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Essential financial metrics for optometrists
By Adam Cmejla, CFP®
August 28, 2024
If any optometrist reading this article were to note to the patient nearby optical shops where they could also buy their eyewear, every one of them would look at their optometrist like they had three heads.
Understandably, a practice owner doesn’t want to do anything to encourage a patient to shop elsewhere.
Taking a patient through a refraction only to not have that Rx filled in the practice’s optical is the equivalent of someone getting a gym membership and then never going to the gym: action without implementation is futile.
The same could be said for a practice owner’s business financial statements. Sure, a practice owner could pay their accountant or bookkeeper to reconcile their books and ensure their financial reports are complete and concise, but unless a practice owner knows how to implement and act on that information, the data is almost useless (sans your CPA using that data to populate your year-end tax returns).
But what if we had a way to not only read our financials, but comprehend them? What if we had a way to use the narrative that a practice is telling us to not only inform us about past performance, but also to use that data to make strategic business decisions going forward?
I’m going to show you how to not only read, but comprehend, three numbers on your financials that you can use to make proactive business decisions in your practice. I will also show you three numbers that are not as important as you or the profession may think.
Net Operating Income vs. Gross Revenue
This is arguably the most common and popular number that ODs look at, but only a percentage of ODs use this number to evaluate the health of their practice and, consequently, make changes to their business.
The most popular “metric” I hear discussed is a practice’s gross revenue and the benchmark of crossing over the coveted $1 million in gross revenue threshold. However, business is about how much you keep, not how much you make.
Net operating income (NOI) is how much money the business has left after paying all of the expenses of the business, including all doctors’ salaries. This is admittedly where the financials of a practice can begin to lie to the owner.
If you are a single-owner practice, the best way to determine if your NOI is healthy relative to the gross revenue of the practice is to look at how much your practice is paying you as the OD performing clinical work in the practice.
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Said differently, you should be paying yourself a “replacement wage” equal to what you would have to pay an associate OD to see patients on your clinic schedule. This is based both on patient volume and, more importantly, the number of days the owner is in clinic practicing/seeing patients.
For example, we’ve seen practice financials where the owner was proud as a peacock about the net operating income of their practice. However, upon digging, we saw that same owner paying themselves anything from $0 to $20,000 in W-2 wages, even though they worked full-time in their practice as the only doctor!
Once we added back into the financials what it would cost the business to replace the doctor as the owner seeing patients, a more accurate story was revealed about the financial health of the practice and whether the owner/OD was running a business that provided a true return on their investment or whether they just “owned a job.”
Revenue per Comprehensive Exam vs. Revenue per OD Hour (and adjusting for COGS)
Admittedly, this is a number you won’t find within your financial statements directly, but rather is a direct factor contributing to the efficiency of your practice to produce top-line revenue. To find this number, you have to do more digging into your practice financials and metrics, but it’s absolutely worth the effort.
Most of the profession is anchored to the coveted revenue per comprehensive exam metric. While this metric is not one to avoid, the challenge with just focusing on this number is that it can cause the numbers of the practice to look distorted when looking at the big picture.
As practices increasingly incorporate additional specialties and services for their patients (myopia control, dry eye, aesthetics, LLT, etc.), there’s a potential opportunity cost: the time to perform these services must come from somewhere, meaning the OD likely has to forego doing comprehensive exams to provide these services. The way to democratize this metric in a practice is to look at the revenue generated per OD hour.
For example, if an OD generates $500/comprehensive exam and sees patients every half hour, their revenue/OD hour is $1,000. Multiply that by 32 hours of clinical time per week (0.8 FTE), and 49 weeks per year gives you projected top-line revenue of $1,568,000.
If an OD wanted to insert more medical eyecare into their practice, they must ensure they are calculating the revenue per OD hour worked that can be generated via medical to ensure they are close to parity with comprehensive exams.
Notice I said “close to parity” with comprehensive exams. This is because a medically driven practice typically has much lower cost of goods sold (COGS) compared to a vision care patient.
To determine the true impact on the NOI of the practice, we must adjust these numbers in anticipation of a higher gross profit, since it’s not uncommon to see medical patients have a gross profit margin of anywhere between 85-90 percent.
This is why it’s important to be able to not only calculate your revenue per OD hour worked, but also to be able to identify the business’s cost to serve the patients that generate that revenue. This is all in service of my first metric and associated mantra: I don’t care how much you make, I care how much you keep.
Profit vs. Distributions
Shout out to my friend Nathan Hayes, practice consultant at IDOC who’s spearheading that organization’s Books & Benchmarks bookkeeping program for bringing this up in a recent conversation. When we talk about profit vs. distributions, which one shows you how much money you ACTUALLY took out of the business?
Despite the attractiveness of the word, it’s not profit. It’s distributions, and you can find it on your statement of cash flow. Put simply, this number shows how much money the business paid out to the owner(s) in distributions throughout the selected time period.
So many doctor owners will focus on a profit number in the practice and confuse/substitute this with NOI, but unless you take a distribution out of the practice and harvest the cash flow that the business generated, as an owner you’ll never truly personally benefit from the NOI of the practice.
To see how much the business provides to you in cash flow, it’s important to ensure that you are reviewing not only the salary you are paying yourself (again, reference the first section of this article), but that you have a systematic distribution plan to harvest the cash flow out of the business and not just let it “sit” in the practice as retained earnings–regardless of what bank account it’s sitting in.
Conclusion
As an OD, you gather clinical data on your patients to evaluate their ocular health and determine treatment plans based on your findings. How you adjust their treatment plan depends on periodic review of that data.
You must manage your business in the same way. Establish a baseline understanding of the current financial performance of your practice and the key metrics I mentioned above.
Next, reconcile that against the target total owner’s compensation you wish to derive from practice ownership. To the extent that these two numbers are misaligned, derive a plan to adjust the inputs (source of revenue generated and costs associated with that revenue in the allotted clinical time) with the desired output (total owner’s compensation).
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM and Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. Check out the “20/20 Money Podcast” to get more tips on making educated and informed financial and business decisions and the “20/20 Money Membership,” built to help ODs become brilliant and the financial basics.
This article was created using several editorial tools, including AI, as part of the process. Human editors reviewed this content before publication.
