By Laurie L. Sorrenson, OD, FAAO
As optometrists, we care first and foremost about our patients’ eye health and vision. As practice owners, we must be equally committed to running our business well. Here are tips to track your expenses—and action steps to run more profitably.
As optometrists, most of us were solely trained in the science of caring for our patients’ eye health and vision. We are able to prescribe eyewear and products like contact lenses and medications that improve their lives. While serving our patients by improving their eye health and vision is where many of us find our greatest fulfillment, it also is essential that practice owners closely track their office’s finances.
With the OD’s passion for focusing on bettering the lives of patients, it is tempting to farm out these tasks to an able office manager. Staff can provide great support in the operations of the office, but the money that is spent to keep the practice running comes from the practice owner and the practice owner is the one who will reap the greatest rewards from a profitable year. For that reason, the practice owner is the one who must closely monitor and track across time (at least month-to-month and year-to-year) financial expenditures and profits.
Since some ODs may not even know which financial metrics to stay attuned to, here are the key expense categories I use to track my practice’s finances:
MBA Resources on Practice Expenses
For further discussion of practice expenses, download the MBA’s Key Metrics: Assessing Optometric Practice Performance on the MBA site.
See section: Expenses and Net Income (page 42)
Cost of Goods (COGS): The cost of the materials that you sell in the office. I subdivide this category into frames, lenses, contact lenses, solutions and supplements. A benchmark for this category is that it should comprise no more than 30 percent of overall practice expenses. I shoot for 26 percent. If you have a lab person who is 100 percent used for making the glasses, all expenses associated with this lab person should be under COGS.
Staff: ALL staff expenses, including salary, taxes, insurance, retirement, scrubs and continuing education should fall into this category. A benchmark for this is 20 percent of total practice expenses, but many consultants think it should be as high as 25 percent. I personally shoot for 23 percent. Your full-time lab person should NOT be in this category!
Rent and Utilities: This should also include all expenses tied to maintenance of the property. If you own your own property, you should take the amount that represents fair market rent value and take that amount from your mortgage payment and put that into this category. The rest of the mortgage payment would go into the owners sub-category under doctors compensation. Seven percent of total practice expenses is a good benchmark for this expense category.
Equipment: All instrumentation, whether purchased or leased, including any payments related to loans that were taken to pay for instruments. This usually runs about 2 percent to 3 percent of practice expenses.
Marketing: Expenses here would include not just print and online advertising (including postage), but also in-person events like trunk shows. A new practice will spend a much higher percentage on marketing. My benchmark for this category is 3 percent of practice expenses. This should include postage for any mailers including recall postcards.
General Office Overhead, otherwise known as Miscellaneous: Anything that does not fit into the other categories! Seven percent of practice expenses is a good benchmark. Watch this number, it can really eat into your profits!
Doctor’s Compensation: All doctor’s salaries and other compensation. Make two sub-categories, one for the owner(s) and one for the associate(s). All expenses associated with the doctors should fall under this category including travel, CE, lab coats, retirement, car, etc. Anything that if you were not the owner you would be paying out of your pocket for.
Remember, though, that many of these doctors’ compensation expenses may or may not be a deduction. This type of tracking is to help you run your business on a day-to-day basis. It is only the basis for what your accountant will use for taxes. You will need to sit with your accountant and review what is under doctors’ compensation to see what is taxable and what is not taxable.
Track your expenses in each of the above categories at least monthly, and see what the trends are like from at least month-to-month and year-to-year to determine whether any of these categories have expenses that are not offering a return on your investment.
Importance of Cash Flow Statement
More important than P&L is a cash flow statement. Simply, that is your P&L (if done on a cash basis) minus any loan payments that you are making. This will show you exactly how much money went in and how much money went out every month.
A P&L is easy to put together. Assign a category every time you write a check. Make sure it is one of the seven categories mentioned above.
Take Action When Financial Red Flags Flash
One time I found that my office overhead expenses were too high. It was a staff person who was indiscriminately buying things for the office (and probably herself) with the office credit card.
Another time, several of my category percentages were too high over quite a long time and profits were down. It turned out my associate was stealing from me! She was writing all the checks at the time and was paying for things not associated with the office and then coding them into our expense categories.
Lesson here: always open your own bank statements. Have them sent to your own home!
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Laurie L. Sorrenson, OD, FAAO, is president of Lakeline Vision Source in Austin, Texas. To contact her: sorrenson@att.net.
