By Scott Colonna, OD
July 11, 2018
Creating a thriving independent practice has become more challenging, with greater competition from online retail and optical chain-store providers. Understanding gross revenue versus net revenue has never been more vital. Once you understand the difference between these two metrics, you will be able to better strategize how to become more profitable, including how to better invest in your office to improve patient care.
As the owner of an independent practice, who now also serves as a consultant for other practices, I find that ODs often have a misconception about how to track these two measures of financial gain.
What’s Gross Revenue?
A business’ gross revenue equals every single dollar collected and deposited in your company’s bank account, while net revenue refers to the amount of money left after every possible office expense is paid.
Gross revenue is often confused with billed revenue. If you are on a cash-basis system with your accountant, billed money means absolutely nothing. However, if you are on an accrual system, then this needs to be looked at differently. As an owner, you need to factor in the percentage you truly receive based on your practice’s historical data.
I am all about focusing over 90 percent of your time on growing your “top” numbers (your gross revenue) as much as possible. It’s always easier to run a business with annual growth rather than with a stagnant, or worse, declining practice.
What Does “Growth” Mean?
Growth for me has always been different because of how the cost of doing business varies. I define growth as anything 5 percent, or more, from the previous year’s gross revenue. It’s my viewpoint that inflationary costs need to be factored into owning a brick-and-mortar business.
For example, our national average for staff salary raises is just above 3 percent. Health insurance rates, utilities, expenses and property taxes are also examples of items that continue to inflate. This is why I use the 5 percent, or more, barometer for “true” growth. Part of being a true practice leader is being honest with ourselves; pats on the back only go so far.
What Should I Do to Manage Net Revenue?
I recommend spending only the month of January on reviewing and prioritizing all possible negotiable expenditure items. Some examples of these negotiable expenses are insurance (all types), costs of goods, I.T., waste disposal, security companies and retirement plans.
I am a believer in the age-old practice of getting at least three quotes for each negotiable expense. Obviously, if a great deal presents itself between February and December, you should address it, but stick with that mindset until the end of January, and then switch to focusing on full-on growth. This also allows us to create a budget for expenses for the entire year, and then take that budget and do the math.
We take the monthly budgeted amount and divide that number by the number of hours we are open, so we know our costs of doing business down to the hour. Too often I will see our clients forget to factor in their one-time payment items. These must be factored in and broken down to truly understand your operating costs.
You Can’t Cut Your Way to Success
There are only so many things you can cut before nothing is left. The mentality of constantly cutting will begin to affect culture within the office or worse, and start becoming visible to patients. It’s all about growth! Growth comes from change and challenging yourself, as well as your staff, to become the best possible.