PART 1 OF THIS SERIES DISCUSSES MANAGING EXPENSES

HOW DO you calculate true expenses? This month, we will discuss how to do so and use these expenses — and the revenue side of the equation — to calculate true profitability. A checkbook balance doesn’t show profitability and, in many cases, it conceals signs of a poorly run business. The good news is that if you operate this way and are still in business, you can use revenue and expense to determine opportunities for enhanced profit. And at the end of the day, isn’t that the important part of the whole equation?

IDENTIFY EXPENSES

How do you define and categorize expenses so we are all talking the same language? Since most of us didn’t become CPAs or tax attorneys, we are left to “figure it out.” You probably have used someone else’s methods, even adopting categories, such as human resources, COGS, occupancy, overhead, administrative, technology and marketing. Though all of it sounds good, defining expense this way does not help to determine profitability. You may remember: Revenue - expense = PROFIT. Here’s how to track expenses and know where your profit comes from.

DEFINE/CATEGORIZE EXPENSES

To track expenses correctly, look at how the money (the revenue side of the formula) works. Typically, there are four major sources of revenue for most eye care practices today. All expenses are in some way attributable to the creation of revenue through one of these four sources.

1. Clinical sales revenue
   1. Vision services
   2. Contact lens fitting services
   3. Medical services
   4. Special testing
   5. Vision therapy (or other specialty care)
2. Optical sales revenue
   1. Frames
   2. Spectacle lenses
   3. Plano sun wear
3. Contact lens revenue
4. Other revenue
   1. Low vision aids
   2. Accessories
   3. Pharmaceutical or nutriceutical sales

DO YOUR HOMEWORK

Your homework assignment for this month: Print out your year-end “detailed” profit and loss (P&L) statement. Go through each line item and attribute it (or some percentage of this expense) to each of the above four mentioned revenue sources.

A few basic expense categorization points:

• Under the accrual basis of accounting, matching is not based on the date that the expenses are paid, but rather on the date the costs are accrued.
• Cash-basics accounting (the most common) is when expenses are paid.

What this means for your homework is: You may have expenses on the P&L statement that “belong” to another time period. For example, you may have recurring payments on an OCT that you purchased last year. Under accrual accounting, you could have counted the total of this as an expense of fiscal year 2015. However, under the cash-basics accounting, you would count it as an expenses against the clinical sales revenue, or the total of the payments paid in fiscal year 2016.

STAY TUNED

Next month, we will determine real or “true” profitability by revenue source. Don’t wait for your accountant to tell how you’re doing at year’s end. Get busy, and take control of all your expense information every day, every week, and every month. OM

MR. BINKOWITZ is president and CEO of Gateway Professional Network, a technology and business management services company. Mr. Binkowitz has extensive experience in retail operations, merchandising, marketing, manufacturing, distribution, technology development, national sales and on-site interactive consulting. Email him at AskJay@GatewayPN.com.