business strategies

Rethinking Your Net Income

Comparing COGS and beating up your vendors is not the solution.

GARY GERBER, O. D.

Two general economic forces affect your net. The first: how much money comes into a practice. The second: how much goes out. The difference between these two is what you take home (before the government takes its share).

So, how can you increase your net? Very simply, turn the top line faucet on fuller (more money comes in), and/or tighten the drain on the bottom (less money goes out).

Major expenses

Of the money that leaves practices, for most, the two biggest expenses are labor costs and COGS. Included in COGS are items, such as frames, ophthalmic and contact lenses and any tangible “accessories,” such as cases, cords and cleaners, that might support them.

So, all other things being equal, you'd think that a practice with a COGS of 20% should have a higher dollar net vs. one with a COGS of 25%. And if that's the case, one of your goals to increase your net should be to continually beat up your vendors for better pricing. Two reasons that logic is extremely flawed:

1. The arithmetic reason

The fallacy with the above example is that “all other things” rarely are equal. Take these examples:

Practice 1 buys frame X for $50 and sells it for $150. If it had no other expenses, COGS for that frame would be 33%, and the practice would net $100.

Practice 2 buys frame Y for $100 and sells it for $250. If it had no other expenses, COGS for that frame would be 40%, and the practice would net $150.

So, in these examples, the practice selling frame Y nets more dollars, but does it at the expense of a 7% increase in COGS.

The lesson here: You can't easily compare your COGS percentage with other practices in a vacuum. Frequently, we examine a practice's profit-and-loss statement and see alarmingly low COGS. By changing frame inventory mix and fitting more vs. fewer contact lenses, the COGS should go up, but the absolute dollars coming in do so at a higher rate.

Remember: You can't spend the percentage points you might save with dropping COGS, but you can spend the extra money you can make if COGS goes up and your products are appropriately priced to reflect that increase.

Also inherent here is that, if you properly display your inventory using sharp merchandising, you can usually display fewer instead of more frames. That alone might drop your total frames COGS significantly, giving you a net of higher margins (each frame costs more, but you have fewer of them).

2. The being human reason

An almost knee-jerk way to decrease COGS is to “beat up the rep” for a better price. While it's smart to get a fair price, through the long haul in a buyer-vendor relationship, you'll eventually lose if you beat your vendors into submission.

The next time a frame is on back order, or you need some “above-and-beyond” customer service, you'll get a positive response if your vendor relationship centers on a reasonable price with give and take on both sides. Saving a few patient sales per year because the lab was willing to go the extra mile for you and you have not constantly hounded them about price more than offsets the percentage point or two you might save by being relentlessly focused on just the bottom line price. OM

DR. GERBER IS THE PRESIDENT OF THE POWER PRACTICE, A COMPANY SPECIALIZING IN MAKING OPTOMETRISTS MORE PROFITABLE. LEARN MORE AT WWW.POWERPRACTICE.COM, OR CALL DR. GERBER AT (800) 867-9303.