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Use These 3 Simple Ratios to Estimate Your Overhead and Profitability




How is your practice doing? For many owners, the answer is: “Fine, I guess. There’s money in the bank when I need it.” Or, “I feel like my cost of goods is too high, but I’m not really sure.” Here are three simple ratios for evaluating your overhead and profitability. We’ll benchmark them as a percentage of collected gross revenues (your revenue after insurance discounts ), or the money that actually hits your bank account.

Cost of Goods + Non-OD Staff = 50% of Revenues

Typically, cost of goods and non-OD staff investment will consume about 45-50 percent of the collected gross revenue. These are variable costs that rise as you see more patients. For each additional exam, you expect to sell a pair of glasses or contact lenses, increasing cost of goods. And as your patient load increases, eventually you’ll need more staff.

Evaluate your cost of goods and staff investment together, because while cost of goods might be 33 percent in a high-end optical or heavy contact lens practice, it could be in the low 20s in a highly medical practice or even under 15 percent in a heavy Medicaid practice. Often, owners focus intently on cost of goods or staff expense, without considering that there’s typically a corresponding increase in staff investment where cost of goods is low, and vice versa.

Fixed Overhead = 20% of Revenues

Fixed costs are expenses you have to pay whether your schedule is empty or full. For an optometry practice, it includes occupancy costs, equipment costs, marketing expense and general office overhead (a catch-all for software licenses, business insurance, office supplies, etc.).

In most practices, fixed overhead runs between 20 and 22 percent of gross revenue, with the biggest variable being occupancy costs. In small practices and start-ups, you may not be big enough yet to make fixed overhead 20 percent of revenue, but a good guideline is to limit fixed overhead to $120,000. High fixed overhead is only solved by revenue growth, so be careful about taking on too much in these categories.

Practice Net = 30% of Revenues

Finally, there’s practice net. This is total compensation to optometrists, owner benefits like car payments or health insurance, non-cash expenses like depreciation and amortization, and corporate profits. Historically, practice net has been around 33 percent of revenue, but it has fallen in the past 10-15 years, due mainly to lower third-party reimbursements. Today, practice net of 30 percent or more is a success.

Keep it Simple

Owners need a simple tool kit to evaluate performance. The purpose of benchmarks isn’t to tell you how your practice “should” look, but rather to give you a reference point for evaluating it.

If your results are different, it could be one of three things. You may be overperforming or underperforming, or maybe its something structural you can’t control (e.g., an expensive real estate market). Based on that assessment, you can celebrate your successes and identify opportunities for improving the practice.

This article originally appeared in the September 2017 edition of GO/OD.



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