Finances

Variance Report: What It Is & How It Can Aid Profitability

By Steve Sunder

Oct. 9, 2019

Effectively tracking profitability in an optometric practice can be challenging. Variance reports can help you better understand your key metrics, and what you should do to better serve patients and become more profitable.

The purpose of a variance report is to identify differences between the planned financial outcomes (the budget) and the actual financial outcomes (the actual). The difference between budget and actual is called the variance.

A specialized variance report that can also be helpful to a practice is an industry benchmark variance report. The industry benchmarks represent percentage rates to revenue in key component areas of the profit and loss (P&L) statement. We can measure the variance between the actual practice financial performance of critical areas of the P&L statements to that of industry benchmarks. The objective is for the practice to equal or better those benchmarks.

Typically, the results of variance reports are only shared among the practice owner, practice administrator, accountant and practice business consultant. However, the practice owner may determine there is value in sharing the optical COGs with the optical manager for the accountability of purchases and budget achievement.

The Management & Business Academy (MBA) is a good reference for industry benchmarks.

What Can Use of Variance Reports Do for My Practice?
Correctly using those two variance reports is critical to conducting a practice financial assessment. The information from the two reports shows the practice owner and the practice administrator where the practice needs to improve.

For example, applying these tools to the monthly P&L and budget can reveal trends in the practice such as cost of goods (COGs) that are higher this month compared to the prior month, marketing and advertising expenses that are higher than the industry benchmark and the practice’s net revenue rate compared to the industry benchmark of 30 percent.

These variances in key metrics may be caused by execution failure, change in market conditions, competitor actions, an unexpected event or unrealistic forecasting.

Essentially, the monthly variance analysis helps the practice owner keep a thumb on the pulse of the financial performance of the practice, so that action plans can be created to offset negative variances.

How Variance Reports Can Help You Implement Specific Improvements
A critical financial success factor of a practice is COGs, or gross profit, which is the profit that covers the practice’s operating expenses.

A practice I worked with had a historical optical COGs of 55 percent, which is 83 percent higher than the industry benchmark of a 30 percent COGs. I was able to calculate this by using the industry benchmark and the P&L variance report. We researched the cause of the high COGs and found there were no vendor-purchase policies in place, no purchase budget and the practice lacked frame inventory that mirrored its patient demographics.

We created the required protocols, controlling inventory purchases, negotiated with frame and lens vendors for better discounts based on sales volume, implemented frame-board management and transformed the frame product on the board so that it better suited the practice’s demographics. Together, these changes contributed to a drastic decrease in optical COGs to 36 percent, in the right direction of the industry benchmark of 30 percent.

In another practice where I worked, marketing and advertising expenses comprised nearly 11 percent of gross revenue. The industry benchmark is 4 percent, meaning this practice was 175 percent higher than other practices in the money spent on marketing and advertising.

The big question was why these expenses were so high, and whether the practice was getting a return on this investment with high new-patient growth. Further research helped us understand that the reasons for the high expenditure was TV, print advertising and the hiring of an advertising company.

Eventually, the agreement with the advertising company lapsed and marketing and advertising dollars were routed to other higher-return marketing mediums, allowing the practice to reduce marketing and advertising expenses. The result of an 11 percent and a 2 percent spend was 25 percent new patients, therefore, the smaller spend had the same result as the higher spend.

What Use of Variance Reports Looks Like
Click HERE to download examples of budget/P&L variance analysis and P&L comparison to industry benchmark variance.

How Often Do I Do Variance Reports & Is There Technology to Help?
I recommend performing the P&L variance to budget, and the industry benchmark variance analysis, monthly. A monthly analysis helps you see the trends quickly so you can create an action plan to keep the practice on track, or return it to where it needs to be. Performing these analyses only quarterly or bi-annually may have negative consequences for the practice, making it difficult to stay ahead of potential problems in financial management.

Analyzing these reports should be the responsibility of the practice owner. If the practice employs a practice administrator, then this would be their responsibility to analyze and report the findings with recommendations to the owner during monthly financial-review meetings.

Accounting software systems such as QuickBooks and Wave include the monthly variance to prior periods in their reports. QuickBooks has two different versions of its software, local server and software as a service (SaaS) in which the SaaS version is online and provides access anywhere where you have internet access. QuickBooks also has an app version and different pricing models for its server and SaaS versions.

Wave is completely a SaaS version with access via the internet, but has the additional benefit of being free.

 

Steve Sunder is a health-care consultant with over 40 years experience in the eyecare industry, including over 20 years at a multi-location practice, and years of work as a consultant to other practices. To contact him: steve@sundervisionsolutions.com

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