business advisor
Net Versus Gross
You may not know as much as you think about this heavyweight battle.

When I'm lecturing to optometrists on financial management, I like to show the finances of two successful solo practices and then ask, "Which would you rather own?"

In the first example, Dr. Gray has a nice practice with six full-time employees, plus an optician who does nothing but lab work. He grossed $800,000 last year with an overhead of 80%. That means he netted 20%, or $160,000 ($800,000 x 20% = $160,000). Not bad in terms of dollars.

By comparison, Dr. Green, a nearby colleague, grossed "only" $500,000 last year with four employees and no lab. While Dr. Gray considers his practice to be better than Dr. Green's because it's both bigger and busier, here's something he doesn't know: Dr. Green netted 35%, or $175,000 ($500,000 x 35% = $175,000).

Although Dr. Gray's gross income is 60% larger than his friend Dr. Green's, her net income is actually $15,000 higher per year than his. This not an uncommon situation and presents an interesting paradox. Who do you think has the more desirable practice?

Be careful what you wish for

The answer depends on what's important to you. It's certainly gratifying to have a fancy office with a large staff and big revenues. But there are some definite advantages to Dr. Green's lower-gross, higher-net approach to practice. Dr. Green:

• Works fewer hours than Dr. Gray

• Sees 40% fewer patients

• Has fewer employees to manage

• Has better cash-flow, which means she has an easier time paying her bills each month

• Nets more in absolute dollars; the practice would actually appraise for a higher value than Dr. Gray's.

Having pointed out those advantages, does that mean we advocate a low-gross, high-net approach to private practice? No. I want you to have both a high-net and a high-gross, whatever that may mean to you. Just look at Dr. Gray. If he netted the same 35% as Dr. Green, his income would be $280,000 instead of $160,000. That could represent a significant difference in lifestyle for him.

Best of both worlds

At this point, my audience usually asks if it is still possible to net the old standard of 30%+ in today's environment of low-margin contact lenses and managed care discounts? The answer is complicated: It doesn't happen by accident, but I see many $500,000+ practices netting 35% and more. How do they do it?

While optometrists often think the only road to higher profits is through higher volume, good managers know there are four ways to increase net income in a practice:

1. Reduce expenses

2. Increase patient volume

3. Sell more product to the same patients

4. Charge higher fees.

Do you think Dr. Gray could benefit from any of the steps listed above? Could you? Start by asking yourself two questions:

1) Do you have a chronic cash flow problem? Is it a struggle to pay your big supplier bills on time each month?

2) Do you often feel like a slave to your payroll, practice overhead and/or bank loans?

If you gross over $400,000 and your answer to either question is yes, then develop a budget with the goal of netting more than 30%. Once you do that, you'll find practice is a lot more fun!

THE FOUNDER OF KNOWYOURSTAFF.COM AND HAYES CONSULTING, DR. HAYES IS A REGULAR CONTRIBUTOR TO OPTOMETRIC MANAGEMENT MAGAZINE. REACH HIM AT JHAYES@HAYESCONSULTING.COM.