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 By Neil B. Gailmard, OD, MBA, FAAO, Editor January 7, 2004 - Tip #103 
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Practice Data, Part 2


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Additional Information

Continuing last week's topic of practice data analysis, let's look deeper into how you should define the seven major expense categories, and what the typical percentage of gross revenue is in each category. I suggested last week that you might want to pare down your expense categories to major ones that are more meaningful. Occupancy costs, for example, would include the costs of utilities, maintenance, janitorial expense, facility insurance, taxes, and rent. It could still be helpful, at times, to track your janitorial costs alone, but if we lump all the costs of your facility together, it can give you the big picture.

The "definition" of each expense category is important so that the proper costs are included and the category is accurate. You can then compare your own data month to month, quarter to quarter, or year to year. As long as you don't change the definition, you'll be comparing apples to apples. If you wish to compare your data with other practitioners, or with national standards (such as the AOA may provide), it is critical to know exactly what expenses are included in a category.

Some of the categories have nuances that make them slightly more complex. For example, if you do your own optical lab work in-office, the payroll for the lab staff should be included in cost of goods sold - not in staff compensation! Listed below are the definitions I use for the seven major expense categories. You may decide to define yours differently, and that's fine -- what matters most is that you are consistent with your own definitions. You should discuss these with your CPA.
  • Cost of goods sold - The cost of frames, lenses, contact lenses, low visions aids and any other product you sell. Include optical lab staff salaries and benefits because that is part of the cost of the finished product. Prorate the salary if an employee is part-time lab and part-time office. Include cost of lab equipment and supplies.
  • Staff compensation - Include all wages, benefits and payroll taxes. Do not include optical lab staff salaries and benefits, as mentioned above.
  • Occupancy costs -- Include a fair amount for rent, even if you own the building and do not actually pay rent. If you pay an excessive amount for rent because you own the building, reallocate the excess as net income. Include taxes, building insurance, building maintenance, landscaping, janitorial, utilities.
  • Equipment -- Include lease payments, interest on loans, service contracts, maintenance. Do not include capitalized purchases. Do not include optical lab equipment (cost of goods) or business office equipment (general office overhead).
  • Marketing -- Include yellow page ad but not the phone bill. Include recall, newsletters, and advertising. I do not include postage (general office overhead).
  • General office overhead -- Include telephone, postage, business office equipment costs, office supplies, clinical supplies.
  • Net income -- Include all doctors' salaries and benefits (even that of employed doctors) plus practice net income and depreciation. Include prorated share of business expenses that are personal, i.e., auto, travel and entertainment.
Now that we've defined the categories, here are the percentages of gross that are considered standard in our profession, based on data from the AOA and from other sources, such as management consultants. When calculating an expense as a percentage of gross, we must first define the gross properly. I consider the true gross to be the total fees that are actually collected and deposited in the bank (not the revenue that is simply billed and may be partially written off).
  • Cost of goods sold -- 30%
  • Staff compensation -- 17% (I differ with the national standards on this point and I believe 20% is more realistic and actually more desirable today)
  • Occupancy costs -- 7%
  • Equipment -- 3% (this may be lower in mature practices)
  • Marketing -- 3%
  • General office overhead -- 7%
  • Net income -- 33% (With the increased cost of staff that I advocated above, or with increased reliance on managed care, this may drop to 30%)
Keep in mind that these percentages are only rules of thumb, but they do serve as useful benchmarks.


Best wishes for continued success,

Read Past Tips Neil B. Gailmard, OD, MBA, FAAO
Editor, Optometric Management Tip of the Week


A Proud Supporter of

Send questions and comments to neil@gailmard.com.

Dr. Gailmard offers consulting services to eye care professionals through Prima Eye Group; information is available at www.primaeyegroup.com.

Please Note: The views expressed in Management Tip of the Week do not necessarily reflect those of the sponsor.

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