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Part 1 of a two-part article on sustaining cash flow during a consumer spending slowdown.
By Erich H. Mattei, MBA
March 6, 2024
Patients coming into your office these days may be less likely to spend money than they were a year ago.
According to a recent Wall Street Journal survey of business and academic economists, recession is highly unlikely in 2024. However, the National Retail Federation is calling for a consumer spending slowdown in 2024, speculation bolstered by the results of the New York Federal Reserve’s latest Survey of Consumer Expectations, Household Spending Survey.
How can your practice adapt to thrive in these uncertain times? What are the key metrics you should analyze to create the optimal cash flow sustainability strategy for your practice?
This article provides a description of consumer demand and demand elasticity. It also offers actions you can take in three areas of your practice to increase financial stability and growth, even if consumers are spending less.
Demand Elasticity & Your Practice
Elasticity of demand refers to the shift in demand for goods or services brought about by a change in one of the key variables consumers consider to be part of their purchasing decision.
In eyecare and optical, these variables include price, availability of substitutes, buyer income, discretionary budget, managed care, marketing and more. Additionally, the degree to which goods or services are considered necessities (versus easily substituted or luxuries) also impacts consumer demand elasticity.
Higher demand elasticity indicates consumer decisions are more impacted by these variables, thus increasing the chances of consumers foregoing the purchase or seeking out substitutes. Conversely, lower demand elasticity indicates buyers are more likely to purchase, regardless of how these variables present at a point in time.
For example, your patient care—professional exam services—may be a necessity for a patient, thus lower demand elasticity (“Dr., I can’t see, I need a new Rx…”), whereas your optical and elective services offerings may be considered easily substituted or an inaccessible luxury for this same patient, competing with their discretionary budget (“Dr., I’m going to take my Rx to purchase glasses and contact lenses elsewhere…”). This consumer demand is more elastic than demand for necessities, meaning that demand for these goods and services is impacted by exogenous factors, and will increase or decrease based on these variables.
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We see these consumer dynamics manifest in optometry practices in a variety of ways, for example- this is why tax season is a peak season for care and optical dispensing, as many households receive tax refunds making extra discretionary spend available!
Now, with a deeper understanding of consumer demand and the dynamics of demand elasticity, let’s explore how you can optimize your business to ensure sustainable cash flows in any consumer spending environment.
Balance Your Budget
Your practice can survive without profit, but not without cash! Cash flow is the timing of when money moves in and out of your business, and the foundation of developing a cash flow sustainability strategy is balancing your budget. Balancing the budget is the process of matching bank account transactions and balances—income, expenses and savings—to identify imbalances that could be detrimental to the financial health of the practice.
Starting with the clean data of a modern optometric chart of accounts, assess cash flow statements at regular intervals (daily, weekly and monthly). From this analysis, forecast three, six and 12-months to anticipate when cash may be tight.
With this clear picture of the trends in your cash flow, you can confidently create scenario budgets and strategic decisions to protect the cash position of your practice.
Pro tip: Remember to include both revenue and expense projections in your budget forecasting, and to adjust expenses as warranted (See the next section, on A Closer Look at Operations).
A Closer Look at Operations
Operating expenses have a significant impact on cash flows. Analyzing expenses with common-size financial statements identifies opportunities to reduce costs across the cost centers of the business.
Common-size ratio analysis expresses financial statement items as percentages of a base amount (total revenue for common-size income statements and assets for common-size balance sheets), thereby allowing for a systematic comparison of practice economics (notably, cost structure!) to competitors and industry benchmarks.
Databases such as those published by Risk Management Association provide benchmarks across a plethora of financial metrics. The results of common-size analyses provide direction on where the practice can reduce expenses.
Pro tip: Consider organizing your analysis around the primary cost centers of the modern optometry practice–non-OD payroll, occupancy, general overhead, equipment and marketing; and adjust expense ratios as the size of your practice changes.
Inventory Management
Inventory and cost-of-goods sold (COGS) have a significant impact on the financial health of businesses with retail components. Assessing COGS and inventory turnover identifies opportunities across the retail channels of the modern optometry practice–contact lens, optical frames, optical lenses, medical supplements, medical devices, OTC products and beyond.
The aforementioned process of common-size benchmarking applies to evaluating COGS just as it does the operating costs centers of the practice, providing direction through these clear comparisons to industry.
Inventory turnover is the financial ratio showing how many times a business has sold and replaced inventory over a given period. The ratio is calculated as: Inventory Turnover = COGS / Average Value of Inventory, where Average Value of Inventory = (Ending Inventory + Beginning Inventory)
Note: utilize COGS instead of sales because inventory is valued at cost, and use Average Value of Inventory to offset seasonality.
Together, COGS benchmarking and inventory turnover analysis provide data insights that can guide optimal strategy across a variety of decisions: supply chain, vendor alignment, product mix, pricing and margin management, marketing and retail sales strategy and more.
Pro tip: Production analytics dashboards such as ABB Analyze or EDGEPro allow for many drill-downs that can take your COGS and inventory analyses to the next level including: price point and sales matrices, optical, contact lens and materials sales reports, patient demographics and much more!
The second article in this two-part series will look at four more actions you can take to offset the impact of a slowdown in consumer spending. Stay tuned!
Erich H. Mattei, MBA, is President and Chief Vision Officer of Akrinos. His mission is to make the business of eyecare approachable, accessible and profitable. In so doing, he consults with private practices across North America, provides strategic advisory to some of the biggest names and hottest start-ups in eyecare, and empowers modern ECPs as a continuing education and keynote speaker. To contact him: erich@akrinos.com
