Optometric Management Tip # 116 - Wednesday, April 07, 2004
The Gross Matters, Too!
Many optometrists take comfort in knowing that practice net income is what "really matters," since that is, after all, what the owner actually puts in the bank. But too often, I think this well-known sentiment is an excuse for not being able to grow the practice and it becomes a way of dismissing the importance of increasing the gross revenue. To me, both the net and gross revenue figures are important, and there is no benefit in trying to argue for one over the other. But, if I had to focus on one more than the other, I'd focus on the gross. I know, that is not the popular opinion, but let me present my reasoning.
There is an implication that a low gross/high net practice is well managed, which may seem to be true, but let's look deeper. For years, the rule of thumb has defined an excellent net percentage as one that is about 33% of gross revenue. AOA surveys show that the mean net revenue has actually eroded to about 30% in this era of managed care.
We could probably all agree that a 40% net is excellent. So, if we look at an example of a practice with gross revenue of $300,000, a 40% net would be $120,000, which is a very nice income for the OD/owner. A $300,000 gross revenue could easily happen in a small practice. Assuming that the doctor's average gross per patient is $200, she would see 1500 patients per year or 30 per week or 6 per day. If the average gross per patient were $300, she would only be seeing 4 patients per day. Either way, that's not real busy. Therefore, the doctor has the time to do many routine tasks herself, which keeps the payroll percentage low. Other expenses, such as rent, equipment, and inventory, are also kept small.
Let's look at a high grossing practice - one that grosses $1.5 million. Let's suppose that this practice has a low net of only 20%. This would be defined as a very poor net percentage and we might conclude that it's poorly managed. This practice may accept too many discount vision plans or it may have a large staff that drives up payroll costs. But, the owner of this practice still has a personal income of $300,000! As "poorly managed" as this practice might be -- I'd rather have it then the "well-managed" low grossing practice with the high net. While it may be poorly managed, it has great potential. If this $1.5 million practice only has one optometrist, she is busy - so she must delegate. If the average gross per patient is $300, she sees 5,000 patients per year, or 20 per day.
While we've looked at the low gross/high net practice and the high gross/low net practice, we shouldn't assume that these are the only choices. The ideal practice is high gross/high net. Let's take the $1.5 million practice and reduce its dependence on vision care plans, use its buying power for better discounts from suppliers, and keep payroll costs under control. Can a high grossing practice achieve a 35% net? 40%? Sure it can.
If the gross revenue of a practice is healthy, an excellent net should follow fairly easily. A high gross is not a license to neglect good management, efficiency and cost containment -- it is a prerequisite to provide the resources that are needed to achieve great success.
How does a high grossing practice get that way? There are really only three ways, and any combination of them works even better:
Of course, achieving those three points is not so easy, but when we simplify the tasks, it helps us to set goals and it defines what we should work toward.
- See more patients
- Charge higher fees
- Sell more services and goods to each patient
Next week, I'll continue with more on this subject of gross vs. net revenue.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management