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.
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.
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?"
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.
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
What if you own?
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.
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.
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.
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
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