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 By Neil B. Gailmard, OD, MBA, FAAO, Editor January 4, 2006 - Tip #207 
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Looking Ahead to 2006

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The start of the New Year is a great time to reflect and visualize about what you would like to have happen in your practice. A good CEO does not simply leave that to chance, but rather sets goals about business volume and gross revenue, and follows that up with predictions about expense categories. A good eye care professional should do the same thing. A written goal for your practice expenses is called a budget.

Power of budgeting

Does the mere setting of a goal actually make the event come true? It can if you monitor the data on a continuous small scale and take action when you see the trend is off track. Dr. Jerry Hayes has long been a leader in the business power of budgeting, and he makes a strong case for it based on his success as an entrepreneur in the ophthalmic industry. According to Jerry, budgeting is an absolute must for a well-managed practice, and working with a budget will improve your practice net income. So why don't most of us do it?

While most eye care practitioners don't set up budgets, many track their expense categories. Those two activities are very closely tied, so if you track your expenses, you could easily take the next step and make a budget from that data. Tracking the categories and simply watching what happens to them does no good at all. You must make a conscious effort to hold expenses in each area, and if a category is running over-budget, find a way to manage it better and pull it back in line. The management challenge comes when you try to reduce expenses without sacrificing service or quality.

Review of expense categories

You may have many expense categories on your profit and loss statement, whether it is generated by your CPA or if you do it yourself with a program like QuickBooks. I think it's valuable to have many categories as long as you are faithful to what is included in each one from year to year. You may want to have a list of definitions of categories as a reference to yourself and to anyone who works on bookkeeping. While it may be helpful to breakdown your expenses into dozens of very specific categories, it's also smart to regroup them into fewer more general ones.

Consultants like Jerry Hayes advocate the following seven expense categories, and these are commonly used in our profession and by the AOA. As a review and as a guideline, I'll include the typical expense percentage of gross figures. Please note that consultants, myself included, don't necessarily recommend these percentages, but rather are simply reporting the averages that currently exist. As a management strategy, you may decide to employ a larger than usual staff to greatly improve customer service; or you may pay higher wages and benefits to attract top level employees. These actions would obviously increase your payroll category, which would be perfectly fine, as long as it was part of your plan.

Typical optometric practice:
  • Cost of goods sold 30%
  • Staff payroll 20%
  • Occupancy costs 7%
  • Marketing 3%
  • Equipment 3%
  • General office overhead 7%
  • Practice net 30%
Here is where I would like to see the percentages in most practices:
  • Cost of goods sold 26%
  • Staff payroll 24%
  • Occupancy costs 9%
  • Marketing 2%
  • Equipment 2%
  • General office overhead 7%
  • Practice net 30%
From tracking to budgeting

Starting with last year's expense data in your practice, you can build this year's budget. Make some small changes in the percentages that you feel do not reflect your business philosophy and then let those percentages become the forecast for what will happen in 2006. Instead of measuring where the money went, you are stating in advance how much will be spent in each area. Run your own P&L statement on a monthly basis to monitor how you are doing. Be aware that large purchases can temporarily skew the data, like a large frame inventory replenishment or a major equipment repair.

Involve your staff

Since your practice does not exist in a vacuum, meet with key staff members who are involved in buying inventory or supplies and share your budgeting goals with them. You don't have to share actual income numbers unless you want to, but giving them feedback on the relevant expense categories as a percentage of gross gets them involved in watching costs.

Setting a budget helps you take control of your practice. Measuring something is the first step to improving it.

Best wishes for continued success,

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

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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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