Optometric Management Tip # 173 - Wednesday, May 11, 2005
Cutting Your Practice Expenses
Last week, I reviewed the definitions of key expense categories and listed the norms (as a percentage of gross) that are
typical in our profession. A great way to increase your net income is to use these categories, along with the norms and
your own practice history, to create a budget. The goal is to find ways to reduce your expenses without sacrificing
quality, service or patient volume.
Cost cutting may not be good
Be wary of cutting expenses too much. You canít cut your way to prosperity! Many optometric practices are already very
closely managed by the owner and expenses are scrutinized. Cutting too much can lead to a downward cycle where the cuts
cause service and quality to drop, which causes a drop in business, which causes the owner to make more cuts, which
causes a further drop in serviceÖ and so on. You really want to create an upward cycle in your practice, and that could
require you to spend moreÖ but letís spend it on the right things!
Obviously, I wouldnít attempt to give specific advice on what expenses to cut without knowing your practice, so please
view this article as suggestions to look into. Here are some of the primary ways some practices have cut expenses.
Cost of goods sold
This is the largest expense category in your practice and it may be one the best places to save.
- In-office lab. The best cost-savings I found came from owning my in-office optical lab. To do a proper analysis in
your practice, you must factor in the projected cost of lab equipment and staff, and then research the cost of uncut
lenses and compare that with your current lab bill. Many practitioners find that the savings they generate by making
glasses in-house more than covers the equipment lease and the payroll of the lab technician. I view hiring the
additional employee as a bonus because staff members are a resource for your practice, which helps it run more
efficiently. The larger your staff, the more flexible you can be. Your new lab technician could dispense eyeglasses or
do a frame selection when the office hits a busy time, or on a day when your staff is short.
Most practices will just do finishing lab work, which means cutting and edging lenses, but donít rule out owning a
surfacing lab, which allows you to grind the prescription into the lens. My practice has had a surfacing lab for 15
years, and the cost savings is significant. Donít forget a major benefit of an in-office lab is the control it gives
you over the product; service and quality can be greatly improved.
- Buying groups. Unless you are buying a large quantity from one supplier, you will probably save money with a buying
group. You may get your best price on some products directly from the manufacturer, and do better with others through a
buying group. Shop and compare and ask for discounts.
- Remakes and warranty coverage. Track and review this area and see how many eyeglasses you make each month that are
at no charge. You may need to change your policies or review them with your staff. Be careful here though. Remakes are
a fact of life in the optical business and you donít want to cause a problem with patient satisfaction or employee
- Pay your bills on time. Be sure to take all prompt pay discounts and find out if you can deduct an additional 2%
if paid by the 10th of the month. Some companies allow you to take this discount Ė but donít indicate that policy
This area should also be looked at very carefully because of the adverse effect cuts can have on service. Most practices
that I see need to hire more staff, not cut it. But payroll costs are skyrocketing for all small businesses and owners
must look at ways to contain it.
- Insurance cost. Health insurance is a very valuable benefit to employees, but the double digit increases in premiums
each year is a huge burden on business. Talk to your insurance representative about your options and poll your staff
about their usage and needs. Get quotes from new underwriters. Find out about health savings accounts and other new
approaches to health insurance. Also, be sure to check premium prices for workerís compensation insurance.
- Salary Creep. This is the tendency for a long-term employee to continue to receive raises which inflates his or
her salary way beyond the marketplace for that job description. I donít worry too much about this and I certainly
wouldnít worry the staff member by discussing it. Long-term employees are extremely valuable to your organization
and the cost of training a new person is very high also (although itís invisible). While salary increases may have
to slow down in later years, there is usually some inflationary increase in cost of living each year, and that amount
of raise is needed to just stay even.
- Automation. Can you reduce the manual labor in your office procedures by adding technology? Would electronic
medical records reduce the paperwork?
- Accept less managed care. Most offices need a staff member just to file and manage insurance claims. If much
of that work is to collect deeply discounted fees, it may not be worth it. You may be able to cut the lowest paying
group of patients from your practice, reduce your office overhead, and still keep the same net income. You may want
to try cutting just one vision plan and gauge the effect.
There is probably not much you can do in this category Ė I donít advocate moving to a smaller office or cutting things
like maintenance or janitorial. I am surprised how many ODs rent their office space, however. Iím sure very few
doctors rent their homes, and yet the office presents the same situation. The monthly rent check is gone forever, with
no equity, while the same payment put toward a mortgage would build equity in a commercial building. If you own your
building, you become the landlord and you have an instant long-term tenant, namely your practice! It is important that
you allocate a fair market value amount for rent as a practice expense if you own the building. If you have your
practice paying a very high rent to yourself, then part of that is really net income. Conversely, if you have your
practice pay little or no rent, then your net is actually overstated. Readjust the numbers for accurate comparison
to the norms.
Measure the effectiveness of all marketing projects and make sure they are paying a return on investment. In many cases,
the cost of an ad campaign, coupled with the cost of any discount that you offer the patient, can wipe out any profits
earned. If itís a break-even situation, I wouldnít do it. Large yellow page ads are a notorious waste of money for
This category expense usually decreases as the practice matures. I strongly believe in high-tech instrumentation as a
great investment for differentiating your practice from others, so I wouldnít cut here.
General office expense
This is a catch-all category and it should be broken down into components and reviewed. There could be some waste here
and close owner supervision is wise.
You may or may not view this category as an actual expense Ė although it includes all doctorsí salaries and practice
profits. It is the one category we would like to see increased!
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management