Controlling Costs to Improve Profitability in Private Practice

Financial success in private practice is a function of sustainably minimizing costs and driving revenue, thus generating profit. According to McKinsey & Company, a 1% decrease in expenses can improve operating margin by upwards of 7.8%.¹

This article explores the expenses, benchmarks, and chair costs for the modern optometry practice, identifies key financial metrics to monitor costs across the business, and offers actionable steps to reduce expenses within each category across your practice.

Categorizing optometry practice expenses

Expenses of the modern optometry practice can be organized across seven key categories:

COGS (cost of goods sold): Includes the cost of goods sold across optical, contact lenses, medical device disposables, and over-the-counter products.
Payroll (Non-Doctor): Covers all non-doctor payroll expenses, including wages, benefits, workers' comp, and payroll taxes
1. Doctor salaries are considered separately, paid from the practice's net operating income.
Overhead: Accounts for technology, utilities, and other general overhead costs.
Occupancy: Encompasses rent and triple net costs (taxes, insurance, and maintenance).
Equipment: Includes expenses for purchasing, leasing, and maintaining equipment.
Marketing: Tallies marketing endeavors, such as advertising, sponsorships, and online activities
Interest: Reflects the cost of financing and borrowed funds.

Organizing expenses into these categories allows for financial benchmarking of the business and then comparing the practice's financial performance to benchmarks.

Benchmarking your business

Financial benchmarking utilizes common-size analysis, which reports a financial metric as a percentage of a base figure (in this case, net sales), allowing the practice to be compared to itself and its peers.

Calculate the expense ratio across each expense category of your practice. The chart below provides a range for each category based on industry aggregates and Akrinos data-on-file of more than 50 practices.²

Expense ratios differ by business size; thus, regularly monitor your expense ratios as your practice grows and be proactive in making business decisions to maintain financial health. How does your business compare to these benchmarks today? Where are the biggest opportunities to reduce expenses in your practice

Read on for tips on how to improve benchmarks in your business.

Table 1: List of expense categories and lower and upper expense ratios to use for benchmarking the practice.

Expense Category	Expense Ratio Range
	Lower	Upper
COGS	24.7%	31.8%
Payroll (Non-OD)	18.5%	24.7%
General Overhead	3.4%	5.0%
Occupancy	5.8%	8.3%
Equipment	2.1%	4.5%
Marketing	0.6%	1.5%
Interest	0.3%	0.6%
Total as % Gross	61.8%	70.8%
Net	38.2%	29.2%

Download the Optometry Practice Budgeting Cheat Sheet here!

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Optometry Practice Budgeting Cheat Sheet

This cheat sheet outlines key terms, formulas, and a step-by-step checklist for optimizing your optometry practice's budget for long-term financial growth and success.

Understanding chair cost

Chair cost measures the overhead expenses associated with providing care to each patient.

This calculation provides a snapshot of the practice’s baseline fixed expenses, including:

Non-doctor payroll
Overhead
Occupancy
Equipment
Marketing
Interest expenses

Identifying the fixed costs is critical to inform pricing, managed care networks, performance goals, and product and optical markups. What is the chair cost in your business? Utilize the formula below and example data to familiarize yourself with the concept of chair cost and how it impacts profitability.

In this example, the practice incurs $193.58 of fixed expenses to see a patient.

Once the chair cost has been calculated, establish:

How frequently do patient encounters generate less than your calculated chair cost?
How do you ensure patient encounters generate sufficient revenue above chair cost?
How can your practice lower chair cost?

Non-doctor payroll

Non-doctor payroll includes all non-doctor wages, benefits, workers' compensation, payroll taxes, and human resource expenses, and is often the highest monthly operating expense. Overspending in this area signals the practice is either overstaffed or overpaying (if operating at capacity) or simply underproducing for the size of the team.

Two ways to reduce payroll expenses are to refine the compensation plan and improve employee turnover.

1. Compensation plan

Overpaying hourly wages, being too generous with benefits, and deploying a sub-optimal bonus program that disproportionately benefits employees at the expense of the business can wreak havoc on practice finances.

When evaluating compensation plans for employees, ask yourself:

What are the wages, benefits, bonuses, and incentive compensation offered to your employees?
How do you ensure your practice is paying appropriate, local market wages across your team?

Acquaint yourself with your local market wages through the Bureau of Labor Statistics, and be sure to “load” wages when performing your own calculations. Note, “loaded” wage refers to the total cost of labor: base pay + benefits + taxes + insurance, thus increasing salary by 25% to account for these costs.³

How do your wages compare to national, state, and local benchmarks? Considering the virtual and tech solutions available across many functions of the modern practice, how could your business utilize these tech solutions to enhance productivity and/or reduce payroll costs?

2. Employee turnover

What is the employee turnover rate in your practice? Including recruiting and hiring, onboarding, training, and lost sales—how much is employee turnover impacting your profitability?

Employee turnover is a significant stressor to the bottom line, costing your business upwards of 50% of the annual salary of the position being filled.⁴ Lack of growth opportunities is the number one reason employees leave.⁵ Meanwhile, pay and benefits rank number four on the list, behind personal health and family needs, work-life balance, and poor leadership.

Sample calculation: Here is an example illustrating the total costs of employee turnover to a practice with 8 employees, paying an average salary of $40,000, experiencing 25% turnover, and incurring costs of $2,500 per person hiring, $3,000 per person onboarding and development, and an average of 2 months to fill a role.

Quantify the costs of employee turnover in your practice, investigate the reasons for employee resignations (or terminations), and explore what you can do to mitigate these issues in the future. In the example provided, reducing turnover by 50% would net over $12,000 in savings.

What is the net sales revenue per full-time equivalent (FTE) employee across your practice? A healthy range of net sales revenue per employee is $175,000 to $200,000. If your business is generating less than $175,000 per employee, consider taking action to improve employee productivity, growing top-line revenue through SOPs and pricing and collections.

Developing SOPs for your optometry practice

When developing standard operating procedures (SOPs), consider the following questions:

How much excess capacity is in your practice?
What is the typical time-in-office for your patients?
How do your conversion metrics compare with benchmarks?

Identify the excess capacity in your schedule, bottlenecks in your operations, and optical and retail sales opportunities, and implement SOPs to capitalize on these across your business.

Table 2: Simple actions and targets to capitalize on excess capacity, time-in-office, and conversion opportunities to increase revenue.

Opportunity	Action
Excess Capacity	Tactical recall of established patients, strategic marketing to attract new patients
Time-in-Office	Goal: < 1 hour total; 40 minutes in-clinic, 20 minutes at optical / retail
Conversions	Optimize marketing mix (products and pricing), training and hand-off (doctor and staff)

Pricing and collections

When calculating pricing and collections, consider the following questions:

How current is your professional service and optical pricing?
How does your revenue cycle manager handle claims denials?
How current is your accounts receivable aging?

Updating pricing regularly on all services and materials and maintaining a tight revenue cycle ensures your business is maximizing net sales collected revenue.

Table 3: Targets for each bucket of your AR aging report.

Timeline	Percentage
0 to 30 Days	58 to 75%
31 to 60 Days	9 to 15%
61 to 90 Days	4 to 6%
91 to 120 Days	2 to 5%

The accounts receivable aging report does not reflect write-offs or delays in submitting claims, so be sure to investigate the volume of write-offs and any claims backlogs to identify leaks in your revenue cycle and prioritize aligning billing systems to capitalize on these missed opportunities.

For example, it is discovered that a practice’s write-offs and the backlog of unfiled claims cost the business nearly $150,000 per year. Collecting these accounts receivable would have a significant impact on practice finances and bring most benchmarks into a healthy range.

Assessing and adjusting general overhead

General overhead includes the business costs that are not readily assigned to the other expense categories, such as technology and software subscriptions, utilities and telecommunications, insurance, and office supplies.

General overhead often also includes myriad owners’ perquisites, which are owner perks paid out of the business that are not categorized as doctor compensation or flow through to the net income. How does your general overhead expense ratio compare to benchmarks?

Table 4: Tips for reducing expenses in general overhead costs.

Expense	Action
Software subscriptions	Evaluate utilization and ROI
	Activate (or eliminate) underperforming services
Office supplies	Go paperless where possible
	Evaluate spending habits, adjust accordingly
Utilities	Energy efficient options for lighting and interiors
	Install Window coverings or slicks, and exterior awnings
Owner perquisites	Be careful using your business as a piggie bank
	Make necessary adjustments to income when valuing practice

Personal use expenses paid through the practice will impact the benchmarks, the bottom line, and the value of the business. When preparing for transition, partnership, or exit, it is recommended to clean up owner perquisites so the financials better reflect the true profitability of the business, boosting prospective buyer confidence.

Ensure these expenses are appropriately added back to net income or doctor compensation when constructing a valuation of the business.

Don't forget to download the Optometry Practice Budgeting Cheat Sheet!

What is an occupancy expense?

Occupancy expense includes all costs associated with the office space, including base rent and triple net terms, which are facilities costs that the landlord passes on to the tenant.

Occupancy expenses can include:

Property taxes
Property insurance
Maintenance and operating costs related to maintaining the practice and its common areas, such as repairs and common area maintenance (CAM)

In a recent survey, 48% of small businesses report dealing with rent spikes, with 10% reporting rent is 20%+ year over year.⁶ What to do? If there is excess capacity across the business, filling that idle time with revenue-generating patient care will increase sales revenue, thus pushing the practice towards the range of an appropriate benchmark.

But if the practice is operating at capacity and booked weeks or months out, overspending on occupancy signals the need to increase revenue per patient encounter (which we explored with non-doctor payroll benchmarks) or be proactive about finding ways to save.

Strategies for reducing occupancy expenses may include:

Researching the market and negotiating more favorable terms, such as lower base rent, smaller annual increases, and rent abatement.
Reviewing maintenance and repair contracts and ensuring they are cost-effective and worthwhile. If not, consider consolidating vendors or switching providers.
Re-locate if overpaying for occupancy and the landlord is not open to re-negotiation. Consider a lease buy-out and relocation if the math makes sense for your practice.

Technological advancements, digitized workflows, and innovative business solutions across vision and eyecare are enabling practices to do more with less space, which presents great opportunities for the bottom line.

For example, wearable diagnostics and all-in-one systems reduce spatial requirements in the pre-testery, digital visual acuity systems allow for smaller exam lanes, direct-to-patient shipping of eyewear, contact lenses, nutraceuticals, tears, and more, reduce the need for storage space in the office.

Further, virtual try-on solutions mean your optical can produce more with less inventory. Consider these trends and the impact on occupancy expenses for your practice.

Estimating equipment costs for your optometry practice

Equipment costs of the modern optometry practice include the price of purchased equipment, rents of leased equipment, freight, installation and calibration, taxes, maintenance and repairs, warranties, capital costs, and any expenses related to equipment operation.

Exam room diagnostic technologies, specialty equipment, optical lab, and dispensing equipment are all tools the modern practice utilizes to provide patient care and dispense optical goods.

Similar to the discussion regarding other expense benchmarks, if the practice has excess capacity, the focus should be placed on growing the business. However, if the practice is operating at capacity, seek to increase revenue per patient encounter and get proactive in finding ways to save.

Be mindful that neither the quality of care nor optical goods are being compromised when equipment changes are made.

Table 5: Practice management insights to control equipment costs.

Factor	Insight
Brand and Technology	More advanced equipment and premium brands will have higher costs
Leasing vs. Purchasing	Leasing can offer lower upfront cost but may have higher ongoing expense compared to purchasing
Used vs. New	Used equipment can significantly reduce costs but may come with need for additional repairs or replacement
Age and Maintenance	Keeping older equipment prone to downtime and repairs & maintenance, may be more costly than replacing it
Utilization	Un- or under-utilized equipment is the most costly to the practice, seek to activate or sell off these devices

Marketing costs

Marketing costs encompass all expenses incurred to promote the practice’s services and products, aiming to increase brand awareness and drive sales.

Marketing strategies can cover a wide range of activities, including:

Website maintenance
Digital presence and SEO
TV / radio
Direct mail
Community events
Sponsorships and more

It is critical that the practice maintains a consistent marketing presence, both internally to retain established patients and businesses and externally to attract new patients and businesses. Marketing spend to acquire a new customer costs up to five times that of retaining an existing customer. Further, a 5% increase in retention can result in an increase in profitability upwards of 25%.⁷

With so many ways to market the practice, the key is discovering the most effective marketing strategies that work in your market and deliver an ROI on your marketing spend. Additionally, consider the function of vision care plans as a marketing expense.

To optimize marketing channel mix, create a list of the current marketing channels utilized, inclusive of the monthly (or annual) cost of the channel and the business generated by that spend. Calculate the ROI of each and compare. The same exercise can be conducted to evaluate, rank, and strategically eliminate vision care plans that are no longer serving your practice.

Consider COGS in your optometry practice

Cost-of-goods sold (COGS) encompasses the expenses the practice incurs in acquiring the products it sells—frames, lenses, lab costs, contact lenses, nutraceuticals, medical devices, alliance membership fees, etc. COGS is often among the highest monthly expenses of the business.

How do your COGS compare to benchmarks? At times, COGS may be high in a single month due to a bulk purchase, but if trailing 12-month measures are consistently high, there is an opportunity to grow profitability by reducing COGS, with a strategic approach utilizing contribution margin, inventory turnover, and conversion metrics.

Contribution margin

Contribution margin measures the portion of each sales dollar that contributes to covering fixed costs and producing profit. Comparing the contribution margin ratio of optical goods and retail products identifies which product sales are most profitable.

For example, Frame ABC retails for $300 and costs the practice $110, and Frame XYZ retails for $260 with a cost of $80.

Table 6: Contribution margin ratio for the frames listed above.

Example Frame	Contribution Margin
Frame ABC	63.3%
Frame XYZ	69.2%

Inventory turnover

Inventory turnover is a liquidity ratio that calculates how many times inventory is sold through in a given period. Low inventory turnover may signal weak sales or excess inventory. Conversely, high inventory turnover may signal strong sales or inadequate inventory.

Performing the inventory turnover analysis across your optical goods and retail products will enable strategic inventory decision-making that will impact the bottom line.

For example, over a specified period, the practice spends $2,000 on Frame ABC, which started the period with $550 in inventory and finished with $820, and spent $4,100 on Frame XYZ, which began with $1,030 inventory, and ended with $4,400.

Table 7: Inventory turnover calculations for the frames listed above.

Example Frame	Inventory Turnover
Frame ABC	2.92
Frame XYZ	1.51

Conversion metrics

Conversion metrics are key performance indicators that measure unit sales conversions as a percentage of the total patient volume served. Assessing the conversion metrics across optical goods and retail products provides insights into patient preference and what sells in the practice.

For example, over a period, the practice provides 225 comprehensive eye exams and sells 128 complete pairs of glasses, of which 22 are Brand ABC and 15 are Brand XYZ

Table 8: Eyewear conversion ratios for the brands listed above.

Example Frames	Eyewear Conversions
Total Eyewear Conversions	56.9%
Brand ABC	9.8%
Brand XYZ	6.7%

Evaluating optical goods and retail products utilizing aggregate contribution margin, inventory turnover, and eyewear conversion measures provides critical insights that would otherwise be unavailable if assessing any single metric.

Table 9: Head-to-head evaluation of the sample data; although Frame XYZ has higher contribution margins, Frame ABC is more favorable to the business as the practice benefits from higher total profit with lower COGS.

Frame	Contribution Margin	Inventory Turnover	Eyewear Conversions	Total Profit	Total COGS
Frame ABC	63.3%	2.92	9.8%	$4,180	$2,000
Frame XYZ	69.2%	1.51	6.7%	$2,700	$4,100

Budgeting best practices: Going for 11%

Reducing monthly operating expenses and COGS will benefit the bottom line of your practice.
Get hands-on with your business to grow profitability:

Create a master budget for the practice utilizing a proper chart of accounts.
Ensure monthly reconciliations of all checking accounts, credit cards, and lines of credit.
Assess expenses monthly and dig into the details of any expense categories that are over benchmark.
Utilize the action items and tips provided in this article to reduce costs in each category.
Set goals for your practice spending and hold yourself and your team accountable to achieve.

Examining excess capacity

At various points in this article, we touched on the importance of better utilizing resources to generate ROI and capitalizing on excess capacity. Excess capacity is a condition that occurs when a business is producing less than it is capable of as a result of idle time.

A typical optometry practice will log 2,500 to 3,500 patients per year per doctor, an equivalent of 1.2 to 1.7 patients per hour. Accounting for cancellations, no shows, and $0 patient encounters, how much opportunity does idle time present for your business? Reducing excess capacity (generating more business on the same cost structure) will improve benchmarks across the board and improve the bottom line.

The same McKinsey & Company study that identified the 7.8% improvement in operating margin resulting from a 1% decrease in expenses, also found that a 1% increase in price can improve operating margin by upwards of 11%!¹

So, perhaps the better inquiries do not pertain as much to cutting costs as they do to growing the business. How can your practice differentiate itself, enhance the patient experience, and further improve quality of care and products to justify increasing prices?

In conclusion

Increasing profitability in private practice demands controlling costs while growing revenue. Systematically benchmarking and monitoring chair costs and practice financials will identify the cost centers that are constraining profits.

Armed with these insights, practice owners are empowered to proactively reduce expenses in a strategic manner that best serves their individual business.