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HomemibusinessTaking Financial Control of Your Practice

Taking Financial Control of Your Practice

Owning a practice as an optometrist involves much more than just the clinical skills needed for consultations. Understanding profit and loss statements, balance sheets and selecting an appropriate business strategy can reduce some of the complexity of operating a successful practice.

Although patient care is the major concern of an optometric practice, the owner of the business must also ensure the service is profitable. Those who find grasping the financial requirements daunting may be comforted to know they are not alone.

A Hayes Consulting survey found only 50 per cent of large established optometric practices set annual performance goals, and only one in five have a written expense budget.1

But understanding profit and loss statements, balance sheets and appropriately selecting a sound
business strategy can reduce some of the complexities involved in running a business.

The cost of equipment to a company is generally much higher in the first year

Profit and Loss Statements

The profit and loss statement (P&L) is a key tool in the management of any company. It outlines the incoming revenue, cost of various expenses and profit (or loss) over a period of time. It is usually issued monthly, depending on the individual practice and it summarises these details so owners can examine the overall state of their company and decide whether there are areas that need improvement.

Before buying into or taking over any business, you should always view P&L statements as they give a good indication of the productivity of a business, and can be followed over a long period of time. The P&L can also be compared to both projected and budgeted expectations of the company and are a good tool to use to track the growth over a specific timeframe.

Depending on the business type and the owner’s interests, the P&L can include details on a wide range of areas within the business, such as the cost of discounts given to customers, or the proportion of frame inventory with low supplier discounts. Each section can also be further divided into various components to give owners a more comprehensive understanding of their business strengths and weaknesses.

Elements of a P&L

Revenue (100 per cent)2


This is all the money coming in from fees, spectacle lenses, frames, contact lenses, therapeutics and other items.

Practice Net (0-41 per cent, average ~25 per cent)

The practice net of a business is the total return of all the optometrists in the practice – the balance left after all store and retail expenses are reduced from the total income. This money is used to pay wages for staff optometrists and/or the owner optometrists should they choose to work in their own store. A portion of this money is given to the owning optometrist, regardless of whether or not they choose to work in the store.5

Cost of Goods Sold (COGS) (27–43 per cent)

This is the highest expense category and often one that is difficult to reduce significantly below 30 per cent. This includes all the costs for ordering and preparing the goods to be sold to customers: lenses, frames, contact lenses, dispensary floor space, lab equipment, share of dispenser’s salary. Other aspects, such as delivery costs and packaging, must also be taken into account. These costs can often be reduced by having a good relationship with providers or by buying in bulk, where possible. Minimising remakes and theft also helps reduce the COGS.

Staff (14–32 per cent)

Usually the second most expensive category, the practice staff is often considered the most important, and can be the “make or break” factor for a successful business. This section comprises ordinary staff wages, superannuation payments, staff reimbursement and bonuses, with other expenses such as education and training, uniforms, and team building events included as well.

Occupancy (4–14 per cent)
Occupancy includes rent, utilities, building insurance, maintenance and cleaning. Depending on the location, the occupancy rates can vary widely. For example, many shopping malls determine a business’ rent according to a percentage of its total profit. Therefore, the more successful the company, the greater this expense will be.

General overheads (5–12 per cent)
This is a broad category, covering the oft-forgotten aspects of simply running a business. Overhead expenditures are the costs necessary for, but not directly associated, with the development of a product6 such as the front office equipment, telephones, computers, legal and accounting, insurance and office supplies. Many of these are variable, and owners/managers should be aware and negotiate for better terms for certain supplies.

Marketing and Promotion (1–8 per cent)
A highly variable segment of the P&L, the expenses incurred for promotions vary depending on the focus of the practice.5 Franchise practices often have a set of marketing and campaign costs required as part of the network, whereas independent operators have the flexibility to change these costs.

Equipment (1–8 per cent)
The cost of equipment to a company is generally much higher in the first year, simply to acquire the necessary tools to trade. The bulk of this is a one-off expense, however devaluation of the equipment needs to be accounted for every year afterwards – a fixed ‘expense’. Other hidden aspects include general maintenance of the equipment, and components such as paper, ink, and light bulbs. Providing the equipment is upheld in good condition, the cost of this to the business can be minimised and, in the case of specialised equipment, the fees the instrument generates often offset the lease.

Balance Statement
The P&L statement is an important document to understand in order to gauge the overall direction of the business, however; it is not the only financial document that should be used. A balance statement should also be viewed to give a clearer understanding of the short-term variations in the finances. The balance sheet is a summary of the debits and credits of the business at a single point in time.7 For optical practices, this includes uncollected and/or unpaid jobs and other discrepancies. Ideally, the balance sheet should be reviewed weekly, so that outstanding expenses can be followed up and dealt with quickly. Balance sheets complement profit and loss statements; each presenting different perspectives
on the business.

Strategic Outlooks
There are four financial strategies that an optometry practice can aim to implement, summarised in Table 1.

The most ideal strategy is a high net percentage, high volume strategy (scenario D, Table 2). The company sees a lot of patients, has a great amount of goods sold (volume/gross revenue), and reaps the benefits of those sales after taxation and other deductions. A business in this position has a lot of buying power and can thus invest in the most advanced technology to make the business as efficient as possible.

A high-net, low volume strategy (scenario D, Table 2) usually involves a smaller number of patients and less employees). It requires the optometrist to take on a bigger role and more responsibilities in running the practice.

Having a low-net, high-volume approach (scenario A, Table 2) still has the potential to bring in high profits, given enough volume. This is the strategy used by discount chain businesses.

Lastly, employing a low-net, low-volume strategy (scenario B, Table 2) is what companies least prefer. It is usually indicative of a declining practice, a practice that has just started up, or a practice that has no conscious strategy at all.

It is imperative that the budget of the practice supports the strategy the business has chosen to adopt. For instance, the cost of staff may be a higher percentage of gross for a business that has more patients and, thus, desires to concentrate more on its level of service in comparison to a practice where the optometrist sees less patients but charges higher fees per patient.

Taking this into consideration, it is also important to note that the best strategy for one business may not be the ideal scenario of high net/high volume.
The best strategy is actually the one that the business itself can most successfully follow through.

Financial Indicators

There are a number of other financial indicators that should be reviewed periodically by a business:

• Average discount given to customers

• Average discount received from frame suppliers

• Proportion of new patients

• Average stock age

• Average frame retail price sold

• Annual rate of frame stock turnover

• Recall response rate within three months of contact

• Proportion of frame inventory with low supplier discounts

• Average billings per patient

• Revenue per consultation

If you want to improve something, measure it!5

Targeting for Improvement

The ‘leaky bucket’ is a powerful metaphor that conjures a visual summary of the P&L statement. Retail sales and consultation fees are the major income streams that ‘fill’ the bucket, with ‘holes in the bottom’ representative of all expenses that ‘drain away’ income, leaving a residual practice net. There are some key areas to focus on for maximising profitability.

One sector is practice income: the ability to sell more (volume) or for higher margins (profitability) varies between practices, dependent on the practice’s own market position and strategy. Regardless, common aspects that can be applied to all practices include patient management and sales focus towards the patients. The ability to see more patients also increases the number of opportunities for making a sale – and can be optimised through proper appointment book management. One suggestion is creating appointment availabilities during known periods of high walk-in traffic, facilitating the retail team’s opportunity to immediately convert a browser into a sale. Routine reviews and less-profitable activities such as contact lens training are not ideal during busy periods, taking up valuable optometric time and wages (especially on weekend periods), and also the opportunity cost of having to turn away a browser as “we can’t fit you in for an
eye test today”.

Sales focus is an area where both optometrists and practice staff are heavily involved – and is reinforced when everyone promotes the same message of optimal vision with best eye care to the patient.

One way to maximise the value and price of each sale is for practice staff to offer the best visual options for each customer, and be able to consider it a professional standard of care rather than an upsell. One oft-quoted example used by sales representatives is the ‘mother’ test, namely: “Would you consider giving the best to your mother? So why not to your patients as well?” Likewise, the discussion with the patient about multiple pairs or multiple corrective modalities (including contact lenses) should always occur.

In the words of Dr. Tony Hanks: “This is not about ‘selling’ multiple pairs, but instead it is about ‘prescribing’ the best eye care solution for the patient”.9

Research has shown contact lens wearers spend more within a practice compared to spectacle-only wearers, one statistic that should be kept in mind for increasing practice income.10

Another way to plug the ‘leaky bucket’ is to find ways to reduce expenditures: most are constant and vital (cost-of-goods sold, rental), so the focus lies on effective measures to reduce the degree of expenses. Minor expenditures may be temporarily stopped, but still nibble away at the overall profit.

One direct way to control expenditure is negotiation – to find and make better deals with various providers to reduce long-term expenses across all aspects of practice operations. Direct applications include negotiating better value for telecommunications, computer and equipment leases, electricity and water supplies, etc. Indirect saving methods can also result in substantial savings, but need to be carefully considered as they can affect the practice as a whole.

One key example is the COGS: corporate practices are often involved in a vertically-integrated supply chain, where significant savings occur from using selected suppliers of frames, lenses and other accessories and distributed across the whole network.11 Independent practices may still be able to attract discounts through negotiations and agreements to source from preferred suppliers. There is also a follow-on impact of reducing freight costs, which is significant in the long term. One hypothetical is if a busy practice elects to source lenses from two labs instead of four, fewer shipments are required.4

Finally, an essential factor affecting both income and expenditure is staffing. Experienced, well-trained staff are more aware and knowledgeable of the latest products, and will be more capable of explaining such features and benefits to patients, increasing the sales of higher value products.

Likewise, familiarity and patient loyalty can be developed by long-serving staff members, who are often the “personal” face to your practice. Over time, this contact allows the staff to build a rapport and personalise eyewear options for each patient, enabling the possibility for increasing fees and sales.

Conversely, staff turnover can become an expensive issue, especially if time and effort is involved in recruiting and re-training new staff. One industry publication has indicated this is a costly exercise to undergo (50–150 per cent of equivalent staff wages), and has suggested strategies to encourage staff to stay.12 An added benefit to having satisfied staff is that they are more likely to assist in reducing general overheads, by lowering wastage, etc. Dissatisfied staff can be detrimental to practice profitability, with research highlighting various opportunities for theft through excessive discounting or fraud.13,14,15
In the US, it has been estimated that 44 per cent of stock losses were due to employee theft.16,17

Conclusion

Good business owners know that the idealised P&L, prepared as a budget and then actively managed, is crucial to financial success.

Through careful consideration of the practice’s ideals, an appropriate financial strategy can then be adopted. Regular performance reviews of the practice should be compared to the initial plan to ensure the desired profit is achieved.

All this takes time and dedication, and good managers will recognise the extra work that is involved – not just working in the business, but on the business too.

Jennifer Williams, Louise Chew and Saleem Ha are optometry students in their fifth and final year of a Bachelor of Optometry and Bachelor of Science (BOptom BSc) at the University of New South Wales. This is their first published work.

The authors sincerely thank Ms. Jenny Saunders of Alcon / Ciba Vision for her assistance and guidance in preparing this article.

References

1. J. Hayes, Conducting A Comprehensive Annual Practice Examination MBA Insights Monograph Series, 2006,
Issue 6.

2. Eye Talk Consultants, The Eye Talk Reference Guide (2007), republished by H. Gleave and J. Saunders. Note, figures in brackets in text on the breakdown of a P&L publication were provided by this publication.

3. J. Saunders, 2011 [email] Management & Business Academy Budget Example. [personal communication,
15 August 2011].

4. H. Gleave, J. Saunders, OPTM4271 Professional Optometry Lecture: The Business of Optometry.
4 August 2011.

5. A.J. Hanks, Improving the Financial Performance of Your Practice. CIBA Vision Academy ANZ Monograph Series, 2008, Issue 7.

6. Investorwords.com [homepage on the internet] “General and Administrative Overhead” c.2011 [cited Sept. 2011]. Available from: www.investorwords.com/2160/general_and_administrative_overhead.html

7. Thomsen Business Information [homepage on the internet]. ‘The Balance Statement’, c. 2009. [cited Sept. 2011], Available from: www.dynamicbusinessplan.com/the-balance-statement/

8. J. Hayes, Can You Increase Your Fourth Quarter Earnings? Optometric Management [serial online]. October 2005 [cited Sept. 2011]. Available from: www.optometric.com/article.aspx?article=71491

9. A.J. Hanks, What Patients Want, 2010.

10. CIBA Vision Business Academy UK, ‘Contact Lens Patients: Dispelling the Profitability Myth’. Contacts in Practice [serial online]. December 2006 [cited Sept 2011]. Available from: www.cibavisionacademy.co.uk/business_newsletter/issues/1/newsletter_1_3.shtml

11. Luxottica Group [homepage on the internet], ‘Vertical Integration’ [cited Sept. 2011] Available from: www.luxottica.com/en/investors/strategies/vertical_integration/

12. Provision Group Publications, ‘Stand By Me’, Profile Issue 23, June 2008 pp.20-21.

13. N. DeHoraitus, A. Raman, Inventory Record Inaccuracy: An Empirical Analysis. Management Science 2008; 54(4), pp. 627-641

14. N. Nelson, S. Perrone, Understanding and Controlling Retail Theft, Australian Institute of Criminology (Paper 152); 2000.

15. J. Bamfield, Sed quis custodiet? Employee Theft in UK Retailing, International Journal of Retail & Distribution Management 2006; 34(11), pp.845–859

16. E.M. Fikes (2009) Dishonest Associates in the Workplace: The Correlation between Motivation and Opportunity in Retail Among Employee Theft.

17. J. Alstete, (2006) Inside advice on educating managers for preventing employee theft. International Journal of Retail & Distribution Management, 34 (11), pp.833–844.