Practice Metrics

Analyze Your Finances to Determine When to Add an Associate

By Jerry Hayes, OD

By analyzing your net profits and potential for growth, you can reliably determine the right time to take on an associate OD.

Calculate Practice Net and Associate Salary
If you are considering an associate OD in your practice, the first thing you want to do is calculate how much your profits have to grow to break even on the associate’s salary. When you are in practice by yourself, the practice net is the same as the owner’s net. When you take on an associate, that practice net will be reduced by the amount of the associate’s salary. Here are two examples to illustrate:

Solo Practice
$1,000,000 gross revenues
$700,000 expenses
$300,000 owner’s net
30 percent net

Group Practice
$1,000,000 gross revenues
$700,000 expenses
$300,000 = 30 percent practice net minus $90,000 salary to employed OD
$210,000 to owner = 21 percent owner’s net

From my experience, ODs will begin to feel busy enough to add an associate once they reach $600,000 in annual practice profits. But the minimum annual practice revenue usually required to profitably add an associate is more in the $800,000 range. This assumes a minimum practice net of about 30 percent.

If your practice grosses less than $700,000 annually, it is likely that you need to delegate more tasks to staff, such as pre-testing, frame selection and dispensing. That, of course, may require adding an additional technician or optician.

Project Practice Growth
Based on the pattern of your practice growth in recent years, is it likely you will grow enough in one year to cover the additional cost of the associate? Here is an example of a $600,000 practice netting 30 percent that added an associate and grew by 20 percent to $720,000 gross.
One OD: $600,000 gross; 30 percent net = $180,000
Two ODs: $720,000 gross; 30 percent net  = $216,000

Meet Higher Payroll
But the practice now has to pay two ODs. Subtract from the $216,000 net a  $90,000 salary for an associate. This leaves $126,000 net for the owner
(vs. the $180,000 he was making as a solo practitioner).

Compute the Break-Even
The break-even for the senior OD in this scenario would be $867,000 gross. Here are the numbers:
$867,000 gross revenues X 30 percent = $260,100
$90,000 salary for associate
$170,100 net for owner

A big question to ask yourself: How many years are you willing to take a pay cut before breaking even? And at that point, you’ve only broken even, while you have an associate and bigger practice to manage.

Factor in Practice Growth Stimulants, Other Changes
Let’s say a new shopping mall is scheduled to open in the same shopping center as the one housing your practice, so you’re all of a sudden right on the way inside the mall for hundreds of shoppers every day. Or, let’s say your town is expected to grow in the next year due to a factory or plant that will be opening. Another growth game changer might be the opening of a second office that needs coverage. Changes to your community or practice situation need to be factored in when considering growth.

You also need to factor in your own plans. If you plan to exit your practice in the next three to five years, for example, it may be worth it to take on an associate you will sell the practice to in the next few to several years.

Bottom line: Don’t add an associate just because you feel busy. Take the time to calculate practice finances and projected growth. Make your decision based on the financial realities of your practice.

Jerry Hayes, OD, is the founder of Hayes Marketing, HMI Buying Group and the e-dr. Network. He also is the former owner and senior partner in a successful three-man practice in Vicksburg, Miss. To contact him: jhayesod@gmail.com

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