BUSINESS

  FINANCIAL FOUNDATIONS

PUT PURCHASES TO THE TEST

CALCULATE THESE THREE EQUATIONS BEFORE PURCHASING NEW TECHNOLOGY

AS OPTOMETRISTS, we must stay on top of innovative products and technology in order to better serve patients. As business men and women, it’s important to make sure that investments into new products are smart financial decisions.

To make the best business decision, invest a little time to project your profitability before you invest a lot of money and time into buying something new.

THREE RATIOS

When you look at the financial side of the equation here, there are three ratios you can look at to evaluate financial Return on Investment on a piece of equipment, product or service:

1. Product profitability ratio. Determine the average Cost of Goods Sold (COGS) for a given line of products. The more specific you are, the better. Then determine your average revenue per unit sale.

If the average revenue per unit sale is greater than the COGS, then start planning how to put this item into your product portfolio. The more detailed you are at determining both COGS and revenue per unit sale, the more accurate your projections will be and, thus, the more accurate information you will have when making your decision.

2. The TCO Ratio. Calculate the Total Cost of Ownership (TCO) of the product or service. This is found using the following equation TCO = The purchase price + ([maintenance fees + technical support charges + anticipated hardware fees] x 5 years) + training costs.

You will also need to calculate the Total Revenue (TR) possible. TR = Number of possible procedures (in one month) x 60 months x reimbursement throughout the office (or potential increases in efficiency).

Compare the TCO to the TR to determine whether you will get a positive return on investment for the product or service you are considering. If TCO is greater than TR, do not purchase the item. The costs are greater than possible revenue stream in your current situation.

An example: A piece of equipment costs $30,000. Maintenance fees are $1,500 per year and you will need $500 of hardware and four hours of support time at $100 per hour. Training cost was $500. So, TCO would be

TCO = 30,000 + ([1,500 + 500 + 400] x 5) + 500 = $42,500

Based on your previous month’s experience, there were 20 patients who would have qualified because the procedure was medically necessary. These procedures would have been performed at a rate of $50 per procedure reimbursement.

TR = 20 x 60 x $50 = 60,000

Based on the math, the equipment is worth it to purchase it.

3. The Chair Cost ROI Ratio. Calculate your chair cost (CC). Chair cost can be found by dividing the total fixed expenses by the total number of hours of operation, regardless of whether patient care is being delivered.

Next, calculate the Potential Revenue (PR). PR = number of possible service encounters in the given time period x the average anticipated retail cost of the service.

If CC is greater than PR, this means the cost of using the product or service is greater than the possible revenue stream. You can either choose not to purchase the equipment, or figure out a way to decrease chair costs or charge more for the service you want to provide.

DO THE MATH

In summary, do your homework and make sound buying and pricing decisions. Doing so will not only make your business more profitable, but, more importantly, it will save a lot of time and energy in the long run. OM

SCOT MORRIS, O.D., F.A.A.O., is chief optometric editor for OM, director of Eye Consultants of Colorado and managing partner of Morris Educating and Consulting Associates. Email smorris@eccvvision.com or visit tinyurl.com/OMcomment to comment.