If you want to increase the profitability of your business, cost reduction is even more important than revenue growth. Do the math: if it costs you $9 to earn $10 (a pretty impressive 10% profit margin), you'd either have to sell another $10 worth of goods or services to make one more dollar of profit, or just cut your expenses by $1. Each dollar of cost reduction is worth $10 of revenue increase.
As we saw in our productivity section, labor and transportation are significant EMS cost elements. We can expand Figure 3 to incorporate two indicators of cost: labor variance and transport variance (Figure 4).
Any outcome that's different from what you expected can be considered a variance. If you planned to work 40 hours last week but only clocked 36, that is a variance of four hours, or 10% of your schedule. Another example is paying $8,400 for a new roof after getting an estimate of $8,000. That's a $400 variance (5%).
Variances can be favorable or unfavorable. Sometimes it depends on your point of view. If you're the homeowner in the latter example, spending an extra $400 for a roof definitely is unfavorable. The terms positive and negative also apply, but a positive variance is not necessarily favorable.
Labor variance is the difference between what your company earned per employee-hour and what you have to earn to be profitable. Standard revenue per employee-hour combines wages, a prorated amount for benefits (medical coverage, insurance, vacation, etc.) and overhead (rent, vehicle maintenance, supplies, etc.). That sum is then marked up to include a profit.
Transport variance shows how your agency performed per transport-hour. Standard revenue per transport-hour considers all direct and indirect expenses associated with operating an ambulance for an hour, an allowance for overhead and a percentage for profit.
Positive variances on our sample report are favorable, meaning they represent more profit than expected. Negative variances (in parentheses) reveal shortfalls in earnings. Over time we can see which cases, employees, vehicles, routes and presenting problems contributed the most profit.
There are variances associated with materials, too. Since supplies usually account for less than 10% of an EMS agency's budget, we don't pay as much attention to that area as labor, facilities and equipment. However, if your company spends $300,000 a year on materials, and you can reduce that by 10%, you've just paid for one or two new cardiac monitors.
A good way to minimize material costs is to consider the trade-off between purchase price and holding cost. Here's how that works: Vendors who sell supplies want you, the buyer, to commit to the largest possible order. Everyone in the supply chain benefits from quantity. Manufacturers keep production lines running longer, and salespeople make heftier commissions. Vendors understand that buyers need inducements to load up on inventory, so they offer discounted unit prices at higher quantities. Sounds like a win-win situation, right? Perhaps not.
Suppose your agency uses 3,000 nonrebreather masks annually. If you purchase four month's supply, the price might be $2 each. But before you can say "oxyhemoglobin," the sales rep offers to reduce the price to $1.95 if you agree to buy at least 3,000 masks—a year's supply—all at once. You would save five cents a piece, or $150 on the order—or would you?
The total price of the larger order would be $5,850. That's $3,850 more you'd be spending today (3,000 masks at $1.95 each vs. 2,000 at $2). If your company can earn 1% per month, either by investing that sum or by not having to borrow as much money to keep the business afloat, then your agency makes $154 (not compounded, before taxes) just by leaving that $3,850 in the bank for four more months.
Next month you would withdraw $2,000 from the $3,850 to buy another four month's supply of NRBs at $2 each. That leaves $1,850 to earn interest for four months ($74). The annual interest earned by making three smaller purchases instead of one large buy is approximately $230 or 53% more than the savings based solely on the purchase price! Time to go back to the bargaining table.