business advisor

JERRY HAYES, O.D.

Equipment: What Can You Afford?

Use these guidelines to ensure your next purchase won’t break the bank

Despite the continuing pressures of corporate competition and managed care, times are good for many private optometrists. I know this because at every meeting I attend, I hear O.D.s talk about expanding their offices and buying new equipment. That’s a good thing!

But when it comes to purchasing new equipment, how much is too much? Here are some ideas to help you decide how much you can afford and how to best handle your most valuable practice resource — your cash.

Start with the big picture

Regular readers of my column know that I like to organize the overhead structure of a traditional practice (that dispenses glasses and contact lenses) into seven categories (see sidebar). These numbers indicate the average percentage range of annual collected gross revenues that a typical practice devotes to each item.

Add it up

I think it’s important to look at the big picture before you buy equipment because your investment will always represent a trade-off. The more you spend on equipment, the less you take out in net income or spend on other things, such as staff, marketing and your office.

Just follow these steps before you make a major purchase, and you should be fine.

 • Evaluate how much you’re spending on equipment now as a percentage of your collected gross income (notice that I don’t include edging or surfacing equipment in this category, that goes under cost-of-goods). For example, a $500,000 practice with a 3% annual equipment expense spends $15,000 ($500,000 x 3%).

• Although you can fully deduct up to $108,000 of equipment expense in one year, analyze the cost of major equipment in terms of a five- to eight-year pay out, not the cash price. For example, your cost to lease $30,000 worth of equipment over eight years is roughly $425 per month or about $5,000 per year.

• Add the annual cost of your new equipment purchase to what you’re already spending. In this case, $5,000 + $15,000 = $20,000/$500,000 equals a ratio of 4% in equipment expenses to practice gross.

• Decide whether that’s the right number for you; 4% is just a guideline, but it tells me that this O.D. would be well within range of what the typical practice owner spends.

Will that be cash or credit?

Once you’ve determined your budget, decide where the money comes from. Do you finance, lease or pay cash? My rule of thumb: You shouldn’t pay cash for any amount over 1% of your practice gross. For example, the owner of the above-mentioned $500,000 practice shouldn’t pay more than $5,000 per year out of his business account. The reason? I don’t think it’s a good idea to use short-term funds for long-term expenses until you have all your personal savings accounts funded.

The decision to lease or use bank financing depends on the terms offered and your particular tax situation. It’s generally a good idea to consult your Certified Public Accountant on that one.

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THE FOUNDER OF THE HAYES CENTER FOR PRACTICE EXCELLENCE AT SOUTHERN COLLEGE OF OPTOMETRY IN MEMPHIS, DR. HAYES IS A REGULAR CONTRIBUTOR TO OM. E-MAIL HIM AT JHAYES@HAYESCONSULTING.COM.