Article Date: 6/1/2004

business advisor
Office Space Considerations
How to figure out how big to go when you're planning your office space.
By Jerry Hayes, O.D.

Deciding on office space is like buying a big-screen TV -- it's human nature to want something a lot larger than you really need. While a nice, big office may appeal to your ego and impress your patients, the trick is to match size and cost with your current and projected needs. Here's how you do it.

Analyzing your situation

First consider dollar production, or sales, per square foot. Calculate this by dividing the square footage of your office into your annual gross collected income.

ILLUSTRATION BY SIMON SHAW

For example, a practice grossing $500,000 in 1,500 square feet of office space produces $333 for every square foot each year. According to the O.D.s we surveyed in the Hayes Practice Index, mid-range practices (those grossing between $400,000 and $700,000 annually) have an average revenue of $314 per square foot.

But of course, a good practice needs room to grow. I'd say you're in good shape if you're generating more than $200 per square foot and growing. If you're doing less than half the average ($156 per square foot and revenues not growing fast), then you're probably wasting money. Which begs the question, "How much should you spend on office space?"

Deciding how much to spend

It's my opinion that O.D.s should invest between 5% and 8% of practice revenues on what I call occupancy costs (rent, insurance, taxes, yard work and janitorial services). So if you have a practice that's grossing $500,000, then you shouldn't spend more than 8% (or $40,000) each year on everything it costs to occupy your office.

The good news is that most of your occupancy costs are fixed, so you'll enjoy economies of scale as your practice revenues grow. For example, $40,000 is 8% of $500,000 but only 6% of $666,000. This trend will last until you hit a point where you have to move into a bigger office and start the investment cycle over again.

What if you own?

Some docs boast that they have almost no occupancy expenses because they own their building and it's totally paid for. While your net is certainly going to appear higher if you have no rent, I think this is the wrong way to look at the situation. I prefer that doctors mentally separate the ownership of a building from the ownership of a practice and view themselves as their own landlord.

That's because your office building represents a personally owned asset. If you charge yourself little or no rent, then you're basically giving that asset to the practice. The opportunity cost of that gift is equal to whatever you could get for that building in the open market.

For example, if the fair market value of that space is $24,000 each year, then you're in effect subsidizing your practice by that much. I think it's better to have your practice pay rent to you, just as it would if you rented space in the mall. Because that will lower your profits, you must then adjust your fees upward so that your net percent is still where you want it.

Balancing the numbers

Consider more than just raw costs when analyzing your occupancy expenses. Spending any more than 8% of your gross on occupancy costs is generally too much. Producing anything less than $200 per square foot per year means that you have too much space and/or not enough revenue.

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: June 2004