Question
I've worked in an ENT office for many years as a salaried employee and they are now considering changing our status to independent contractors so that we would take a biweekly draw from everything that audiology brings in. Do you know of the specific formula that is used to determine profit? How much of the overhead is assigned to audiology etc.?
Answer
Since the question does not address the legal ramifications of a contract consultant as opposed to an employee, the issue is how the consultant would be paid based upon a profit margin formula. Although there are no absolute formulas, a guideline that can be used is to set the profit margin around 65%. This assumes that the cost of hearing aids would be 1/3, the fixed expenses of the office are 1/3 and the profit is 1/3. For example, if I purchase a hearing aid for $500 and want to make a 65% profit margin, the cost of goods ($500) is divided by .35 (100%-35%=65%). The hearing aid that cost $500 would then sell for $1428. Another way to look at it is the selling price;in this case $1428 minus the cost of goods sold ($500) divided by the selling price is the profit margin ($1428-$500=$928 net profit). The $928 is divided by $1428 to get a profit margin of 64.99%. This pricing strategy can be used for all but the highest end hearing aids that might be priced too high for the market.
The plan calls for a draw based upon profit. The consultant needs to look at what costs are directly attributed to the audiology/hearing aid part of the ENT operation. There are two constant or fixed costs that comprise most of the overhead: rental and labor. Rental costs are determined by taking the amount of square feet for the entire ENT office and determining the number of feet that would be dedicated to audiology. To determine the cost per foot, take the annual expense for rent and divide it by the total number of square feet. For example, a 1000 square foot office that leases for $1800 a month has a square foot cost of $21.60. That figure is arrived at by taking the monthly rent and multiplying it by 12 months. Then divide that figure by the number of square feet to determine the cost per foot.
Labor costs can be determined by the number of hours ancillary staff are devoted to the audiology part of the practice. Divide that into the compensation for all employees involved (receptionist, secretary, biller, etc.) to arrive at an hour labor cost which is charged against the audiology service.
There are other costs for liability insurance, janitorial services, shared telephone etc. that can be calculated on a square foot basis. Be sure to exclude ENT's malpractice insurance and any other costs that are not related to audiology.
Granville Y. Brady, Jr., Au.D. (AZ School of Health Sciences) has over 40 years experience in audiology. Dr. Brady owns a private practice in New Jersey and teaches the business development and accounting course at ASHS, Mesa, AZ.
