financial foundations

Making a Profit

Increase your practice’s net profit by understanding costs of goods sold.

DAVID MILLS, O.D., M.B.A.

Most optometric practices earn revenue through the delivery of services as well as the sale of products. Developing strategies to better control expenses related to the sale of products, or cost of goods sold (COGS), often is the greatest determinant on the level of net profit.

Definition

Your COGS includes all ophthalmic laboratory bills, frames and lenses purchased, as well as contact lenses purchased for resale. To give a more accurate value, employee wages and benefits paid to those employees who are directly involved in the sale of products in the practice should also be included in COGS.

In other words, what expenses would not be incurred if the practice derived income from only the delivery of optometric services?

Subtract the COGS from the adjusted gross revenues for a given period to obtain the gross profit for that period. The old adage of one-third of the adjusted gross revenues being a realistic benchmark for the value of the COGS has become too simplistic. Decision makers should routinely monitor this ratio, and develop strategies to increase the gross profit of the practice.

Increasing gross profit

In simplistic terms, there are three approaches to increase the gross profit: Raise your fees, lower your COGS or do a combination of both.

When strategizing in raising fees on products, be cognizant of the market demographics of your practice and patients’ price sensitivity. Due to the proliferation of Internet contact lens vendors, patients often seek competitive pricing, which can somewhat limit pricing strategies within your practice. The online sale of eyeglasses is in its infancy, so it remains to be seen what the impact will be on pricing strategies within an optometric practice.

Strategies to reduce the COGS have a much greater impact on the level of gross profit. Contact lens manufacturers often offer low price points for their products if you purchase either an inventory or a “bank” of product. Typically set at a minimum number of units to purchase, you should investigate prior sales of that product in your practice before committing to the bulk purchase. Unsold product in your office freezes up cash that could be used for other purposes.

In dealing with the vast number of frame manufacturers, you may realize significant savings and discounts if you commit to a smaller number of vendors. This can generate significant savings as long as you maintain the product mix to satisfy your patient base.

For practices that do not have the “buying power” of the large “mega practice,” optometric buying groups may offer a solution in lowering COGS. Buying groups offer its members competitive pricing advantages, allowing small optometric practices to achieve product costs on level with large practices and “box retailers.”

In most cases, buying groups have membership fees that are levied on the practice. Prior to joining any group, each practice owner must determine whether the potential savings is worth the added expense and find the best match for the practice.

A continual evaluation

Developing sound strategies to monitor and control your COGS creates profits that go straight to the “bottom line.” Continually evaluate all purchase and product acquisition arrangements, assuring that they meet the financial benchmarks of your business. OM

DR. MILLS PRACTICES AT OCEAN STATE EYE CARE IN WARWICK, R.I., AND HOLDS A M.B.A. FROM PROVIDENCE COLLEGE. E-MAIL HIM AT MILLSD@NECO.EDU, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.