business advisor
Your Year-End Practice Check Up
Use these three areas to evaluate your practice's performance in 2003.

By Jerry Hayes, O.D.

I recently met with a financial advisor to discuss the performance of my investment portfolio. But before we reviewed my specific stocks and mutual funds, we went over what he referred to as "performance benchmarks," or how my portfolio compared to the market in general.

Because your practice is probably your largest investment and your biggest income producer, you should have some performance benchmarks too. I'll use this month's column to help you set some of your own.

Three points to ponder

As you review your practice's performance for 2003, look closely at the following three critical areas:

1. gross income

2. cost of goods and staff expenses

3. net percentage.

ILLUSTRATION BY ELVIRA REGINE

Gross income. Retail optical has been flat to slightly down over the past two years, so you're doing a good job if you had any revenue growth at all in 2003. According to national surveys, the average gross per independent optometrist is around $350,000 to $400,000 each year. Anything above $500,000 per year puts you solidly above average. While revenues drive profits, gross income can be a misleading statistic because many high-revenue practices have low nets.

Cost of goods and staff expenses. These are the two biggest expenses for every traditional dispensing optometric practice. And even though they may seem unrelated, the two expenses become intertwined if you pay your staff to do lab work such as cutting and edging. Therefore I've created one benchmark that applies to both categories.

If you want to net more than 30%, then the sum of your staff expenses and cost of goods cannot exceed 50% of your gross. If you net 30% and spend more than 50% of your gross on cost of goods and staff, then that leaves less than 20% to pay for rent, equipment and the rest of your practice overhead.

Net percentage. According to both the American Optometric Association and my own surveys, the average independent O.D. nets 31% of his gross income. O.D.s love to focus on gross income, but I think net income is the most important number to look at when judging the financial performance of your practice. Let's look at two comparable O.D.s to see why.

Learn by example

Dr. Scope grosses $400,000 with an above-average net of 35% ($400,000 x 35% = $140,000). His nearby colleague Dr. Dials is grossing a healthy $500,000 but nets only 25% ($500,000 x 25% = $125,000). That means that Dr. Scope nets $15,000 more than does Dr. Dials on $100,000 less gross. At this rate, Dr. Dials would have to gross $560,000 to net the same amount as Dr. Scope.

I see this kind of scenario all the time in my consulting practice and the results are clear: High-gross, low-net practices are harder to manage, have more cash flow problems and are worth less in appraisals than are comparable grossing, high-net practices.

Check your numbers

I rarely see financial stress (such as problems paying monthly bills) in practices that net more than 35% -- even those in the $300,000 gross range.

No matter how much your practice is grossing, if you're netting less than 30%, then I advise you to get help. Owning and managing a private practice is a lot more fun and profitable when you have good margins.

A frequent writer and speaker on practice management issues, Dr. Hayes is the founder and director of Hayes Consulting.  You can reach him at (800) 588-9636 or JHAYES@HAYESCONSULTING.NET.