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The start of the New Year is a great time to reflect and visualize about what you would like to
have happen in your practice. A good CEO does not simply leave that to chance, but rather sets
goals about business volume and gross revenue, and follows that up with predictions about expense
categories. A good eye care professional should do the same thing. A written goal for your
practice expenses is called a budget.
Power of budgeting
Does the mere setting of a goal actually make the event come true? It can if you monitor the
data on a continuous small scale and take action when you see the trend is off track. Dr. Jerry
Hayes has long been a leader in the business power of budgeting, and he makes a strong case for
it based on his success as an entrepreneur in the ophthalmic industry. According to Jerry,
budgeting is an absolute must for a well-managed practice, and working with a budget will improve
your practice net income. So why don’t most of us do it?
While most eye care practitioners don’t set up budgets, many track their expense categories.
Those two activities are very closely tied, so if you track your expenses, you could easily take
the next step and make a budget from that data. Tracking the categories and simply watching what
happens to them does no good at all. You must make a conscious effort to hold expenses in each
area, and if a category is running over-budget, find a way to manage it better and pull it back
in line. The management challenge comes when you try to reduce expenses without sacrificing
service or quality.
Review of expense categories
You may have many expense categories on your profit and loss statement, whether it is generated
by your CPA or if you do it yourself with a program like QuickBooks. I think it’s valuable to
have many categories as long as you are faithful to what is included in each one from year to year.
You may want to have a list of definitions of categories as a reference to yourself and to anyone
who works on bookkeeping. While it may be helpful to breakdown your expenses into dozens of very
specific categories, it’s also smart to regroup them into fewer more general ones.
Consultants like Jerry Hayes advocate the following seven expense categories, and these are
commonly used in our profession and by the AOA. As a review and as a guideline, I’ll include
the typical expense percentage of gross figures. Please note that consultants, myself included,
don’t necessarily recommend these percentages, but rather are simply reporting the averages that
currently exist. As a management strategy, you may decide to employ a larger than usual staff to
greatly improve customer service; or you may pay higher wages and benefits to attract top level
employees. These actions would obviously increase your payroll category, which would be perfectly
fine, as long as it was part of your plan.
Typical optometric practice:
Cost of goods sold 30%
Staff payroll 20%
Occupancy costs 7%
General office overhead 7%
Practice net 30%
Here is where I would like to see the percentages in most practices:
Cost of goods sold 26%
Staff payroll 24%
Occupancy costs 9%
General office overhead 7%
Practice net 30%
From tracking to budgeting
Starting with last year’s expense data in your practice, you can build this year’s budget. Make
some small changes in the percentages that you feel do not reflect your business philosophy and
then let those percentages become the forecast for what will happen in 2006. Instead of measuring
where the money went, you are stating in advance how much will be spent in each area. Run your
own P&L statement on a monthly basis to monitor how you are doing. Be aware that large purchases
can temporarily skew the data, like a large frame inventory replenishment or a major equipment
Involve your staff
Since your practice does not exist in a vacuum, meet with key staff members who are involved in
buying inventory or supplies and share your budgeting goals with them. You don’t have to share
actual income numbers unless you want to, but giving them feedback on the relevant expense
categories as a percentage of gross gets them involved in watching costs.
Setting a budget helps you take control of your practice. Measuring something is the first step
to improving it.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Editor, Optometric Management Tip of the Week
Dr. Gailmard's new book, Practice Management in Optometry: A Blueprint for Success Based on the Optometric Management Tip of the Week, is now available on Amazon.