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Is It Better to Cut Cost or Grow?

06/18/2018

Here’s a not-too-controversial observation: everyone would like to earn more income. As practice owners, your income is a function of the revenues your businesses bring in and the expenses you have to pay.

So, if you want to increase your income, should you be going over your expenses with a fine-toothed comb?  Or should you focus on growing your patient base and revenues?

Cutting Costs

In the short run, it’s obviously easier to cut costs from the practice.  But what costs can you cut?  Let’s consider the 7 Key Expense Areas and how easily they can be lowered.

  • Cost of Goods – Easy. You can negotiate for better deals with your vendors.  Some will lower your pricing; other’s wont.
  • Non-OD Staff – Hard. You could cut hours or let someone go, but payroll is not easily changed.  Payroll is managed when you make hires, set salaries, decide on raises and – possibly – put incentives in place.
  • Occupancy Costs – Hard. Chances are, you can do very little to lower your space costs.  It’s not as though you can fire 1/3 of your space.
  • Marketing – Easy? You can cut this, but would you want to?  Besides, most practices only spend 2%-3% of their revenues on marketing.
  • Equipment – Hard. You need it, and your vendors or distributors aren’t generally going to just take it back.
  • General Office Overhead – Moderate. There’s usually some potential here, but it tends to be small things.  Things that might pay for your next trip to Disney but won’t buy you a new BMW.
  • Practice Net – Occasionally, practice have more associate ODs than they need, or pay too much for their associates.  This won’t apply to solo-OD practices.
  • Having reviewed several thousand P&Ls and having worked with nearly 750 unique practices, there’s usually not a lot of fat to cut.  Keep an eye on your expenses, but there’s typically very little low-hanging fruit if you’re looking to increase profitability by cutting costs.

Grow Your Revenue

Having said that cutting cost is easy but perhaps not as fruitful as people think, let’s discuss why focusing your energy on growing your revenues is the better way to go.  Consider the impact of reducing one expense area by 5% versus growing your revenues by 5%.  And when we talk about reducing expenses,  Cost of Goods is the most obvious, as it’s the largest and easiest to affect.

Consider a $1M spending 27% of its revenues on materials.  Reduce that by 5% and congratulations!  You’ve increased profits by 1.35%, or $13,500 for the year.  To do that, you may have simply clamped down on excess buying in the optical, but it probably also involved a series of contentious meetings with your vendors to fight for better deals.

Now, what if you had put your energy into growing your revenues 5%?  5% growth on $1M in revenue is an additional $50,000 in revenue.  And what are the costs tied to that revenue growth?  Did rents go up?  Your software licenses?  Utilities?  Equipment costs?  You may not even need to increase the patient care hours in your practice.

Probably only cost of goods increased, which we’ve said is about 27% of revenues.  So for modest growth, you’ll see 73% of the revenue growth fall to the bottom line, before paying any ODs.  That’s $36,500!

Even if you had to increase your non-OD staff to generate the growth, Cost of Goods combined with non-OD staff tend to consume 50% of a practice’s revenues, so that’s a $25,000 increase in profits, before paying an OD.

And it should be said that for practices with high cost of goods, the first solution we recommend is not to work on discounts but to review your markups and pricing strategies.

If Revenue Growth Was Easy…

So, now you’re probably thinking: that’s great, but I would have grown my revenues already if it was easy! And fair enough.  Let’s consider the two ways revenues grow: more patients and more revenue per patient.  Fundamentally, this is how any business grows.

This is where you should put your attention and energy.  First and foremost, patients are the foundation and lifeblood of your practice.  You and your staff must put effort into having systems and attitudes that are oriented towards your patients’ wants and needs.

In all my conversations with multimillion-dollar practices that have sustained double-digit growth rates for years, a focus on patient experience is the first reason they give for their success.

Other things to focus on include your recall process (keep the schedule full!), your practice brand, your internet and social media presence and your practice marketing.

For revenue per exam, the think I can’t recommend enough is that every practice needs to have a ‘standard of care’ that defines the suite of products the average patient needs for optimal eye health.

For revenue per patient, the low hanging fruit is to be sure and review your fees and markups every year.  Vision plans aren’t raising their reimbursements, but you can at least capture more overages if you keep your pricing up and make up some ground with your private pay patients.

I know I’m pushing the bounds of that term, but while I think most OD practice owners really believe every contact lens patient NEEDS a pair of plain sunglasses and a backup pair of spectacles, I’m confident almost no staff really believes it.  If they did, capture rates would be much higher.

Buy your staff the cheap stuff some they can ‘taste and see’ the difference.  Make sure the know – in their bones – that your practice offers superior products and care.

Grow your revenues.  Watch your costs.  And your income will increase.

Finance

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AUTHOR

IDOC Optometry - Color Bar
Nathan Hayes

Nathan Hayes

Nathan serves as IDOC’s Practice Finance Consultant and developed the unique 3-Year Growth Plan, as a benchmarking, planning and decision-making tool for ODs. He also writes and lectures on various practice management topics. Nathan graduated from Vanderbilt University in three years, with a degree in Spanish and a minor in mathematics. After graduating, he spent a year working abroad. During that time, he worked for two firms in San Jose, Costa Rica. He interned with Grupo Juridico de San Jose, working in environmental policy to protect a threatened parcel of land, then he worked as a project manager for a US-owned precision machining shop, Olympic Precision Machining. Nathan then spent 6 months working with street children and orphans in Mexico. Before getting into the healthcare industry, he was an Assistant Store Manager and completed the Corporate Training Program with Haverty's Furniture Company in Atlanta, GA. Nathan serves on the advisory board for the Hayes Center for Practice Excellence at the Southern College of Optometry.