Staying Profitable in a Soft Economy
See how a budget can increase your profits, even in today's economy.
Jerry Hayes, O.D.
This past year wasn't great for the U.S. economy in general or for the vision care industry in particular -- and forecasts for 2003 are mixed. Consumer confidence is down and retail is still weak. The success of your practice may depend primarily on a variety of local factors, but all signs point to a soft year for the national economy.
If you've been running your office as many doctors do, that is, not paying much attention to the business side, then challenging times such as these are a good reason for you to get in touch with your practice finances. But where do you start? My advice is to develop a practice budget. Here's how.
Tallying up your net income
Take your year end profit-and-loss statement for 2002 and look at what you netted last year. For example, let's look at a practice that had a gross collected revenue of $500,000 and a "true net" of $150,000 (30%). I say true net because many O.D.s forget to add things such as personal health insurance and retirement plan contributions to the salary they take from their practice and their net then looks lower than it really is.
Next, decide how much more you want to net in 2003. If you've never done this before, then be aggressive. Shoot for a 15% to 20% increase -- in this case, say to $180,000. (Most mid-sized practices can add between $20,000 and $40,000 to their bottom line when they apply the budgeting process for the first time.)
After you decide how much you want to net, take a guess as to how much you can grow your gross. Look back a few years -- are your revenues steadily going up? If so, they'll probably continue to increase at about the same rate. But even if you're not expecting a big increase in gross, you can still improve your net by better controlling your overhead. That's where a budget comes in.
Setting up your budget
Let's say that this practice is only looking to do $525,000 -- or a 5% increase. That means that their expenses for 2003 can only be $345,000 ($525,000 - $180,000) to meet their net income goals. Considering that expenses were $350,000 in 2002 ($500,000 - $150,000), is that possible? To find out, you have to perform the key part of the budgeting process -- break all your expenses down into logical categories and determine how much you need to spend in each area for the next year.
Cost of goods: 27% to 33%
Staff salaries: 15% to 20%
Occupancy costs: 4% to 8%
Patient Care Equip.: 3% to 5%
General overhead: 6% to 9 %
Go through every expense area to decide where you can spend less money without impacting the growth of your practice or the quality of care you deliver. Sometimes this is hard to do, but I've never seen a practice that didn't have some room for improvement.
Once you've done that, the budget becomes the financial blueprint for all of your spending in 2003.
If you budget, you'll benefit
Creating a budget takes some time and it can be a pain for nonfinancial professionals. But the payback is huge. I urge you to do it -- even if you have to hire an accountant or retain a consultant to help you. You'll be glad you did when you're counting your profits this time next year.
A FREQUENT WRITER AND SPEAKER ON PRACTICE MANAGEMENT ISSUES, DR. HAYES IS THE FOUNDER AND DIRECTOR OF HAYES CONSULTING. YOU CAN REACH HIM AT (800) 588-9636 OR
Optometric Management, Issue: December 2002