Optometry financial review: Strategies for revenue and expense evaluation
By Mick Kling, OD
Oct. 16, 2024
As we enter the last quarter of the year, I find it beneficial to reflect on what we accomplished to this point in the year, and to start thinking about the year ahead.
From a financial standpoint, my primary focus is evaluating how well we met our revenue targets and how (if) we controlled our expenses, which drive our desired profit goals.
In this upcoming three-part series, I will explore the critical areas I evaluate as we close out the year and prepare for the next.
In Part One, we’ll dive into how to conduct a comprehensive review of the profit and loss statement to assess whether we met our revenue goals, managed expenses effectively, and learn strategies for controlling costs.
In Part Two, we’ll examine our debt, focusing on how debt repayment is impacting the practice’s cash flow. This will help us determine what investments are feasible for the coming year.
Finally, in Part Three, we’ll evaluate doctor compensation. This includes W2 wages, owner distributions and payments to associate doctors to assess whether our doctor compensation is appropriate for the size of our practice.
What is a Profit and Loss Statement?
Before diving into the review of our profit and loss statement, it’s essential to understand what this document actually reveals.
The profit and loss statement captures three key financial elements: the income or revenue our business generates, the expenses incurred to pay bills and the profit that remains (hopefully).
It’s important to realize that while this report offers crucial insights into the financial health of our business, it doesn’t provide a complete picture. It won’t show our cash flow, the impact of debt on our practice, how much money we have in the bank and if we are going out of business.
Organizing the Profit and Loss Statement
Most likely, your CPA or bookkeeper created a detailed profit and loss statement for you if you have been in business more than a year. It may be quite detailed or overly complicated thereby making it confusing and difficult to understand.
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In my role as Practice Transition Advisor for Vision Source, I review 5-6 profit and loss statements each week and find most to be disorganized and illogical. To efficiently review your profit and loss statement routinely, I highly recommend that you work with your CPA, accountant or bookkeeper to create an easy-to-understand report.
By organizing and simplifying this critical financial report, you will increase the likelihood that you will routinely review, follow and understand it.
When empowered with the financial information that your profit and loss statement provides, you will be much better prepared to respond to the income and expense trends of your office.
Analyzing the Profit and Loss Statement
When evaluating my profit and loss statement, my first focus is on revenue. Very simply, I want to know if we are hitting our revenue goals. If not, I analyze the number of exams we performed so far this year. Using this information, I can easily calculate my revenue per exam by dividing our total revenue by the total number of comprehensive exams performed.
When revenue goals are not met, one of two things is generally happening. Either we have not performed enough exams, or we are not generating enough revenue per exam (or both). If we find that we aren’t hitting our exam-volume goals, I take time to review our marketing (internal and external) and recall strategies.
On the other hand, if we are hitting our exam-volume targets, yet not hitting revenue targets, it’s likely our revenue per exam goals are not being met. In this case, I look closely at our eyewear and contact lens annual supply capture rates and average eyewear sales metrics to better understand why our productivity is down.
In almost all cases, it’s related to reduced capture rates from our retail business. This gives me the opportunity to revisit with my team the importance of product sales and identify any potential obstacles affecting our business.
Evaluating Expenses
Once I have a better understanding of revenue, I next look at our expenses, starting with our cost of goods sold (COGS), in relation to that revenue.
As a reminder, COGS represent the products we purchase and resell to our patients and customers such as frames, lenses and contact lenses. In most optometry practices, COGS typically fall between 25 percent and 30 percent of total revenue.
To gain a clearer understanding of where costs are concentrated, it’s crucial to further break them down by expense categories on the profit and loss statement into “Frame Expenses,” “Lens (Lab) Expenses” and “Contact Lens Expenses.”
It’s common for COGS to be higher than ideal, and without a detailed breakdown, pinpointing the exact source of the issue becomes challenging.
I find in most practices, frame expenses are usually around 8-10 percent of revenue while contact lenses run about 10-12 percent.
Lens (lab) expenses can range from as low as 4-5 percent in practices with a high penetration of managed vision care (MVC) patients, and as high as 13-14 percent in practices that don’t accept these plans. (Note: Practices with high MVC penetration often have lower lab spend reflected on the P&L statement due to “charge-backs.”)
Busy contact lens practices will often have higher contact lens percentages (15 percent+), and high retail practices (as compared to highly medically oriented practices) often have COGS above 30 percent.
One final point to consider when evaluating your COGS: It’s important to remember that while we include frames in COGS, they are also inventory.
Unless you are utilizing a true static frame board strategy (e.g. Vision Source Frame Dream Program), meaning you are not selling off the board, but rather, fulfilling both frame and lens orders at the lab, it’s easy to over-invest in frame inventory, driving up your COGS. This is why creating a detailed breakdown on your profit and loss statement is important when tracking your COGS spend.
Next, I examine non-doctor wages, including all benefits, which for many practices hover around 25 percent of revenue. At this point, I reflect on how effectively I managed staff wages throughout the year and consider any anticipated staffing needs for the upcoming year.
If wage costs are too high, I have two options: either reduce staff or allow natural attrition to occur as employees leave the practice over time and our practice revenue grows.
Following this, I turn my attention to occupancy costs, which include rent, utilities, repairs, security and maintenance. These should range from 7-10 percent of revenue. Practices that struggle with cash flow often have occupancy costs that exceed 10 percent of revenue.
Unexpected expenses, such as HVAC repairs, plumbing problems, pest control, etc., can drive up these costs. It’s essential to assess how such unforeseen events impacted the overall financial picture, and anticipate potential facility-related issues that may need to be addressed next year.
Finally, for simplicity, I group all remaining expenses into a single category and conduct a thorough, line-by-line review of each of these expenses to identify other areas of concern or opportunities for improvement.
In most practices, this catch-all category usually runs around 10-12 percent of revenue and includes things like insurances, credit card merchant fees, office supplies and marketing.
Reducing Operating Expenses
Once we identify potential “red flags” in our spending, I focus my attention on reducing expenses for the coming year. This requires effort, discipline and a strong commitment to improving profitability, as we scrutinize every dollar spent on running our business.
On closer inspection, you will likely uncover surprising inefficiencies: unnecessary costs, wasteful spending, or overpaying for services that could be renegotiated for better terms.
To address this, I assess each expense to determine if it contributes to profitability, can be renegotiated or replaced with a more affordable vendor, or is unnecessary for maintaining a profitable business. I usually start with unnecessary expenses that can be easily eliminated.
Examples include what I call “but it’s only” expenses such as paid subscriptions to music services, gym memberships you no longer use, wine clubs charged to the company credit card, etc. These small costs may seem insignificant, but they add up over time. Cutting these can save you hundreds of dollars per month, with no impact on your business.
Once you address the obvious unnecessary expenses, move on to renegotiating anything that can help you cut costs. Contact your vendors and explore whether better pricing or terms can be arranged.
Additionally, consider researching alternative vendors who might offer similar services at a lower cost. In many cases, your current vendors may be willing to negotiate to retain your business, especially if they know you’re considering other options.
Finally, re-examine the expenses that directly drive profitability. Be cautious when making cuts in this area, as these expenditures are critical to the success of your business.
For example, it’s generally not advisable to renegotiate staff salaries. If you find that your payroll is too high, it’s better to reduce headcount than to cut salaries. Pay cuts can demoralize employees and harm workplace culture, which, in turn, may negatively impact revenue.
Conclusion
As we approach the end of the year, thoroughly reviewing our revenue and expenses allows us to identify opportunities to maintain revenue, reduce costs and optimize financial health, ensuring our practice is well-positioned for success in the upcoming year.
In Part Two of this series, we will take a deep dive into how debt repayment impacts our cash flow, and determine how much debt our practice can afford, allowing us to make better decisions as we plan for next year.
Mick Kling, OD, is the president of Impact Leadership and the founder and CEO of Invision Optometry in San Diego, Calif. Dr. Kling is also the Practice Management and Transition Advisor for Vision Source. To contact him: dr.kling@invisioncare.com