Article Date: 2/1/2002

Business Advisor
Staying on Budget?
Does your practice have a budget? Here's why it needs one.
By Jerry Hayes, O.D.

I recently helped my daughter figure out how she spent her savings from a summer job during her first semester of college. After we added everything up, she was amazed at how much those off-campus meals, lattés and trips to WalMart cost. We worked out a budget and I sent her back to school hoping she'd learned a lesson in basic economics.

Drawing a comparison

It's much the same way with an optometric practice -- all those little things add up fast. And if you don't have a well-thought-out financial plan, then you're probably spending too much on overhead. If you're netting more than 30%, then you're doing a good job controlling expenses. If you're netting 29% or less of your gross, then you definitely need a budget.

Why budget?

Why should you have a budget? Take a look at the following points.

Creating a budget makes you look at the big picture of the business side of your practice. It helps you get organized and plan your income and spending. I've never worked with an O.D. who didn't improve his profitability immediately -- often by tens of thousands of dollars -- just by the act of creating a budget.

O.D.s who don't budget tend to judge each expenditure on an item-by-item basis. But it's easier to make individual spending decisions when you start the year by looking at things on a macro basis. That's where a budget helps.

Say you gross $500,000 and decide in the budgeting process to spend 20% or less on staff salaries. You've mentally allocated $100,000 for staff, so all you have to do is decide how to spend it.

Another reason why a budget is important is that with third-party care, it's not always possible to pass on higher overhead in the form of fee increases. If you can't increase revenue, then control your expenses.

Budget Wizard
Here are my suggested ratios for your
2002 practice budget.

Cost of goods sold  27% to 33%
Staff salaries and benefits 15% to 20%
Occupancy costs 4% to 8%
Patient care costs and equipment 3% to 5%
Marketing and promotion 2% to 4%
General office overhead 6% to 9%
Net income 30% to 40%

Where to start

Project your gross revenue and decide how much you want to net this year. (A healthy net for most private-practice O.D.s falls in the 30% to 40% range). Now all you have to do is make the expenses fit. That's where the budget comes in.

For areas where your overhead is too high, think of what it'll take to cut those expenses. A fixed expense, such as rent, is hard to bring in line in 1 year. That may require moving or increasing your gross revenue. But a variable expense, such as cost of goods, is easier to remedy quickly by finding lower-cost suppliers, increasing your fees or dropping low-paying plans.

It's particularly important to budget staff expenses. Once you've decided how much to pay, a budget helps you evaluate your staff compensation as a whole and not look at people individually. If your staff expenses are too high, you can lay someone off or increase production, but it's difficult to decrease salaries and keep employees happy.

Become one of the top 10%

Like goal setting, budgeting is something that only 10% of O.D.s do, but this group has the highest gross production, the lowest overhead, and the highest profitability of all O.D.s. You can join the club; just create a written budget.



Optometric Management, Issue: February 2002