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 can’t 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 service… and so on. You really want to create an upward cycle in your practice, and that could require you to spend more… but let’s spend it on the right things!

Obviously, I wouldn’t 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 don’t 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. Don’t 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 don’t want to cause a problem with patient satisfaction or employee morale.
• 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 – but don’t indicate that policy anywhere!

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.

• 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 worker’s 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 don’t worry too much about this and I certainly wouldn’t 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 it’s 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.

Occupancy

There is probably not much you can do in this category – I don’t advocate moving to a smaller office or cutting things like maintenance or janitorial. I am surprised how many ODs rent their office space, however. I’m 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 it’s a break-even situation, I wouldn’t 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 wouldn’t 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 – although it includes all doctors’ 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