Measures
How Does Your Practice Measure Up?
This survey of optometric income can tell you.
BY JERRY HAYES, O.D., AND MARILEE BLACKWELL, M.B.A., C.P.A., A.I.B.A., Ponte Vedra Beach, Fla.

In the second quarter of 2001, more than 100 private-practice optometrists submitted detailed, confidential information about their practice incomes, overhead expenses and patient loads for analysis by Hayes Consulting. We compiled and tabulated this information into a customized report that allowed participants to compare their key financial and production data to those of peers with practices of equal size. The participants could then use the report as a practice management tool to correct problem areas.

While there were some surprises in our findings, most of the income and expense ratios agreed with what management experts have been teaching for years. However, since there's no such thing as an "average" practice, the real value of the data lies in helping each owner measure his own practice against "the best in class." This allows him to determine the weaknesses and strengths of his practice with an eye on improving productivity, controlling overhead, increasing profits and building personal wealth.

Why should you care if your practice is in line with others? As our good friend and noted consultant Jerry Legerton, O.D., likes to say, "Measurement is the beginning point of positive change." Here's what our survey said; see how you compare.

Big gross versus big net

When it comes to managing a practice for growth and profits, optometrists possess a wide range of business skills. Some are good at building high patient volumes and large gross incomes (more than $700,000). Others are adept at controlling expenses and generating a high net-to-gross ratio (more than 31%). But for all owners, the Holy Grail of good practice management is doing both -- generating a big gross income and a high net.

In our experience as consultants, if we show an O.D. the right parameters for the key business areas of his practice and provide a way to measure them, it's usually not difficult for him to take corrective measures when needed. Just like the intraocular pressure findings you take every day, there are known norms for the financial performance of your practice. When you find problems in critical areas, you must take remedial action. But that's only possible if you're measuring the right things to begin with. Some O.D.s know how to do this intuitively, but the majority have to be taught. Either way, O.D.s who understand how to manage the business side of their practices by the numbers are always the ones with highest nets.

That's because when it comes to increasing profits, knowledge is power. Gross is important. But your net is your single most important financial parameter.

Take the example of a large practice in our survey that grossed $974,000 and netted $227,000 or 23.3%. That's outstanding production, but another practice in our survey netted more -- $237,000 -- on a gross of only $603,000, a net of 39.3%. That O.D. worked less, saw 38% fewer patients and had less invested capital at risk to produce a slightly greater income. We're not suggesting that the owners of the million-dollar practice should gross less and net the same. But what if they grossed 39%? That 16% difference in net is lost income of $156,000 to the larger practice.

Breakdown of practices

This survey included 114 practices broken into categories of small, medium and large. Nine practices had an annualized gross of $300,000 or less; 66 practices grossed more than $300,000 but less than $700,000. Thirty-nine practices grossed more than $700,000 .

Practices with a net-to-gross ratio of more than 31% were defined as "high net." Practices that netted less than 31% were defined as "low net." Of the nine small practices, five were low net and four were high net. In the medium practices, 38 were low net and 28 were high net. Twenty-one large practices were high net and 18 were low net.

Overhead expenses

These are the basic operations costs you must consider:

Cost of goods sold. This is always the biggest expense for any traditional optometric practice. Because this area has such an impact on your net, carefully monitor the amount you spend on frames, ophthalmic lenses and contact lenses. As the chart on page 58 shows, medium-sized and large practices spent 28% to 33% on cost of goods -- right in line with what we recommend. Lower-netting small practices had the highest cost of goods, at 41%. This reflects less ability to buy at volume discounts and a tendency to set fees lower than their higher-volume colleagues.

Low-netting practices had higher cost of goods, regardless of practice size. This is usually a function of lower fees, poor collections and inefficient purchasing procedures. However, this is one of the most manageable expenses in your practice.

Note: Practices with in-house labs were instructed to allocate a pro rata portion of their lab employee salaries to cost of goods. Otherwise, they would be understating the cost of goods and overstating staff expenses.

Staff Expenses. This is the second-largest expense item for most optometric practices. It includes salaries, all employer-paid payroll taxes, insurance and uniforms -- in short, anything you pay for on behalf of your staff.

Small practices had the lowest staff cost, at 15%. We think this happens for a couple of reasons. O.D.s in smaller practices probably do more of the administrative work themselves or with the help of an unpaid spouse until they can afford a bigger staff. Also, efficiency declines slightly as staff size grows.

Staff expenses for medium-sized and large practices were similar; 21% at the high end and 16% to 18% at the low end. It's important to note that high-netting practices of all sizes had staff expenses 18% or below of gross.

Another important measure of staff productivity is the dollars each employee generates per hour. Staff of small, low-netting practices generated $80 per hour per employee. Staff of small, high-netting practices generated $98 per hour per employee. This is consistent with the idea that small-grossing O.D.s do more administrative work themselves. Medium and large low-netting practices generated between $61 and $65 per staff hour worked, while high-netting medium and large practices generated between $65 and $68 per staff hour worked. This again lends credence to the theory that staff efficiency declines slightly as you hire more people.

The scale at bottom shows how we measure staff productivity. Suppose the O.D. had staff productivity of $90. Then each staff hour worked would generate $90 in revenue.

Rent. This is rent paid for the practice facility. O.D.s. who own their practice facilities were asked to include principal and interest in this category.

Small, low-netting practices spent significantly more (12%) than high-netting large and low-netting medium practices on rent (3% to 6%), reflecting relatively high fixed overheads. Unlike "cost of goods," which varies depending on how many patients you see, rent stays the same no matter how much revenue you generate. The high rent small, low-netting practices in our survey paid could mean that they're not using space efficiently. Or they could be small, young practices that are still growing into their leases.

Medium and large low-netting practices spent approximately 6% on rent, while the high-netting practices spent 4% or less. Savvy practice managers not only know how to control variable expenses such as cost of goods -- they also know how to project their need for fixed expenses.

Marketing and advertising. The amount all O.D.s spent here was generally low. Across-the-board, low-netting practices spent slightly more on advertising and marketing than high-netting practices.

Financial benchmarks

Here are important financial benchmarks to be aware of:

Exam fees. In general, the larger the practice gross, the higher the exam fees to private patients seem to be. Small practices had the lowest exam fees, at $58 to $59. Exam fees for medium and large practices were similar, ranging from $68 to $73.

Conversely, and almost by definition, the lowest average exam fees were found in small, low-netting practices. In our consulting work, we find that low fees are a common problem for O.D.s who have low nets.

There seems to be a direct correlation between the willingness to set fees at or higher than the market level and practice size. The higher the fees, the larger the practice. Because the practice owner has total discretion over how much to charge private-pay patients, this should be interesting to small practices who think they're going to chase patients away by charging too much.

Average revenue per patient. Average revenue per patient was based on collected gross revenue. The average revenue per patient ranged from $239 in small practices to $277 in large practices, reinforcing the observation that larger practices tend to charge more for their services.

While many doctors ask how much to charge for a given service, that can vary for each practice in each geographic location. What the numbers do tell us is that because the highest-grossing practices charge the most, patients aren't as fee-sensitive as small practice owners think. Most patients pick doctors for location and personal relationships, good service and perception of quality rather than on the basis of price.

Revenue per employee. This area measured the total revenue of the practice divided by the number of non-O.D. full-time-equivalent employees (FTE). The amount of revenue produced varied from $142,000 to $204,000 per FTE and was lowest in medium practices. As expected, high-netting practices generated more revenue per FTE than low-netting practices. However, small practices had a higher production per employee than medium and large practices. Again, the small-practice O.D. does more of the administrative work himself, and larger staffs aren't as efficient.

Revenue per O.D. This category measured revenue produced per O.D. per hour. Smaller practices had lower figures than medium-sized and large ones, consistent with both lower fees and less staff to assist with patient care. Revenue per O.D. hour seems to increase as the size of the practice increases. Again, this could be a function of higher fees and more staff available to assist the doctor.

An important finding in this category is that small practices (less than $300,000) ranked very high in staff productivity but very low in productivity per O.D. We think that doctors in this category need to delegate more, hire more staff and spend more time on doctor duties rather than staff duties. Exactly how much time, however, depends on personal preference.

O.D. hours spent on management duties. The smaller the practice, the less time the doctor spent on management. O.D.s who own small practices probably have less to manage. However, based on the time doctors in medium-sized and large practices spent on management, this area could also be a predictor of practice gross and revenue. The moral: Don't get so bogged down with the day-to-day duties of running your practice that you don't make time for planning your future growth. Spend about 1 hour every day on promoting, planning and managing your practice .

Complete exams per O.D. hour. Large, high-netting practices saw more than twice as many exams per hour (1.66) as small, low-netting practices (0.79) . The more patients you see, the more gross revenue you generate and the better use you make of your fixed overhead.

Words of wisdom

If we had to make three simple suggestions for any O.D. who wants to increase the size of his gross and net, they would be:

• Raise your fees. If you're netting less than 30% and managing your overhead reasonably well, you likely need to raise your fees. How much? Have an optometric consultant help you work through the math, and make sure your increase will get your net income up above 30%.

• Monitor your key overhead expenses more closely, especially cost of goods and staff. Note: Remember that it's very difficult to net more than 30% if your cost of goods and staff expenses combined exceeds 50%.

• Spend more time setting objectives and planning your growth, and less doing things your staff should be doing.

O.D.s traditionally measure success by gross revenues. Certainly, that's important, but it's the net that really counts. As you've seen, a high-gross practice can actually net less than a well-run medium, high-net practice.

As we look at the results of one of the most extensive surveys ever conducted on optometric income and overhead, it's apparent that high-netting O.D.s share important management traits. First, while they realize that optometry is their profession, they treat their practice as what it really is -- a small business that hires people, pays rent and promotes itself with the goal of making a profit. To do that, high-netting O.D.s are on top of the numbers side of their practices. Either self- taught or working with consultants, they've learned how to measure key production areas and take corrective action when needed. They generally have large gross revenues, but they don't try to attract patients by offering the lowest fees. They have the courage to charge what it takes to make a good profit and the skill to deliver a level of service that makes patients feel like they got their money's worth.

More than just being willing to delegate, they're good at hiring and firing and growing a staff of assistants who can provide good patient care. They can see the big picture, look past the duties of the day and plan the future growth of their practice. It's a unique blend of skills that only a minority of practice owners possess. However, the tools for significantly improving the financial performance of an optometric practice are at the disposal of any O.D. who wants them. It's just a matter of deciding that you want to be a better manager and then taking appropriate action.

A frequent writer and speaker on practice management issues, Dr. Hayes is the founder and director of Hayes Consulting. Marilee Blackwell is an MBA and the senior consultant for Hayes Consulting.