Pushing Reset If Your Practice Is Operating in the Red
June 7, 2017
Last week I wrote about ways to infuse your practice with cash… quickly. As promised, this article will be about how to analyze your practice finances (even if your records are not that great) and what steps to take to get back on track if your practice has low profitability.
A short term burst of cash flow can buy you some time, but a practice that often struggles to pay bills must have some changes implemented by the owner.
Find out what is wrong and fix it
I realize that many optometrists who own practices really don’t like the business aspect very much. Many of these doctors just want to provide clinical eye care for patients. This can be at the root of the problem if your practice has financial challenges, but I’ll make it very simple to evaluate and design a corrective plan. Operating your own practice is a great way to provide needed eye care to the public, but you have to stay in business to do so and that requires profit.
If you have good financial records or if you are working with a CPA, then you probably already know where the problem is. If you do not have good records, follow this list to collect some basic information. We need to find out how much money your practice earns and how much it spends.
• More accurate than any other record, your practice revenue is found in your bank deposits. Be sure you have a separate business checking account where all payments from patients and insurance companies are deposited. Do not make any deposits into this account that do not come from your practice. If you must transfer some personal money into this account, make sure it is clearly marked with a notation that it is a loan from the owner. Do not take any money from your practice that does not go through this account.
• Be sure that all money collected by the practice actually goes into the bank. Review how the bank deposit is made and that it balances with your sales every day. This includes cash, checks and credit card payments. I like the bank records to be very clear, so I prefer that the collections for each day are made as a separate deposit in the exact amount. In other words, don’t mix the money from two days together into one deposit. Make two deposits that match each day’s collections.
• Your expenses are also found in your business checking account. You may need to spend some time organizing this, but your bank can supply a statement that shows every payment (check or auto debit) your practice has made. Group these expenses into large categories so you can see where the money is going. Consider these five groups: Cost of goods, staff expense, rent and utilities, miscellaneous office expense and doctor salary or draw.
Produce your own P&L statement
Your profit and loss (P&L) statement can be done by a CPA or can be produced with QuickBooks software if you are using that and have very accurate records of deposits and payments. If you don’t have those resources, just use the data you gathered above. Select a time period of at least six months so you can even out unusual events and add up all the bank deposits in that period. That is your practice gross revenue. Group all your business expenses into the five expense categories listed above and subtotal each group.
This income summary should show you what the major problem is. Where is the shortfall of cash? What can you do about it? Obviously, all problems would be solved if you had more gross income at the top line, but that may not be easy to increase quickly in a sustainable manner. Of course, you can work on increasing sales over time, but you need your practice to be on solid ground now. That means working within a budget.
Take action in a big way
To overcome a long-standing pattern of financial shortfalls, you must change some habits. Some corrective actions may be unpleasant, but so is living with debt collectors, suppliers who stop doing business with you and worrying about bankruptcy. So make a vow to make some major changes and remind yourself that they should be temporary. When you see some cash accumulating in your checking account at the end of the month, and it remains there and keeps growing, you can return to spending more on yourself and on the practice again.
• Consider borrowing from a bank to help pay for business operations in the short term. Talk to your bank about consolidating existing loans and borrowing funds to help you catch up. But you will need to show some good financial records and have a good plan for correcting the shortfall in the future.
• Correct the problem areas identified in your P&L. The first step is probably to try to cut expenses. Many expenses can’t be cut, like rent and basic staff payroll, but look at everything and do what you can. Stop buying new equipment and try to hold off on large frame inventory purchases. If you are overstaffed, you may have to lay someone off.
• Your personal income draw may be too high for your practice profits. Lowering your personal expenses may not be easy, but you can’t starve your practice by taking a draw that is bigger than it can afford. Generally, the owner is paid last after all other expenses. You get to keep what is left.
• You might find that you need to find a new optical lab vendor in order to get better deals on cost of goods. Cost of goods sold (frames, lenses and contact lenses) should not be more than 30% of your collected gross revenue.
• Try to increase your frames on consignment. Buy some lower priced frames and closeouts to fill your displays, but don’t cut out all your good brands or your sales will drop.
• Work longer hours. If you have enough patient demand, you can open yourself for more appointments. But most practices that are struggling do not have enough patient demand.
• If you don’t have enough patients, you can work on ways to increase demand, but consider taking a second job in the short term. Compress your existing patient load into fewer days that are busy and productive. Work in another practice or retail location on your other days.
See if you are collecting what you bill by running current reports of accounts receivable for patients and insurance plans. Spend a lot of time reviewing each line item and have a staff member call patients who have a balance and try to collect. Send statements every month. Also, investigate each past due balance owed by an insurance plan and either resubmit the corrected claim or call the provider help line to find out why it has not been paid.
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.