cases of optometrists' practice dilemmas and how these seasoned
consultants resolved them.
Overworked and Underpaid
Solving one doctor's problems: Part one of
a two-part series
This article is
about an optometrist who had a good practice with two common problems: A heavy
workload and tight cash flow. Her solutions might help you solve similar
Trouble in River City
Beverly Arnette (not her real name) told us that she was an overachiever who
wasn't afraid of hard work and didn't mind making personal sacrifices.
married her college sweetheart and when she graduated in 1988, opened her own
practice in his hometown, River City. Dr. Arnette worked there 1 and one-half
days each week because she felt that she wasn't busy enough to justify working
Because she needed more income
to pay off student loans, she worked at a commercial optical on weekends and
filled in for Dr. Togtema (not his real name), owner of the Cordora Eye Clinic,
1 day a week on "nursing home day." When he suddenly died in 1996, she
purchased the Cordora Eye Clinic from the estate.
her drive time between the two locations and her home, Dr. Arnette worked 60- to
80-hour weeks between the two practices for 2 years and no longer enjoyed work
because she felt stressed. She contacted us because she didn't want to work
herself into an early grave as Dr. Togtema had. She also had cash flow problems.
River City Eye Clinic is
located 20 miles from Cordora Eye Clinic. Cordora Eye Clinic is in an affluent
area, and the River City Eye Clinic is in a middle-income community. Dr. Arnette
lived 5 miles from the Cordora location -- a more convenient commute than to
The Cordora location was open 3
days each week and the River City location was open 2 days each week.
Arnette grossed $500,000 in total for both locations, and netted around 20%.
"How can I make all this money and still have trouble paying bills?"
she asked us.
Part of the answer was poor
cash flow. Cash flow is the difference between collected gross income and all
checks written. Cash flow becomes tight when total checks written are more than
collected gross income.
When we discussed
how and when she paid bills, it appeared that Dr. Arnette regularly wrote checks
for more money than she was taking in. Sometimes she couldn't pay her lab bill
until it was 6 or 7 weeks past due.
one of her frame vendors had put her on C.O.D. because they'd been receiving
late payments. She regularly transferred business expenses to credit cards that
offered a lower interest rate and "switched" these balances from card
to card. She also owed a large amount on a small business loan/equity account
through her bank.
Dr. Arnette also had
"negative equity." Her balance sheet (a financial picture of assets,
liabilities and equity -- what remains after bills and notes are paid) confirmed
that she had $15,000 more liabilities than assets.
Arnette's position was precarious. The combination of a low net and negative
equity had put her in a vicious circle. The low net caused cash flow problems.
Each time Dr. Arnette had cash flow problems, she would delay bill payment, use
a credit card or get a cash flow loan from her credit line. Without an increase
in the net, her cash flow continued to get tighter. In her current situation,
her bank could call in the notes if her finances didn't improve.
Our first step was to figure
out why her net percentage was so low. This was difficult because Dr. Arnette
didn't have her profit and loss figures broken out by location. When it comes to
a low net and cash flow problems, you can't assume that the lowest-grossing
practice is the one that's in trouble. Although collected gross income certainly
affects the net, how you manage the overhead is what really creates positive
cash flow and profits.
We worked with Dr.
Arnette to separate her profit and loss accounts by location. We reformatted her
chart of accounts and began entering data the first of 1999. However, some
expenses weren't that easy to allocate. For example, how should Dr. Arnette
allocate shared expenses such as legal and accounting fees? We suggested that
she allocate shared expenses based on each location's pro rata share of total
collected gross revenue.
Arnette's reformatted profit and loss figures by location for the first 6 months
of the year, we were able to prepare a pro forma profit and loss statement for
the entire year. A pro forma income statement is a "best estimate" of
income and expenses for the entire year. The chart below shows how we broke her
On a combined basis, the
projected gross was $550,000. The projected net was $131,000 or 24%. The chart
above shows our recommended ranges for each of the expense categories.
down the numbers
Here's a breakdown of
Dr. Arnette's expenses by location.
overhead. Overall, the numbers indicated that Dr. Arnette was doing a
good job managing her practice. The expense that was most out of line was staff
salaries and benefits. She employed 4.5 full-time equivalent staff. Our analysis
indicated that a practice grossing $400,000 only needed 3 to 3.5 staff, meaning
that she was probably overspending by $15,000 to $20,000 per year in this area.
City overhead. This location was netting only 10%. With the exceptions
of cost of goods sold and patient care costs and equipment, expenses were more
than the recommended ranges. Fixed expenses (staff costs and occupancy costs)
were significantly more than the recommended.
costs are expenses that don't change with the number of patient visits, while
variable expenses are those that do change. For example, rent is a fixed expense
because it will stay the same whether Dr. Arnette sees 10 patients or 100. Cost
of goods is a variable expense because it changes with the number of frames,
spectacle lenses and contact lenses she sells. The dollar amount of cost of
goods increases as the number of glasses and contact lenses sold increases. It
decreases as the number of glasses and contact lenses sold decreases. Which of
the two practices was in trouble?
reformatted profit and loss figures by location showed us that Cordora Eye
Clinic, which Dr. Arnette had purchased, was in good shape. She could improve
the net if she made a few changes. It also showed us that the River City
practice -- the one Dr. Arnette had started cold -- was in serious trouble and
was dragging down the overall net of the combined practices.
primary reason why the River City location had such high staff salaries and
benefits and occupancy costs was that the revenue at this location wasn't high
enough to offset the fixed costs associated with operating the practice. We now
knew what was draining her net. The next step was to work through several
scenarios that would fit with Dr. Arnette's personal goals.
In the end, we decided that
Dr. Arnette had two good options:
one location and continue to operate as a solo practitioner. Because the Cordora
location was closest to Dr. Arnette's home and the more established location,
closing the River City location made the most sense. Dr. Arnette would be able
to focus 100% of her effort on the Cordora location if she sold the River City
location. She could use the proceeds to pay off the River City debt.
Hire an associate O.D. so that both locations would have full-time O.D.
coverage. This option made sense because both locations were in communities that
had great opportunities for growth.
table at the top of page 76 shows that we projected Dr. Arnette's net income to
increase from $131,000 in 1999 to $156,160 by closing the River City location
and focusing on the Cordora practice. In addition, she'd eliminate the stress of
traveling between the two locations and managing them both.
Arnette had the final say. As always, our job as consultants is to objectively
assess the situation and offer solutions that work with the facts and support
the client's goals. The scenario we endorsed was to hire another O.D. and
operate both locations on a full-time basis. The table at the bottom of page 76
shows our projections for gross and net income over a 3-year period. This way,
Dr. Arnette could reach her goal of a million-dollar practice within 4 to 5
years. Not bad, considering the slow growth she could expect with two part-time
as Dr. Arnette soon discovered, owning two locations more than doubles the
stress of managing just one. Increasing employee productivity without being on
site can be a challenge. Then there's the matter of finding an associate. Dr.
Arnette was involved in her local association and knew the employed O.D.s. She
didn't want to hire any of them.
wanted to conduct a candidate search for someone who shared her passion for
quality care but didn't want to own his own practice -- she wasn't looking for a
partner. Searching for an associate can be difficult and time consuming. It was
now August and the superstore where Dr. Arnette worked earlier in her career was
looking for someone to fill her vacant position and offering $500 a day -- a
figure that Dr. Arnette couldn't match.
our help, Dr. Arnette resolved these and other efficiency and productivity
issues during the on-site portion of our consultation and in the ensuing 12
months of support. In part
two, we'll tell you how she proceeded.
Blackwell, M.B.A., C.P.A., A.I.B.A., senior consultant for Hayes Consulting
(904-273-1115), and Donna Suter, president, Suter Consulting Group
(423-236-5465), team up to offer financial guidance and on-site consulting
services designed to increase your gross revenue while significantly improving
your net income percentage.
Optometric Management, Issue: September 2002