Financial Indicators for Physical Therapy Practice
Part Two of Three Part Series
In the first part of this series, explanations regarding variable and fixed costs were
provided to help understand the costs of providing care. The implications of these costs
were also discussed as they relate to signing contracts with third party payers. In the
second part of the series, the cost of providing care will be looked at in relation to
contribution margin. Contribution margin is often understood by using your clinic’s
income statement. An income statement is generally structured using the following
format:
Revenue…………………………………………………1,000,000
Less Variable Costs……………………………………… (500,000)
Profit Margin………….………………………………… 500,000
Less Fixed Costs………………………………………… (200,000)
Net Income………………………………………………. 300,000
The contribution margin is the amount of revenue remaining once the total variable costs
are subtracted from total revenue. This is the portion of revenue that will be allotted to
cover fixed costs and generate profit. From the contribution margin the fixed costs are
subtracted, resulting in the calculation of net income (which we all know is most
desirable when positive). By separating out these costs the contribution margin per
treatment can be determined. This number can be extremely useful for making decisions
regarding growth and capital purchases. Contribution margin calculated on a per
treatment basis is achieved by subtracting the per treatment variable cost from the per
treatment revenue. It is also determined by dividing the total profit margin by the total
number of visits. For example:
Total Number of Treatments Annually: 8000
Per Treatment
Revenue…………………………………………………1,000,000
$125.00
Less Variable Costs…………………………………….(500,000)
(62.50)
Profit Margin………….…………………………………500,000
$62.50
Less Fixed Costs…………………………………………(200,000) (25.00)
Net Income……………………………………………….300,000
$37.50
This per treatment breakdown allows managers or owners to quickly calculate the total
net income generated for a projected number of treatments. For example, if your clinic
wanted clinicians to increase productivity and see a total of 1000 more visits year,
keeping fixed costs the same, the growth in net income would be calculated as follows:
$62.50 profit margin/visit x 1000 visits = $62,500 increase in net income annually
Financial Indicators Part II
Steffes & Associates
July 2008
In addition, it also allows management / ownership the ability to determine the number of
treatments that must be performed to achieve a given level of revenue. For example, if
your clinic had a goal of 15% growth of revenue annually, the number of visits needed to
achieve this (assuming costs stay the same) is as follows:
1.15x$1,000,000=$1,150,000 in new revenue
$1,150,000 /$125.00= 9200 visits
9,200 are visits needed to generate growth in revenue
By breaking the components of your income statement down into per visit amounts,
calculations like these can be performed for budgeting purposes, productivity incentives
and forecasting revenue. In part three of the series, contribution margin will be used to
explain your organization’s sensitivity to changes in revenue or cost. How much can
revenue and costs fluctuate before your clinic is affected?
Financial Indicators Part II
Steffes & Associates
July 2008