By Mark Wright, OD, FCOVD,
and Carole Burns, OD, FCOVD
Sept. 9, 2020
Practice owners frequently have investments, such as new instrumentation and inventory, to consider. Here is how to accurately gauge the return on investment on any of these investments, or others, that you must make a decision on.
Return on investment (ROI) is a financial ratio used to calculate the benefit received in relation to the investment cost. ROI is most often measured as net income divided by the original capital cost of the investment. The higher the ROI ratio, the higher the benefit.i A positive number is good and a negative number is bad.
ROI = NET INCOME / INITIAL CAPITAL COST
• The formula for NET INCOME is Calculated Revenue Generated – Initial Capital Cost.
• The formula for Calculated Revenue Generated is # of Potential Patients X Reimbursement/Patient.
The ROI formula helps you decide if you should purchase (or lease) a piece of equipment, hire an additional employee, outsource your eyecare billing and/or know when you will see a ROI on your optometry degree.
Let’s do an example to see if we should purchase a new piece of equipment.
Over the last 12 months you had to send 200 patients out of your practice to get test results that you could not do. You think that by purchasing a new piece of equipment, you could keep those patients in your practice. The typical third-party reimbursement for the procedure is $80.
INITIAL CAPITAL COST = It cost $30,000 to purchase this piece of equipment for your office.
CALCULATED REVENUE GENERATED = $200 X $80 = $16,000
NET INCOME = $16,000 – $30,000 = -$14,000
ROI = -$14,000 / $30,000 = -0.47
The ROI is a negative number. That is not good. Based on these calculations, you should not make this purchase.
But what if the expected life of the above piece of equipment is five years? Let’s re-do the calculations based on five years.
200 patients/year X 5 years = 1,000 patients
CALCULATED REVENUE GENERATED = 1000 X $80 = $80,000
NET INCOME = $80,000 – $30,000 = $50,000
ROI = $50,000 / $30,000 = 1.67
The ROI is a positive number. That is good. Based on these calculations, this would be a good purchase.
As you can see from EXAMPLE 2, adding time to the equation gives better insight into the true ROI.
Other Articles to Explore
Besides adding time, another way to make this formula even better is adding all expense variables. Expense variables to consider would be the cost of maintenance agreements, training costs, rent for the space the equipment occupies, cost for any supplies the equipment needs in order to function and the additional cost of any employees dedicated to running the equipment.
The more detail you put into the ROI formula, the better a tool it becomes to help you make decisions.
ROI ON ADDING A STAFF MEMBER
You can take the ROI formula and apply it to hiring additional staff. By adding an additional staff member can you see more patients, add additional reimbursable testing, free up another staff member to be more effective – in other words, will this hire help you generate more practice income? Since you can determine the additional revenue generated and you know the costs associated with hiring the additional staff member, you can now calculate the ROI on this decision.
ROI ON OUTSOURCING EYECARE BILLING
You can use the ROI formula to determine if you should outsource your eyecare billing. HERE is an article to take you deeper into those calculations.ii
ROI ON YOUR OPTOMETRY DEGREE
SUNYiii and New England College of Optometryiv published articles answering the question: When Will You See a Return on Your Optometry Degree Investment? You can use this analysis to calculate the ROI from any school or college of optometry.
As you can see, ROI is a valuable and versatile tool. In our day-to-day world, calculating ROI helps the practice owner make better practice decisions.