Reece Tomlinson explains the importance of understanding capacity related challenges and how it can help you manage both busy and quiet periods more effectively
For any business, managing capacity is critical to being able to maximise efficiency, increase cash flows, increase profitability, and ultimately provide a better patient experience. In the world of aesthetic medical clinics, the business makes revenues and profits off of the services performed by a combination of people, facilities, and input products. Consequently, effective capacity management is often the difference between mediocre and above average clinic results from a financial, operational, and patient perspective.
Capacity, as it relates to business, can generally be defined as the maximum output that the business can produce in a given period with its available resources. In the aesthetic medical clinics, capacity generally refers to the number of treatments that can be performed in a given period as it relates to the people performing the treatments, the space required to perform the treatments and the input products required to make the treatments happen such as the dermal filler in a dermal filler procedure.
Given that trained and often highly paid individuals are required to complete the services offered by aesthetic medical clinics; it becomes clear that one of the most significant costs a clinic incurs is that of paying its employees. Therefore, regardless of the size of the clinic, without effective capacity management in the clinic, it becomes very challenging to reduce swings in cash flow while generating profits. Conversely, if the clinic is continuously overbooked, the patient experience is diminished, and as a result, the clinic may observe less repeat patient bookings and less word of mouth referrals, which will ultimately negatively impact the clinic in the future.
This article intends to help clinic owners and managers better understand capacity related challenges and how they can manage them more effectively. Below are some best practices I have learned for managing capacity throughout my career as a CEO and entrepreneur.
Understanding the clinic’s capacity
The first step in understanding the clinic’s capacity is to determine how many hours per day are available combined with the potential mixtures of service that can fit within this. For example, if the clinic employs five doctors and the clinic only performs dermal fillers and toxin treatments, the clinic could, in theory, handle 50 patients per day (based on 10 patients per doctor per day). This figure inherently changes per clinic based on a large number of circumstances including the type of treatments, service levels, type of clientele etc. However, the underlying notion is that there is some maximum figure which becomes the capacity level of the clinic. Once this is determined the clinic can then begin to understand how much it can book in a given day, week, and month without reducing service quality or requiring employees to work overtime to meet demand. In short, the clinic can identify its optimal capacity.
Generally, the clinic should identify and understand the capacity of the employees required to deliver its services and should identify whether any part of this capacity is considered variable, meaning it can be flexible such as scaling hours up or down. Employees that are paid hourly are a great example of variable capacity, which can be increased or decreased based on demand.
No different than the underlying reasons behind why airlines allow more time than is needed to travel from one destination to the next; it is a wise idea to allow some amount of room for unforeseen events, delays, and flexibility when determining the true capacity of the clinic. Although every clinic and every business are different, allowing 5% of the total capacity of the clinic to be a buffer will help reduce the impacts of a treatment taking longer than expected, patients being late or squeezing in a patient last minute.
The general formula I use for managing capacity is as follows:
Non-variable resources (think staff that are salaried and full time, rent costs, utility bills, etc.) + Variable resources (hourly employees, costs that can be scaled up or down, inventory, etc.) + Flex room (5%) = Clinic capacity.
Generally, when performing the capacity calculation of the clinic, it is measured in relation to the desired output of the business, which for most aesthetic medical clinics should be the number of treatments performed or patients seen. Therefore, the end result of the calculation should equate to a number the clinic can perform on an hourly, daily, weekly, monthly, quarterly and annual basis. This becomes the clinic’s capacity.
Therefore, when attempting to manage capacity, understanding the capacity of the clinic is the first step and is absolutely critical in maximising efficiency and profitability.
Capacity and cash flow
Perhaps the single most important reason to ensure that capacity is well understood and managed is to ensure cash flow remains strong during periods of weaker demand such as months where the clinic has fewer bookings than others.
Capacity and cash flow are directly correlated because poor capacity management costs the clinic money in the form of staff that are not directly producing revenues, spaces that are not being used, and money that is tied up in the form of inventory and not being utilised. When capacity is not managed correctly it can decrease available cash flow and negatively impact the profitability of the clinic as the company starts to spend more money than it is making.
Therefore, it is paramount that the clinic recognises that improved capacity planning can directly equate to better cash flow and increased profitability.
It is critical that the clinic engages in the practice of forecasting for the demand of the clinic’s services.
Why? If the clinic can forecast demand over the coming weeks and months, it can better apply its resources to ensure that there is an optimal combination of people working and product available (think dermal fillers etc.) to meet the demand of the clinic.
For example, the clinic should be ensuring that the hours being worked by employees match the demand of the clinic over a given period of time. If it is a slow period of the year, such as the summer months or January/February, the clinic should book fewer employees to be working and have less stock on hand. Conversely, if the forecasted demand appears to be much higher than expected for a short period of time, the clinic should look to bring additional, perhaps part-time, employees on board to assist in being able to handle the increased demand and should ensure that more stock is on the clinic shelves.
The simplest way to forecast demand is to review what the clinic has booked over a given period of time (I recommend looking 6–12 months out at any period of time) combined with the typical historic seasonality of the clinic over a given period (certain months are typically busier than others) and any one time factors that could influence demand, such as the addition of new treatments, special offers etc.
When the clinic utilises demand forecasting, it can then begin to make strategic decisions to better maximise its capacity.
Altering demand and capacity to maximise efficiency
After the clinic understands both its capacity and future demand it can then be proactive in altering demand or its capacity in an attempt to ensure that capacity is optimised.
For example, the summer months are traditionally slower in aesthetic medicine than other times of the year. As a result, many clinics will experience issues of having excess capacity during this period, which invariably costs the clinic money in the form of paying staff who are not necessarily producing income, holding on to inventory that is not turning and paying for space that is not being effectively used. Consequently, during these slower times, the clinic risks operating at a loss, which invariably eats away at cash flow and full year profitability. In such a scenario it becomes critical that the clinic alters either its demand or capacity as a means of ensuring the clinic can improve cash flow and continue generating profits.
Fortunately, the clinic does have options. Table 1 highlights some ways in which the clinic can increase demand and/or alter capacity during slow periods to maximise cash flow and profitability.
In summary, understanding capacity is a very relevant and important concept for any clinic. When a clinic can understand capacity, forecast capacity demands, and make strategic decisions to ensure that the company is operating as efficiently as possible, the clinic can increase cash flow, increase profitability, and operate at a much higher degree of efficiency, which impacts all areas of the clinic including the patient experience.