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. Payroll

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. Occupancy

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.

Marketing

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 established practices.

Equipment

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.

Net income

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