I covered some valuable practice metrics in my article last week and I mentioned that I would devote this week's tip to the profit and loss statement (P&L). The P&L statement (also called an income statement) is a summary of the income and the expenses that occur in your practice. I'm sure most readers are very familiar with P&Ls and use them all the time, but I get asked about them quite often so a quick review is a good idea. I'll follow that with a list of nuances and tips about how to use the data in a practical way.
The basic review
The P&L statement is a report that can be generated by most financial software programs (like QuickBooks) and it is also produced by accountants. I recommend that practice owners use both of these methods; it is smart to manage your finances yourself, but an accountant will include more advanced information in the P&L and will help you understand it.
P&Ls are quite simple: there is a top line, the middle stuff and the bottom line. The top line is the total of all the income generated by the practice; also referred to as sales in the business world. It is shown in total dollars collected for some specified period of time (often six months or one year). This dollar amount is also known as gross revenue.
The middle stuff is a list of expenses. This list can be very long and detailed or it can be quite short. You get to design that aspect of the P&L by selecting the expense categories you want to see. When you enter a payment in your accounting software, you generally give it an account code, which becomes the expense categories in the P&L. Most QuickBook P&L statements show many expense categories, but it may be more meaningful for you to categorize them into fewer categories. My business partner, Jerry Hayes, O.D., selected seven expense categories that have become well-accepted in optometry and are currently used by the AOA and the Management and Business Academy (MBA) program. I'll list the seven expense categories below.
The bottom line is the profit of the practice over the period of time that the P&L covers. Also referred to as net income, it is simply the gross income minus all the expenses. There are often some subtotals inserted at various places in the P&L statement.
It is important to remember that the P&L is a summary over time and that time period is always listed at the top of the page. The P&L is more accurate if it is for a longer period of time, like one year, because some expenses do not occur monthly and purchases like frame inventory can be higher in some months than others. But it evens out over a year. Income and expenses are always shown in dollars, but it is also helpful to express the dollars as a percentage. Some expenses go up as sales increase, such as eyeglass lab bills, so it is helpful to look at those as a percentage of sales.
P&L statements are useful as a way to measure the growth of your practice and to be sure that expenses are in line. If optometrists can define the expense categories and use them the same way, we can develop national norms for those expenses. Actually, the AOA and other groups have been doing that for years and I'll provide that data below.
Special notes on P&L statements
You may want to take your last P&L and reallocate some items that are currently not in the right category for practice use. Just take some of the costs out of one category and put it into another. Once you have your P&L the way you want it, show it to your accountant and have him/her format it that way in the future.
Realize that the expense percentages that I provide are only median figures, adjusted in some cases based on my philosophy. They can vary widely and for good reason. Every practice is different.
Gross revenue. This should be the amount you actually collect and deposit into the bank after insurance adjustments. Usual and customary fees can still be tracked if you wish, but it does not mean much anymore. You can get this number from your practice management software production reports, but it really comes down to your bank deposits.
Cost of Goods Sold (COGS). All the payments for frames, lenses, contact lenses, low vision aids and any other items you resell. By convention, optometrists do not typically include the charge-backs from vision plans, but we really should. It would be complicated, however and some of the lab costs for basic products are covered but no actual value is shown on the explanation of benefits report. Thirty percent of gross revenue is considered the norm for this, but I like to see it at about 27%.
Staff expense. This should include all costs of employees, including benefits, uniforms if paid for, taxes, etc. It does not include ODs even if they are employees. To be really accurate, the cost of staff members who make eyeglasses in an in-office finishing lab should not be included here; it should be added to COGS. The median for this is about 19%, but I like to see it higher at around 23%. Why would I like to see any expense higher? I'd like it to be a bigger percentage of a much larger gross revenue figure.
Occupancy cost. We think of this as rent, but it includes taxes, insurance, maintenance, utilities, and any expense related to the facility. If you own the building, you should assign a true market rent value to analyze your P&L properly. The rent is not really free even if there is no payment being made. And some doctors may charge themselves excessive rent just to get more cash flow. Adjust it to be normal for your area. This expense is usually about 8%. A new start-up practice can't maintain that percentage figure because it has to pay normal rent, but it has not generated much income in the first couple years.
Marketing. Typically 3%
Equipment. Should include lease payments and interest in equipment loans. Typically 3%.
General office overhead. This is everything that is not covered in the other expense categories above. It is typically about 7%.
Practice net. This bottom line is theoretically everything that is left over after deducting the six expense categories above, but your net is probably better than it looks. It should include all payments, bonuses, distributions and salaries to doctors, even employed associates. This is simply by convention. It should include all benefits such as health insurance and retirement funds for all doctors. You should add back depreciation if that is shown on your P&L; it is just an expense on paper. Consider if there are any quasi-personal expenses that are shown in other categories, such as car expense, travel that was actually personal, other items that you use personally. Technically, that is part of your net. If there is any retained profit in your company, that is also part of the net income.
Spend some time analyzing your P&L statements and looking for trends. It will help you manage your practice.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Editor, Optometric Management Tip of the Week