Article Date: 10/1/2005

earnings
Can You Increase Your Fourth Quarter Earnings?

Save your time looking for a quick fix. It's time to plan your strategy for 2006.
JERRY HAYES, O.D., Ponte Vedra Beach, Fla.

When optometrists ask me for last-minute tips on increasing practice profits in the fourth quarter my usual response is "Save your time and start working on next year." That's because the key to developing a financially successful practice is planning. And meaningful financial planning for your practice is something you must do before the year gets started.

It's like creating a game plan in football. Coaches put in a lot of work before kickoff to develop a strategy their team can execute. But once the game starts, all they can do is make adjustments. Therefore, now, not next fall, is the time to start laying the groundwork for a more profitable 2006.

4 Types of Optometric Practices

High net (35%+)
Low $ volume
 Less$500,000*
High net (35%+)
High $ volume
Over $500,000*
Low net (-29%)
High $ volume
Over $500,000*
Low net (-29%)
Low $ volume
Less $500,000*

   

Where do I start?

To start your planning process, step back and look at your practice from a strategic standpoint. How you position your practice in the marketplace should dictate the fees you charge, your overhead expenses and your level of profitability.

Look at the illustration above to determine which of the four strategic types your practice currently falls into.

What's your strategy?

Let's examine the options. The high-net, high-gross quadrant is the goal of most independent optometrists. Because this type of practice never happens by accident, we know the owner has spent time developing a strategy for his practice. Likewise, high-net, low-gross practices, are usually created by design and are often just a younger version of a high-net, high-gross practice waiting to grow up.

Low-net, high-gross practices are also usually the result of a conscious strategy. This is an approach commonly employed by discount chains and can be very profitable given enough volume. However, the low-net, high-gross strategy is difficult for independent O.D.s to execute successfully. Low-net, low-volume is a strategy few optometrists choose for themselves. This scenario generally indicates a very new practice just getting started; an older practice in decline; or a practice with no clear strategy for financial success.

While it's easy to say a high-gross, high-net strategy is the best, this may not be the case for everyone. In reality, the best strategy is the one that you can successfully execute. The worst strategy is having no conscious practice strategy at all.

Choosing your strategy

The overhead profile of your practice must be consistent with your financial strategy. You can't expect to attract patients by charging high fees if all you offer is a dumpy office and bare bones staff. Nor will you be profitable if you offer discount prices and try to provide full-service care with a big staff in plush surroundings. They just don't go together.

Let's look at a practice with "average" fees and overhead, based on AOA survey results. Dr. Middleton grosses $600,000 and sees 2,000 primary exams per year for an average of $300 per patient. His overhead structure is given in the table on the right.

Now compare that with the overhead of Dr. Hightower's high-net practice. He sees 1,500 primary exams per year and grosses $600,000; an average of $400 per patient.

What's different? Two things: Dr. Hightower spends less on cost of goods but more on staff. Cost of goods is a lower percentage of gross because the high-net practice sees fewer patients but charges higher fees. Despite higher margins, Dr. Hightower spends more on staff than Dr. Middleton because this supports his strategy to provide a higher level of service.

The point is this: The most financially successful practice owners work to execute a conscious strategy in their practice. And it's important the practice budget be designed to support the practice strategy.

 

 
 

Dr. Middleton's Overhead

Cost of goods sold   33%   $200,000

Staff salaries and benefits   20%   $120,000

Occupancy costs   6%   $36,000

Patient care equipment   3%   $18,000

Marketing   2%   $12,000

General office overhead   6%   $36,000

Practice net   30%   $180,000

Dr. Hightower's Overhead

Cost of goods sold   28%   $168,000

Staff salaries and benefits   22%   $132,000

Occupancy costs   6%   $36,000

Patient care equipment   3%   $18,000

Marketing    1%   $6,000

General office overhead   5%   $30,000

Practice net   35%   $210,000

Dr. Dowell's Overhead

Gross      $575,000

COGS   33%   189,750

Staff   22%   126,500

Occupancy   6%   34,500

Equipment   5%   28,750

Marketing   3%   17,250

General Overhead   6%   34,500

Total expenses   75%   $431,250

Net   25%   $143,750

Creating a practice budget

Let's look at a fictitious optometrist we will call Dr. David Dowell. Dr. Dowell has a solid practice that is on track to gross $575,000 in 2005 and net 25%, or $143,750. His overhead structure is in the chart below.

After joining a study group with some successful colleagues, Dr. Dowell realizes he has a low- net, high-volume practice, even with a nice office and a well-trained staff. In other words, his financial results are not consistent with the quality of service he provides. What can he do?

Create a financial plan

Since we already know the answer is for Dr. Dowell to develop a financial plan for his practice, the only question now is where to start. Projecting gross income and practice expenses are important, but the key financial goal to establish is really net income. Therefore, we will ask Dr. Dowell to come up with a realistic but ambitious goal for 2006. What would you propose Dr. Dowell net in 2006: $175,000, $200,000, $225,000?

Dr. Dowell decides he wants to increase his net to $200,000 in 2006. I recommend every practice owner begin the planning process with the end in mind. Now let's work backwards to see how he can get there.

Based on his gross of $575,000 in 2005, what is a realistic gross income goal for 2006 that will support Dr. Dowell's net income goal of $200,000? A gross of $600,000 would represent only a 4% growth in dollar volume and seems very reasonable for him to achieve.

Do the math

If Dr. Dowell sets $600,000 as the budget for his gross income and $200,000 as the budget for his net, his practice overhead can be only $400,000 (gross – net = practice overhead).

Believe it or not, Dr. Dowell just created a macro budget for his practice. See, this isn't rocket science! Now he must develop a detailed budget for expenses that supports the net income goal.

If you're wondering where the hard part comes in, this is it; getting into the nitty-gritty details of overhead expenses. To do this, we advise Dr. Dowell analyze his 2005 overhead and use that information as the basis to create an expense budget in 2006. This is more accounting than Dr. Dowell wants to do and he's not particularly good at it, either. So, we encourage him to get his office bookkeeper or outside accountant to help him work through the process.

Look at each expense area

Here is a process Dr. Dowell can use to analyze cost of goods. His biggest expense was 33% of his gross, or $189,750, in 2005. Dr. Dowell should begin analysis with a meeting of all staff who are involved in ordering frames, spectacle lenses, contact lenses and related supplies, as well as frame stylists and receptionists, who quote and collect fees.

Typical questions to consider:

Once this review is complete, Dr. Dowell (and you) needs to analyze his other five key expense areas in a similar manner to determine what needs to happen for that particular expense area to meet its 2006 budget. If you and your staff haven't gone through this process in the last few years, you'll quickly find many ways to cut expenses and be more efficient.

Ultimately, a detailed budget should resemble the table above.

Once Dr. Dowell has his budget in place, he can use it on a monthly basis throughout 2006 to drive spending decisions in all his key expense areas, as well as help decide when it's time to raise fees and by how much. Now, just like a coach, he may have to make adjustments as the year goes on. But at least he has a game plan in place.

Detailed budget

Gross      $600,000

COGS   30%   180,000

Staff   20%   120,000

Occupancy   6%   36,000

Equipment   4%   28,750

Marketing   2%   12,000

General Overhead   5%   30,000

Total expenses   67%   $400,000

Net of:   33%   $200,000

Nowhere to cut?

If you're already keeping a close watch on your budget, it may be very difficult to cut expenses. If that's the case there may be only one other way to raise your profit margins: Increase your fees to private patients.

In this example, if Dr. Dowell raised his fees 9.8% and grossed $631,250 with the same overhead of $431,250, he would achieve his goal of netting $200,000. As you can see, sometimes all it takes is some expense control or a modest fee increase to dramatically increase your net profits. In the real world, it usually takes a combination of both.

Doctor or businessman?

Many O.D.s tell me they went to optometry school to be a doctor, not to develop strategy and budgets. Optometry is our profession, but like it or not, your practice is a business. If you want to be a financially successful practice owner in these days of intense corporate competition and pressure from managed care, you really don't have a choice. You have to learn how to apply basic business principals to managing your practice if you want to thrive for the long term.

Dr. Hayes is the founder of Hayes Marketing, HMI Buying Group and e-dr. Network. He authors OM's Business Advisor column and is a frequent speaker and writer on the business side of practice. He may be reached at jhayes@hayesconsulting.com.



Optometric Management, Issue: October 2005