BUSINESS: financial foundations
Calculate Chair Cost: Part 1
Collect the necessary data to improve your business decisions.
DAVID MILLS, O.D., M.B.A.
The proper calculation of chair cost is an invaluable asset to any optometric business manager. The chair cost value can be used as a tool to set your fee schedules and utilized as a major determinant on which insurance plans your practice can afford to participate.
Chair cost is defined as the amount of fixed expenses incurred by an organization, or overhead, per hour of operation. In other words, these are the operational costs for every hour the practice is open, regardless of whether patient care is being delivered. Getting the final value is a lengthy process, but it is well worth the effort.
In part one of this two-part series, I discuss the data that must be collected and some of the preliminary calculations. Part two will describe how chair cost value should be implemented in your practice’s strategic planning.
1 Identify fixed expenses.
Analyze your profit and loss (P&L) statement to determine your total fixed expenses. Some of your expenses do not occur on a monthly basis, such as association dues, so make sure the P&L statement captures your entire fiscal year — a monthly or quarterly P&L may miss some expenses.
Chair Cost Formula
Next, review all expenses, and label them as either fixed or variable.
Start by identifying the fixed expenses. Remember: a fixed expense, or operating expense, occurs regardless of the volume of business. Your rent, telephone bill, dues, salaries, taxes and insurance are examples. (Depreciation expenses are not included because these are non-cash entries.)
If done correctly, the other expenses remaining on the P&L are variable expenses.
You may be making critical business decisions based on these values, so I recommend contacting your accountant if you have any questions regarding whether an expense is fixed or variable.
Once you have the value of the total annual fixed expenses, break it down to a monthly average by dividing by 12.
2 Determine practitioner hours.
For each practitioner, calculate the average patient contact hours. For example, a doctor working five days a week with three weeks vacation works 245 days in a year (5 x 52 – 15). Calculated on a monthly basis, this is equal to 20.5 days.
Next, multiply the monthly days worked by the scheduled hours of patient contact time per day. If the practitioner is scheduled for six hours of patient contact per day, the value is 123 hours per month.
For multiple practitioner practices, calculate the practitioner hours in the aggregate since the fixed operational expenses were calculated based on the practice. (This will be discussed in detail in part two.)
3 Complete the calculation.
If the overhead per month is $12,450 and the total practitioner hours per month are 240, the chair cost is $51.87/hour ($12,450/240 hours).
Another way to express this: It costs the practice $51.87 per hour in fixed operational expenses for each hour the practice is open, regardless of whether patient revenue is generated.
Using the data
Now that you have your chair cost, next month we will examine how this value can be utilized to help you make better business decisions. OM
Optometric Management, Volume: 49 , Issue: June 2014, page(s): 82