Multiplier (2) = $30,000 X 2 = $60,000)
Here's what we found...
Here's what we found when we start working with agencies. In just three months using new technology and business processes, overhead costs were lowered by 3%. This improved the profit margin for the company from 3% to 6%. This meant that profits were doubled. If we use the same calculation for business value, with the new profit margins, BV= $60,000 X 2 = $120,000. Business Valuation will have doubled
OK, so you're right... this doesn't tell the whole story. Fortunately it gets better, not worse. Adding just a little bit of technology allowed the staff to increase employee productivity as well. What we found was that by month three, instead of 12 shifts per day, the agency had added 4 (or more) shifts per day. All without increasing overhead costs. In this example, the yearly gross income of 1.0 million rose to 1.25 million in gross earnings. With this increase in company earnings, here's what the new margins will look like in a year.
- Total Yearly gross = $1,250,000
- Operational costs = 70% = $875,000
- Overhead = 22% = $270,000 (note no increase in overhead costs)
- Profit = 8% = $105,000
The new profit for the company ($105,000) represents a 2.6 times increase in profit. It also means the owner will be able to pocket an extra $75,000/year. Of course the owner can also re-invest this money back in the company. (What would you do, re-invest, keep all the profits or a combination of both?)
But you are right, that's still not the whole picture. Again the picture gets better, not worse. Remember we talked about business value. With the original business value calculation was based on $60,000 in profit. In the new forecast, two things have changed,
- Profits have increased by a factor of 2.6
- The technology improvements have increased the multiplier to 3 instead of just 2.
The new business value for this same company has improved from an initial $60,000 to $315,000. (BV = Profit (105,000) X Multiplier (3) = $105,000 X 3 = $315,000)
Remember this started with a small 3% improvement in overhead. By leveraging that small 3% improvement, the value of your business has increased 5.25 times.
To get results like these, you will need a team. In our experience a good team starts with you, the expert in your company. You will also need an expert at integrating business and technologies. Working together, the members of the team will integrate your business processes and technologies in ways that will immediately start improving company margins. Ultimately by building a strong team your company can execute and achieve these same results.
Often, the first thing most small agency owners think is, "Oh... I bet that's expensive!!!"
Probably not as much as you think. Far less than the 3% being lost on extra overhead right now.
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