Optometric Management Tip # 266 - Wednesday, February 21, 2007
A New Look at Practice Expense Ratios
Even though the topic has been covered before, I continue to receive many questions about expense
ratios and benchmarks. Today, Iíll cover the basic expense categories, how to define the nuances of
those categories, the typical percentages from national surveys, my goals for these categories and what
effect vision plans have on the data.
The seven expense categories
Practice gross income can be divided into seven categories that have been widely defined by Jerry
Hayes, O.D. Six of these categories are expense groups and the one thatís left over after all expenses
are deducted is practice net income. Based on surveys by the AOA and Hayes Consulting, the following
are typical percentages of gross income by optometrists practicing in the U.S.
|Cost of goods sold||30%|
|General office overhead||7%|
|Practice net income||33%|
It is extremely important to understand and apply the correct definitions to the categories if you want to
make any meaningful comparison to the national data or to other individual practices. If you donít, you
will be comparing apples to oranges. Itís very likely that your accounting system has many more
categories than the seven listed above. Thatís fine, but you may want to reallocate those expenses
to meet these accepted standards. Sometimes, having fewer categories allows you to analyze data in
a more meaningful way.
There are some surprising nuances to the definitions. Here are the most commonly misunderstood
- Gross income. It should be collected revenue from all patient services and products. It is the actual
total of bank deposits. It is not what is written up before insurance adjustments and write-offs.
- Cost of goods sold. Seems simple enough, but did you know it should include the payroll costs for
lab staff who make glasses if you have an in-office lab? It should also include a prorated share of the
rent equal to the percentage of office space a lab uses.
- Staff expense. All costs incurred with non-doctor employment including all benefits and payroll taxes.
Uniforms and staff continuing education goes here if paid by the practice. Associate OD compensation
does not belong in this category. That is considered part of the net even if the doctors are employees.
- Occupancy costs. Rent, utilities, maintenance, janitorial, real estate taxes, commercial insurance and
any other cost associated with the facility. If you own the building, your practice should still pay you a
fair market rent in order to account properly for the other categories.
- General office overhead. A catch all category for all general office expense that is not covered
elsewhere. All office and clinical supplies go here.
- Marketing. Include postage for marketing projects and recall notices. Include yellow page cost,
but not the whole phone bill. Phone expense goes under occupancy.
- Equipment. Clinical equipment only, not business office or optical lab. Those would go under office
overhead and cost of goods, respectively. Include lease payments, interest on loans, service contracts
and maintenance. Do not include capitalized purchases.
- Practice net income. Include all doctorsí salaries and benefits plus any retained practice net income
and depreciation. Include a prorated share of business expenses that are actually deemed to have
personal value, i.e., auto, travel and entertainment.
Here are the same benchmarks with percentage goals that I believe are achievable and desirable.
Of course, this would vary based on the age of the practice, for example, a new practice would
have higher equipment and marketing expense. The biggest differences below are a greater investment
in staff expense (which is necessary for the high service practice) and a reduced cost of goods sold
(which can be achieved with an in-office lab and with higher volume purchasing).
|Cost of goods sold||27%|
|General office overhead||8%|
|Practice net income||33%|
The effect of vision plans
Vision plans have become so large in many practices that they cause some special considerations.
First, some plans pay the lab bill directly. This is an invisible payment, if you will, which could be
recognized as gross income and then would be allocated out to cost of goods sold. If recognized, the
gross income and cost of goods would be higher.
The second effect is in the ďcharge-backsĒ that are deducted from your payment by the vision plan
company to cover lab costs of non-covered items. You are allowed to charge a fee to the patient for
these items, but the costs of the items are your responsibility. They are paid for by the vision plan but
then they are deducted from your check. This has the effect of reducing your gross income and
lowering cost of goods sold.
These two factors offset each other to the point where it is not necessary to analyze it in most practices.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management