By Adam Cmejla, CFP®
June 5, 2019
The summer is the perfect time to assess where your finances stand for the year, and to adjust as needed, so you meet your year-end goals.
You’ll often hear me talk about how important it is to pause and take time to work on your practice (in addition to the work that you do in your practice).
I love looking at the numbers of the practice, and it’s not just because I’m a CFP® Professional who has an affinity for numbers. It’s because the numbers of the practice take all emotion and bias out of the equation and show the results of the efforts that are being put into the practice. Math doesn’t lie, is a universal language, can give you incredible insight into your practice and should influence decisions that you make going forward. You can’t improve what you don’t measure, and it’s important to hit the <<pause>> button and dive deep into the financials of your practice. Below are key areas that you should review, along with action items to take based on the data.
This is an obvious one, but most practices want to see the gross number (compared year-over-year) rising, albeit at different rates for different practices based on the life stage of the business. Don’t just analyze the YTD gross revenue, though. Break it up on a monthly basis and determine where you had your strongest months and reflect back on that time. What caused the increase in revenue? Did you run a referral campaign? Invest in Google Adwords? A Facebook ad campaign? Postcard mailings? Invest the effort to best understand the root cause of the increase in revenue. Realize that the examples of the initiatives mentioned above don’t have immediate payoff. They require an investment of time, focus and consistency.
Cost of Goods Sold (COGS)
This is probably the biggest variable that can influence the financial health of a practice, so it’s important to understand what the numbers are telling you. The ranges vary, but typically you’ll see COGS in a practice be anywhere from 18 percent on the low end to 30 percent on the high end of gross revenue. If your COGS increased, but was consistent in relationship to your gross revenue, then there’s probably not much to worry about in your practice. If you saw COGS increase more than revenue, it’s worth pausing and understanding why.
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If you’ve consistently seen your COGS increase over time, it may be worth evaluating whether and how you can lower COGS in your practice. Perhaps this means expanding (or adding) an in-house lab to do more internally rather than outsourcing your lab work. Not only can this help reduce expenses over the long term, but it can improve your patient experience by enabling quicker turnaround time on optical purchases.
Next to COGS, payroll expense (minus owner’s compensation) is one of the other biggest expenses on a practice’s profit and loss statement. I’m a big fan of investing in a practice’s team, as the talent of your team is integral to providing a great patient experience. Almost every time I’ve worked with a practice that’s struggling to grow, and we analyze the financials, there’s an inverse correlation to low payroll expense and high staff turnover. It’s hard to deliver a consistent and exceptional patient experience if you’re having to spend significant time finding and training talent, only to have them leave months, or just a year or two, later to find a better-paying job.
Identifying when to expand and grow your team based on growth is a deeper topic worthy of its own article, but suffice it to say, you want this number to typically be around 25 percent of gross revenue, if you are including associate doctors in the calculation. If you are only including support staff in the calculation, it should be 20-22 percent of gross revenue.
This is important as it relates to the relationship to gross revenue. I had a client in the office recently who was proud that their year-over-year revenue was up 18 percent. On the surface, that was admirable…until we realized that his expenses had grown by 20 percent during the same time period. You can’t make up profits in volume.
At the end of the day, you should not only be paid fair compensation as the OD in the practice, but also a return on the risk that you took in owning the practice by realizing a profit on your practice. The range varies based on where a practice is in its life cycle, but the range can be as low as 15 percent (growing practice that’s reinvesting heavily back into the practice) to 30 percent+ for a healthy, cash-flow-rich practice.
Assuming your practice is taxed as an S-corporation, how you split that compensation between W-2 wages and pass-through income is a deeper conversation between you, your CFP® and your tax advisors because the implications affect many personal and professional planning strategies.
After reviewing the data, make sure you understand the actions you’ll take based on your findings. It’s one thing to know it just to know it. The real magic happens when you tie the awareness of your numbers to specific, measurable, achievable, relevant and timely (SMART) goals…and then systematically review your progress on those goals.
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a number of free resources, visit https://integratedpwm.com/ebooks/ and check out the “20/20 Money Podcast” wherever you find your favorite podcasts to get more tips on making educated and informed financial and business decisions.