By Ken Krivacic, OD, MBA
July 13, 2022
Times are tough on all business owners now – inflation has skyrocketed recently, the stock market is in a fall that hasn’t been seen for years, consumers are apprehensive about spending their hard-earned incomes and the cost to employee workers is at all-time highs. What is a practice owner to do?
I built a more-than $4 million practice, which I profitably sold in 2020. Over the years of practice ownership, I saw firsthand the delicate balance between keeping costs in check, including staff salaries, and the need to maintain a great patient experience and spur growth. I didn’t want to take cost control measures if those measures would negatively impact the service my patients received, and make it less likely they returned for care and referred others.
Here is what I learned from my own experience about balancing staff salary cost controls and building a profitable practice.
Maintaining & Building a High Net Profit
No owner wants to see their net take a hit. The owner is paid out of the net the practice generates. Net is merely what is left over after the revenue is collected and all costs are paid. It is a simple equation:
Net = Revenue – Cost
Even though it is a simple formula, there are numerous variables depending on the age and size of the practice. Younger practices generally have higher costs associated with starting the practice. These include start-up loans, equipment loans and a schedule that is not always full. Older practices have had time to pay off loans and are usually established long enough that the appointment schedule is routinely filled.
Smaller practices have a harder time keeping expenses lower due to less revenue, whereas larger practices generally have more revenue to make some costs lower. This usually applies to fixed costs such as occupancy costs and equipment cost. A simple example would be if you bought a retinal camera that cost $50,000, the percentage to the practice varies depending on size. If the practice generated $500,000 per year, the camera would represent 14 percent in cost, whereas in a $1,000,000 practice the cost would be 7 percent. As you can see, revenue solves many problems in a practice, yet many practice owners continually emphasize cost almost to the exclusion of revenue.
This brings me back to the title of this article about cutting staff cost. This has been a recent discussion among several of my colleagues lately who are feeling the pinch of their net and are looking for ways to cut cost. The two largest costs in a practice are cost of goods (26-32 percent) and staff (18-24 percent).1,2
The Hidden Costs of Cutting Staff Salaries
If, like my colleagues, you feel you have a handle on cost of goods (COGS), then that leaves staff, and why not cut there to increase your net? The logic is correct, it will increase net, but there are implications that may not be best for the practice in the long run.
Let’s look at the pros and cons of cutting staff or cutting staff expenses.
Pros:
Cutting any cost will increase net – employees’ salaries are a cost.
If you need to cut cost then getting rid of a non-productive employee is a good way to do that. Either that job can be phased out, if possible, or the employee can be replaced by a more productive individual.
Sometimes letting one employee go gets the remaining staff to work harder.
Cons:
The remaining employees have to pick up the extra work load if a staff member is let go.
Employee morale can be negatively affected. No one wants to work for a perceived “sinking ship.”
Performance and productivity can decline due to the extra workload imposed on the remaining staff.
Patient service can decline in the practice due to over-worked staff and low morale.
How Exactly Do You Cut Staff Costs?
There is also the question of what, or how, to cut cost in the staff cost category. Do you release one or two individuals depending on how much cost you need to reduce? This way you pull the Band-Aid off quickly and move on. It also allows the practice owner to pick who they want to let go.
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The alternative is to make it fair to all employees and cut everyone’s salaries, or more commonly, cut their work hours across the board. For example, if all your employees work 40 hours per week, then you reduce everyone’s hours to 36 hours or less. The idea here is that eventually some people will quit and seek other employment, enabling you be successful in cutting your costs. The downside is you have less control over who leaves. What if that person is the optician who always has better sales than all the other opticians?
The Big Picture
In the 30+ years I managed our practice, and grew it to over 4 million in revenue, employing 2.5 doctors, I was never a fan of releasing or firing an employee to reduce costs. Instead, I looked at other areas to cut to increase net.
Typically, most independent optometric practices employ four full-time staff for every one full-time doctor. That ratio will increase with an increase in revenue. Larger, higher-income producing practices tend to delegate more, and so, their staff size and percentage cost increase. Another way to look at it would be by revenue per employee.
My expectation was that when we hired a new staff member, they would eventually generate $150,000 in revenue for the practice. So, a four staff member practice should generate $600,000 in revenue yearly and 13 staff member practice should generate around $2 million per year.
So, what can you do to reduce cost? The real question should be what can you do to increase net, because, after all, the reason to reduce cost is to increase net. The thing I emphasized in growing our practice over the years was to increase revenue. If you increase revenue and control cost then the net increases. What other alternatives are there to increase revenue besides cutting staff?
- Raise fees on services and products. This will help in the equation listed above, and therefore, increase net. Small changes can go a long way to making your practice more profitable. With inflation today, most patients may not even notice.
- Improve patient flow. Can you work your schedule to add one more patient slot in your morning schedule and your afternoon schedule? The revenue from those patients will improve your net.
- Make sure your appointment book stays full. Encourage patients to refer friends and family. Make sure the staff knows the importance of patient recall.
- Hold off on new equipment purchases until the net improves, especially equipment that does not immediately generate revenue.
- Reduce the number of frames in inventory.
- Reduce or eliminate contact lenses in inventory. Consider not stocking contact lenses and ordering when needed.
- Study all categories of cost and cut in other areas, if possible
Finally, years ago I read the article and then the book “The Three Rules: How Exceptional Companies Think” by Michael E. Raynor and Mumtaz Ahmed.3
Click HERE to watch a Ted Talk featuring Raynor and Ahmed.
It influenced how I managed my practice. Rule number two was: Revenue before cost. The authors studied over 25,000 companies over a 45-year period and concluded most companies that were successful, profitable and stayed in business for a long period of time looked for ways to increase revenue more than ways to cut costs. There is an old business adage, “You can’t cut your way to success.” Be careful when and where you make cost cuts. Your employees can be more of an asset than a cost.
References
1. Manage Your Office by the Numbers: Pay close attention to how much money flows out of your office and where it goes to avoid serious financial trouble. Gary S. Gerber, O.D.
2. Key Financial Metrics to Track–and Improve–for Profitability Gerald A. Eisenstatt, OD, MBA
3. The Three Rules: How Exceptional Companies Think: Michael E. Raynor, Mumtaz Ahmed
Ken Krivacic, OD, MBA, practices at Las Colinas Vision Center in Irving, Texas, now a MyEyeDr. practice. . To contact him: kkrivacic@aol.com.
