Analyzing Your Practice Overhead
Are your practice expenses in line? Compare them to these benchmarks.
Jerry Hayes, O.D.
An ongoing theme of this column is to give private practice optometrists reliable benchmarks for overhead expenses, practice profitability and staff productivity. And so continues that theme this month.
Just so you know, these aren't my numbers, they're yours. They come from three highly correlated sources:
1. Actual consulting clients
2. Hayes Consulting surveys, which a CPA verifies
3. The American Optometric Association's mass surveys.
Although a lot of optometrists tell me that my suggested staff salaries are too low and that nobody can net 35% of gross in these days of managed care and low-margin disposable lenses, I must report that I've seen little change in overhead expenses for private practice optometrists since I started tracking these numbers in 1990.
ILLUSTRATION BY STEPHANIE CARTER
National expense averages
Having said that, following are the national norms for all expenses in a traditional dispensing optometric practice expressed as a percent of collected gross income:
Cost of goods (27% to 33%). Always your biggest expense, cost of goods includes everything you spend on lenses, frames and contact lenses. This category also
includes the cost of your lab equipment and the portion of salary you pay your staff to do lab work.
Staff (15% to 20%). Your second highest expense. Include everything you spend on staff such as bonuses, payroll taxes, uniforms, insurance and continuing education. Remember to deduct what you pay your staff to do lab work and calculate that with cost of goods.
Occupancy costs (5% to 8%). This includes rent, insurance, property taxes, utilities, maintenance and janitorial. If you own your building, act as your own landlord and charge your practice fair market value for rent.
Examination equipment (3% to 5%). Because of the new tax laws that allow up to a $102,000 deduction in 2004, this expense can prove misleading. If your deductions exceed 5% of your gross, then look at this expense as if you were leasing.
Marketing and promotion (1% to 2%). We find that the larger the practice, the less the doctor tends to spend on marketing as a percent of gross.
General office overhead (6% to 9%). Use this as a catch-all for the expenses that don't fit anywhere else (e.g., your office computer, phone system, postage, legal, accounting, dues and subscription).
Doctor's compensation (30% to 40%). This includes any salary, draw, bonuses, insurance and other personal benefits you derive from the practice as an owner. The national average is 31%, but I like all of my clients to manage for a net of 35% to 40%.
Do the numbers really matter?
Yes and no. The point of giving you specific benchmarks is not to tell you that the right number for your cost of goods is 33% or for your staff is 18%. Rather, it's to give you a basis for comparing your practice to those of your peers and to then provide you with a model to help manage your overhead for maximum profitability.
If your practice profits are lower than you'd like,
then decide what percent of gross you want to net and use the rest of these
benchmarks to create a written budget that will yield the desired bottom line.
This takes some work and time, but the payoff in higher profits is huge.
Optometric Management, Issue: January 2005