business advisor

Five Key Indicators to Watch in 2012

Keep your practice healthy by focusing on these top-level metrics.

Jerry Hayes, O.D.

Now that 2011 is in the rear view mirror, it's time to reflect on how your practice performed financially and then set some production goals for 2012. Here, I'll discuss five key indicators that are particularly important to watch and are very easy to measure.

1. Practice rate of growth

Calculate your growth rate by dividing the amount you increased in 2011 by what you grossed in 2010. So, a practice with collected gross revenues of $600,000 in 2010 that grew to $660,000 in 2011 had a growth rate of 10% ($60,000 ÷ $600,000).

Depending on the size of your practice, consider a 10% growth rate as very healthy. Growing less than 6% per year in decent economic times is probably on the slow side.

2. Net percentage of profit

Calculate your net percentage of profit by combining all your owner's compensation (salary, profits, benefits, etc.), and then divide that by total gross revenues. For example, a net income of $180,000 ÷ $600,000 gross revenue = 30% net profit for the practice.

I get push back from optometrists who operate practices that have low nets. They tell me that 30% is too high in this competitive market. All I can say is that recent surveys from both the American Optometric Association and the CIBA Vision Essilor MBA program still show a median net income of 31% for private practice O.D.s.

3. Cost of goods plus total staff expenses

I've lumped cost of goods and total staff expenses together because they are your two biggest expense areas. Plus, how much you pay for these expenses varies widely depending on practice size and type and area labor costs.

So, regardless of how you slice and dice it, my recommendation is those two expense categories combined should not exceed 50% of your gross revenues. The reason is simple arithmetic: If you hope to net 30% of gross, and you spend 50% on staff and cost of goods, that only leaves 20% for all your other practice expenses, such as rent, equipment, insurance, etc.

4. Staff productivity

I know your staff tells you they're busy, but the real question is are they producing enough dollars? An easy way to quantify that is to add up all the hours your staff works (do not include vacation and days off), then divide that by your gross income.

For example, each full-time employee works 40 hours per week x 48 weeks = 1,920 hours per year. 1,920 hours x five employees = 9,600 hours.

Assume a practice gross of $600,000 ÷ 9,600 staff hours = $62 per staff hour. Consider anything below $60 per hour per employee low. A total of $80 per hour per employee is optimal.

5. Average revenue per patient

Calculate average revenue per patient by dividing the total number of complete exams into your gross-collected revenues. Don't worry about trying to break out the revenue generated by medical visits and progress exams. Just count your total revenue.

Example: A total of $600,000 gross revenues ÷ 2,000 exams = $300 per patient. O.D.s participating in the MBA program survey produced an average of about $306 per patient.

Information to use

Use these metrics not only to evaluate performance, but to set goals for 2012 and beyond. OM