Cash Flow Cure
Think you need to increase your gross to increase your net? Well you don't. Here's a better way to profit more.
By Jerry Hayes,
Ask any private practice optometrist what the best way to increase his take-home income is and nine times out of ten, the answer you'll get is that he needs to see more patients so he can increase his gross revenue.
It's my experience as a financial consultant, however, that once an
O.D. grosses above $400,000, the biggest financial challenge isn't generating more revenue. Rather, it's dealing with tight cash flow and low net percentage (below 35%). And, not surprisingly, these two problems are linked.
To see why, let's look at two fictional optometrists who own practices in the same town and compare how they did in 2002.
Examining the details
Dr. Smith grossed $600,000 and netted $150,000 (25%). His nearby colleague, Dr. Brown, only grossed $400,000 but she netted $160,000 (40%). Not only did Dr Brown net more on a smaller gross, but she also has better cash flow.
For purposes of this article, let's define cash flow as the ability to pay all of your bills on time -- and still take out enough money to live in the manner that someone of your net income would expect to live.
The usual symptoms of tight cash flow are much less money in your checking account than your gross would indicate, a need to hold off paying your major lab bills until late in the month and trouble taking enough draw to pay your personal expenses. Sound familiar?
Build your DCF
Several factors, such as slow-paying providers, excess inventory and debt more than 50% of assets, can cause tight cash flow. But low net percentage is also a common culprit for optometrists. Here's why:
Dr. Smith grossed $600,000 last year -- an average of $50,000 per month. Because his net profit was 25%, his overhead was 100% -25% = 75% x $50,000, or $37,500. That leaves $50,000 gross - $37,500 expenses = $12,500 in what I term "discretionary cash flow"
(DCF). This figure is the cushion between the bills he has to pay and what he has to take out in salary each month.
His ratio of DCF to monthly bills is $12,500/$37,500 = 33%.
Dr. Brown, on the other hand, grosses $400,000, which works out to $33,333 per month. Because her net is 40%, she has expenses of 60% or $20,000 each month (100% - 40% = 60% x $33,333). That leaves $33,333 - $20,000 or $13,333 in DCF before she takes a salary. Her ratio of DCF to monthly bills is $13,333 net income/$20,000 expenses = 67%.
Therefore, the higher your ratio of DCF to monthly bills, the bigger your cash cushion and the easier it is to pay your bills each month. Importantly, the DCF ratio is tied directly to your net percentage.
For example, a DCF ratio to bills owed of 1/1 would represent a 50% net practice; 2/3 would be like Dr. Brown, a 40% net practice and 1/3, like Dr. Smith a 25% net practice. The rule is, the lower your net percent, the less cushion you have and the tighter your checkbook is each month.
There's more than high gross
O.D.s love high-gross practices, but based on what Dr. Brown did last year, her practice actually has the better financial profile of the two. She works less hours, takes home more money and has better cash flow. The secret: Once your gross nears $400,000, start focusing on the net. Once the net is in the 30%+ range, work on profitable growth.
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 JHAYES@HAYESCONSULTING.NET.
Optometric Management, Issue: April 2003