Article Date: 2/1/2005

business advisor
Practice Net Vs. Owner Net
Net income is net income, right? Wrong. It depends on your practice type. Read on for an explanation.
Jerry Hayes, O.D.

As we discussed last month, the overhead structure of a traditional dispensing optometric practice falls into seven readily identifiable categories. Expressed as a percent of collected gross income, they are:

Of course, these ranges will vary slightly from practice to practice. For example, salaries tend to increase as a percent of gross as a practice gets bigger, while cost of goods usually decline.

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.

Practice net

But there's an important caveat I want you to be aware of. We use the "Hayes Seven Key Expense" model to analyze an optometric practice as if it were owned and operated by one optometrist, no matter how large the gross income. That's what we call "practice" net.

In a solo practice doing $1 million in gross revenue, the net income would look something like this: $1 million gross revenue minus $700,000 in expenses equals $300,000, which is 30% net.

Owner's net

Owner's net, on the other hand, is what a practice owner takes home after he pays his employed optometrist(s). Let's say in this case that's $90,000. $1,000,000 Gross Revenue minus $700,000 expenses equals $300,000 practice net. To calculate the owner's net, you have to subtract the employed optometrist's salary from the practice net. Therefore $300,000 minus $90,0000 equals $210,000 equals the owner's net, which in this case is 21% of the gross.

So is this practice netting 30% or 21%? Answer: The practice net is 30%, but the owner is only netting 21%.

Paying an employed OD

Instead of paying an employee a set salary regardless of how many patients he sees, I recommend paying associate optometrists based on their gross production minus cost of goods.

For example, if your employed optometrist produced $300,000 gross in a practice with 33% cost of goods, his gross profit production would be $200,000. As a rule, I like to see the practice net at least 5% more than the employed optometrist.

Therefore, if the practice net was 35%, I'd pay the associate 45% of his $200,000 gross profit ($90,000). That way, the associate would be netting $90,000/ $300,000 or 30%, which is very fair for an employed optometrist in a 35% net practice. If your practice was only netting 30%, then I'd advise you to only pay the associate $75,000 or 25% of his gross production.

Fair's fair

In my opinion, the practice owner deserves a higher net percentage than the employed optometrist because he's the one bearing all of the management responsibilities and the risk of ownership. If you want to create a long-term relationship, you must create a compensation package that's fair to your associate while yielding a reasonable profit to your practice.

 

 

1. Cost of Goods Sold  27% to 33%
2. Staff Salaries and Benefit 15% to 20%
3. Occupancy Costs 4% to 8%
4. Equipment and Machinery 3% to 5%
5. Marketing and Promotion 2% to 4%
6. General Office Overhead 6% to 9%
7. Doctor's Compensation

30% to 40%

  Total = 100%

 

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: February 2005