Perhaps the most frequently asked question we get as practice management consultants is "what separates average netting practices from high netting practices?"

After a decade of focus on the financial side of optometric practices, we can say with certainty that two key factors determine whether your practice is going to be high, average or low in terms of net income.

These factors are:

1.    how much your practice grosses

2.    how well you manage your overhead.

The following information will provide a look into both of these factors and how they relate to different size practices.

Perhaps this article will also shed some light onto how your practice compares, and produce some ideas for you to pursue.

Survey says . . .

Each year, our firm conducts an in-depth financial survey of independent optometrists across the country.

The goal is to develop a financial profile of high netting practices that allows us to provide better, more detailed management information to our clients.

This year, we asked the survey participants to provide us with information about:

        revenues

        expenses

        number of full-time equivalent O.D.s and staff members

        hours worked

        in-house labs.

All information was related to calendar year 1998. We received 100 surveys and excluded 14 because of insufficient information.

We divided those 86 practices into small, medium and large categories based on gross.

        Practices with revenues of less than $300,000 were considered to be small.

        Practices with revenues of between $300,000 and $560,000 were categorized as medium

        Practices with revenues in excess of $560,000 were classified as large.

Practices that netted 32% or more were placed in the "best practice" category, regardless of revenues.

Of the respondents, 13% were group practices, three in the medium-size category and eight in the large-size category. To no one's surprise, none of the small gross practices was a group practice. See the "1998 Practice Gross and Net" table.

Cost of goods sold

The largest single expense for the typical optometric practice is cost of goods sold (COGS). Because this category makes up such a large portion of total expenses, it should be managed very carefully. Even though many of our clients feel otherwise, cost of goods is a very controllable expense.

The most important factors affecting cost of goods are:

        the fee structure of the optometric practice

        the percentage of managed care patients the practice accepts

        the effectiveness of the practice's collection policies

        the presence and efficiency of an in-house lab.

The best practices in the medium and large categories had COGS expense that was several percentage points lower than the average practice.

The "Percentage of Practices with In-House Labs" table shows the percentage of practices with finishing and/or surfacing labs in each category.

Analyzing the data

The data for practices that have in-house labs seem to indicate that practices must have a certain level of volume before an in-house lab starts to pay for itself. That's not to say that the service aspect of having a lab can't offset an equal or higher expense.

None of the small practices in the "best" category had either an edging or surfacing lab, while 38% of the medium-sized "average" practices had an edging lab versus 37% of the medium-sized "best" practices. Also, 63% of the "best" practices in the large category had edging labs.

To keep things simple, we didn't ask participants to include a pro-rata share of their bench optician's salary and payroll taxes in the cost of goods calculation.

However, you must add that expense to get a true picture of how much it costs you to run an in-house lab.

Staff salaries and benefits

The second largest expense incurred by an optometric practice is staff salaries and benefits.

Over the years, we've listened to hundreds of O.D.s talk about difficulties they've had finding and keeping good employees. Optometric practices these days have to be competitive in terms of salaries and benefits with other small businesses in order to recruit qualified staff members.

We recommend that O.D.s keep their total staff costs, salaries and benefits, between 15% to 18% of gross revenues. This is easier for O.D.s who live in smaller communities with low costs of living. The O.D.s who live in higher income areas do have more difficulty keeping these numbers in line.

Although practices in areas with a high cost of living usually have to pay more for staff salaries, it doesn't necessarily mean that the cost of staff category must exceed the 15% to 18% range.

In those high cost of living areas, consumers usually expect to pay more for goods and services. You can be assured that your suppliers are passing off their higher cost of labor to you. Therefore, you must also pass your higher labor costs off to your patients in the terms of higher fees. Otherwise, your net will drop.

Also, some O.D.s are plagued with "salary creep," otherwise known as, overcompensation of their long-term employees. When an employee's salary becomes larger over many years and surpasses the fair market value, an O.D.'s net will suffer.

Law of averages

Without exception, high-net practices had lower staff costs as a percentage of their gross compared with average practices.

Based on the information in the "Average Revenue per Full-Time Equivalent Staff Member" table, we believe that staff costs are lower as a percentage for high netting practices not because they're paying less, but because their employees produce more revenue per full-time equivalent staff member than average netting practices.

This is generally a matter of the practice owner doing a good job of managing his staff. When you combine the tight job market with the reality of managed care, it's imperative that employers do a good job of managing their staff to be as productive as possible.

Marketing and advertising

Marketing and advertising expenses were basically the same across the board when we compared the average netting practice versus the best netting ones in the small, medium and large practice categories.

We didn't find any group of practices that realized profitability as a result of advertising.

It appeared to us that a significant number of survey respondents reported the cost of advertising in the Yellow Pages along with their telephone expenses. Therefore, we included telephone expenses in the market and advertising category.

Occupancy costs

The difference in expenditures for occupancy costs (rent, utilities and maintenance) between the average and best practices was significant, especially for small practices. O.D.s often rent or build more space than they need to operate efficiently. The result is higher than necessary expenditures for occupancy costs.

We recognize that there's a delicate balance -- O.D.s who have too little space are unable to operate efficiently and tend to have lower average revenue per patient.

If you have to make a judgment call, you should decide on having a little less floor space than you think you need, instead of a little too much.

Hours worked per week

O.D.s in small, average netting practices worked about the same number of hours as O.D.s in small best netting practices. We found the same was true for medium and large-size practice.

It isn't how many hours an optometrist worked that made the practice profitable; it was how well the optometrist managed his time.

A winning combination

While O.D.s have traditionally focused on gross revenue as the single measure of practice success, it's our experience -- and the survey clearly supports this -- that high net is driven by two factors: gross and controlled overhead.

One myth is if you generate a high gross, the net will take care of itself. Well, we've seen too many high-gross practices with suprisingly low nets.

It's no coincidence that optometrists who had the highest netting practices also had lower cost of goods, lower staff salaries and lower marketing costs than their average netting colleagues.

Gross is important, but if you want a high net, you also must learn how to manage your overhead effectively.

Ms. Blackwell is the senior consultant for Hayes Center for Practice Excellence. You can direct practice finance questions to her by fax at 904-543-2401 or by e-mail at mblackwell@e-dr.com.

1998 Practice Gross and Net

Percentage of Practices with In-House Labs

Cost of Goods Sold Percentage

Staff Salaries and Benefits

Occupancy Costs

Average Revenue per Full-Time Equivalent Staff Member

Marketing and Advertising

Hours Worked per Week