Know Your Numbers

Some years ago as the V.P. of Sales & Marketing for an optical laboratory I accompanied our sales rep into the office of an Optometrist for whom our lab did 100% of the work. He was an engaging and forward-thinking gentleman with a lot of drive. The purpose of our visit was to talk about increasing Anti-Reflective treatment sales, although we didn’t announce the purpose in advance of the visit.

After exchanging some pleasantries with the doctor, I asked him if he knew his percentage of A/R. He proudly exclaimed, “we have almost everyone in A/R. We’re over 95%”. I had to let a little air out of his balloon at that point. I said, “Doctor, I brought along your lens utilization statistics today. I think you are going to be surprised, your numbers are actually 41%, which is still a good number”. He almost went ballistic! He wanted to immediately confront his opticians and read the riot act to them. I was able to calm him down pretty quickly.

One thing that tends to be true in business: if you don’t actually know the numbers, you think the numbers are pretty good. Another thing that tends to be true: if you aren’t tracking your key performance indicators (KPI’s), then things can get out of control and get your business in trouble.

In a medical practice, the financials we recommend tracking on at least a monthly basis are Cost of Goods Sold, staff compensation, occupancy costs, marketing, equipment, general office expense (a catch-basin for expenses that don’t fit anywhere else), and net to owner. These seven categories should be built into your monthly and yearly expense reports for your P & L statements. They give you a good tool to manage the business of your practice.

There are benchmark numbers available for each of these categories. But most importantly, you want to establish your own baseline, then work to improve the numbers. If a category suddenly gets out of control, you need to know why, and how to fix it.

If you need help with organizing your own expenses into these categories, please contact us. We charge only $500.00 to do a “clean-up” of your expense reporting, then it will be easy for you to maintain this powerful business tool afterwards.

Advantages to Owning the Practice

I speak to some of the Colleges of Optometry in the United States, and without fail get asked what is the advantage of owning your own practice, versus the advantages of working for someone else. My reply to this question is usually pretty long, but I’ll try to shorten it for this blog.

The obvious advantage to working for someone else is that you don’t have to worry about paying the bills, staffing the practice, marketing the practice, etc. You basically get to do the “doctor” stuff and go home. When you own the practice, you also have to deal with all of the other “business” stuff.

Advantages to owning the practice are primarily these four things:

1. Money.

Most commercial practices these days pay the OD a percentage of revenue produced by their patients, usually 14-16% of the net collected. As an example, if that number is 15% and the revenue produced by patients from Dr. Amblyopia is $1,000,000.00, then Dr. Amblyopia will be compensated $150,000.00. On the other hand, if Dr. Amblyopia owned the practice, the typical “target” for owners is about 31% of net revenue, so he would earn $310,000.00. More than twice the figure for an employed OD.

2. Tax advantages.

As the owner of the practice, you get to make decisions on what is “company” business and what is personal business. Many practice owners deduct car payments, cell phone payments for family members, and have family members on payroll for peripheral support positions. All are tax advantages.

3. Self-determination.

When you own the practice, you get to choose when it is open, which managed care plans to accept, when to go on vacation, who to hire, which charities to support, etc.

4. Equity.

If you own the practice, you build equity in the value of the business. When it comes time to sell, you get to reap the profits.

An easy way to determine Managed Vision Care (MVC) profitability

Have you ever wondered if you are making a profit with certain MVC plans? In order to know if you are profiting, you need to know two things: your cost per hour to keep your doors open, and your reimbursement per hour for patients of the MVC seen by your practice.

To calculate your cost per hour, look at your profit and loss report for last year. Look at expenses, including cost of goods sold and the doctor’s salary. Do not include excessive profits that may be taken as a year-end distribution. For illustration purposes, we will use $380,000.

Now that we have the expenses, we need to get the hours for the year. Take the number of hours the practice is open per week, and multiply by 50 weeks to allow for holidays. For example, if the practice is open Monday, Tuesday, Wednesday and Friday from 9:00 am to 5:00 pm and Thursday from 10:00 am to 7:00 pm, then the total hours per week would be 41 hours. Multiply the total of 41 hours per week by 50 weeks and the result is 2,050 total hours.

To arrive at the cost per hour to keep the practice open, we use the following calculation:

$380,000 / 2050 hours = $185.37 per hour.

Now that we know it costs $185.37 per hour to keep the practice open, we need to know how much per hour the MVC pays. A good way to do that is to take the next 12 patients that carry the MVC and track the total payments on their behalf to the practice. Include any co-pays from the patient, and deduct any chargebacks. Make sure you allow at least a month for each patient in case they come back for further services.

Once you have this total, factor in the typical number of patients you see per hour. If you see 2 patients per hour, divide the total by 6. If you see 3 patients per hour, divide the total by 4.

For this illustration, we will use $850.00 total revenue for the 12 patients contributed by the MVC and patient co-pays. We will also stipulate 2 patients per hour, so the total will be divided by 6. Here is the math:

$850 / 6 = $141.66 per hour total income for this MVC.

In this case, with costs of $185.37 per hour and revenue of $141.66 per hour, the practice is losing $43.71 per hour to see these patients. Now its up to you to decide: keep the plan for the additional volume, or leave the plan and work on increasing volume from other patients.