financial foundations

FINANCIAL MANAGEMENT

Analyze Operating Expenses

Ensure your practice is running as efficiently as possible.

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

Operating expense analysis not only gives you, the business manager, the tools to better evaluate the efficiencies of your practice, but also can be used as a critical piece in business strategies, such as developing your fee schedules for services and products. Think of operating expenses as costs incurred by the business whenever the practice is open, regardless of whether revenue is generated.

Here are the formulas you need to analyze.

Profit and loss statement

Before you can begin, review your profit and loss statement, and separate fixed expenses from variable expenses. Be sure to exclude all non-cash expenses, such as depreciation expense, as well as interest paid on loans and leases. Fixed expenses are costs incurred regardless of sales volume, though they often vary among successive accounting periods. Variable expenses are recurring costs dependent on the volume of services and product sales.

Be sure to calculate this on an annual basis to be sure you capture all expenses.

Break-even point

This is the volume of sales revenue a business must collect to recoup all fixed and variable expenses. When the break-even point is reached, no profit has been made, but no losses have occurred.

The formula: Break-Even Point = Fixed Costs / (1 - Variable Costs). When calculating, determine the variable cost as a percentage of expected collected revenues. The lower your break-even point, the quicker your practice becomes profitable.

Operating Expense Ratio (OER)

This is a measure of the financial efficiency of the business. It is a very useful tool in comparing your practice with others, regardless of size. For our purposes, operating expense is synonymous with fixed expense.

The formula: OER = Operating Expense/Collected Revenues

This ratio is measured as a percentage. The lower the percentage, generally the more profitable the business. Changes in the OER indicate whether the practice can increase sales without increasing operating expenses. It is generally accepted that the OER for opto-metric practices should range between 20% and 30%.

Contribution margin

This is defined as the amount of sales revenue remaining after paying all variable expenses. Simply, how much of each dollar collected goes directly toward profit?

The formula: Contribution Margin = Revenue per patient - Variable Expenses per office visit.

The higher the contribution margin, generally the higher the profit per patient encounter.

Using the numbers

If you break operating expenses down to an hourly rate, you can use the values to ensure that the fees you charge in your practice allow for the generation of profit.

Also, when reviewing proposed reimbursements from insurance panel participation agreements, use your practice’s break-even values to help you be sure that your participation will generate profit for the practice.

Understanding the relationship between business expenses and gross revenues is critical to ensure your practice is financially efficient and profitable. 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.