For years, many DSO’s have focused on one thing: growth at all costs. This has been accomplished through the acquisition of supported offices, de novo practices, revenue growth and cost-cutting. As the DSO remains a newer model, and companies are many times private equity backed, growth at all costs may be a viable initial growth model, however, it is not sustainable.
While there are many paths to success, there is a single metric that management should be paying the closest attention to. This metric does not focus on revenue growth but instead puts the emphasis on operating efficiency.
Naturally, any manager worthy of their position will also pay attention to items such as historical metrics showing performance for the last month, quarter, or year. They also want to pay attention to current metrics such as cash in the bank and the balance sheet. They will also develop anticipated future trends, attempting to predict what actions taken today will produce tomorrow.
Even still, for long-term health, there is but one metric to pay attention to:
A practice that is in great shape is able to grow operating income faster than revenue by properly managing costs as revenue increases. Simply put, growing the bottom line is more important than growing the top line.
Revenue alone can be deceiving. Many companies have been forced to liquidate despite having strong sales. If costs are not properly managed, you may easily find yourself hanging up the going out of business banner.
If a practice is healthy, it is building operating income faster than revenue. If income and revenue are growing at the same rate then your affiliated practice is experiencing trouble scaling. If operating income is growing less than revenue then your affiliated practice is headed for the red and needs to make serious adjustments. This most often takes the form of drastic cost-cutting, including layoffs. For multi-location practices, it could mean closing a few doors for good.
Operating leverage is a metric that you should pay more attention to than any other. It paints a clear picture of how you are performing. Watching and improving this single metric will help you more easily scale your business, as well as the practices you support.