Episode 1 - Profit First Cashflow for Optometry Practices
Do you find yourself, as a practice owner, wondering “Where does all my money go?” Do finances perplex or even bore you? As optometrists, many of us are familiar with clinical topics and how-tos. However, many of us who become practice owners are blindsided by the sheer amount of work it takes to run a successful business. We sat down with Dr. Mick Kling, OD to delve into the financial side of ownership via a four-part video series. In our first episode, we cover budgeting, profit margins, and more. Join us in learning more about “Profit First Cashflow for Optometry Practices with Mick Kling.”
It’s normal to not feel immediately comfortable with the financial aspects of practice ownership. Kling experienced a similar level of dissonance after starting his own practice, and eventually got fed up with "sleepless nights, a strained bank account, and a growing resentment toward my decision to own my own practice." In 2011, he decided to start his own business coaching company to help other optometrists avoid these pitfalls. He now helps other eye doctors find financial freedom through courses and workshops.
Kling truly enjoys the business side of ownership, and now spends most of his week speaking and consulting. He still sees patients, but simultaneously focuses on helping other doctors to find financial success. Read on or click these topics to learn how to stop stressing about finances!
- How to create a simple budget
- How to monitor finances like a pro:
- Profit and loss statement
- Balance sheets
- Cash flow statements
- How to uncover how your cash flows
- Which KPIs matter for your practice
- The profit-first model and compensation
Watch the trailer, and fill out the form to watch the full video!
For many of us, budgeting is simply an issue of mindset. We might feel intimidated, disinterested, or otherwise reluctant to actually sit down and map out a budget. But that’s an important hurdle to cross. Kling teaches a course on the 5 Building Blocks of Business Finance.
The first two steps are crucial when it comes to setting your business up for success.
Step 1: Learn to see the value in creating a budget. And then create one.
Step 2: Obtain the proper tools and knowledge to get it done. Once you’re armed with the underlying knowledge, it’s just a matter of doing it.
Many of us simply don’t know where to begin, and we feel that it’s just too complicated. With just these two steps (Check out impactod.com to learn more), you’re on the right track. The barriers, whether mental or physical, decrease immensely once you get something down on paper.
Kling began with handwritten notes and eventually moved on to more and more expansive spreadsheets. When you create a budget, you have a tangible idea of where all the money’s going.
Here’s a (potentially unnerving) fact. The likelihood that the budget you create turns out to be 100% accurate is zero. Placing too much pressure and too many expectations on yourself and your budget is setting yourself up for confusion. It’s essential to understand that a budget is a tool that will simply give you an idea of where you are. If you don’t meet your initial expectations, then you can take a look at your budget to see where you may have veered off.
The idea of “rear view accounting” allows you to do exactly that—see your expenses and where your initial plan might have fallen short. After taking everything into account, you now have a much better picture of your practice’s finances.
Monitoring Your Finances
Take these four items and compile them into your initial budget. See what percent of your total financial status each of these represents.
The Four Buckets of Finances:
- Costs of goods (25-30%)
- People and human resources (25%)
- Place/location costs (8-10%)
- Things — Everything else (10-15%)
From here, you have a holistic view of your practice’s financial health. Now, into the nitty-gritty. It’s important to pay attention to a few key aspects of finance as you navigate your budgeting journey.
This metric represents the money that’s coming in, your expenses, and the leftover profit. Keep in mind, however, that the profitability says very little about the health of your practice. These numbers are not all-encompassing, and fluctuations may not be fully represented. Remember to look at these numbers objectively, as they are not necessarily indicative of anything other than basic statistics.
For example, many business owners fall either under the realm of cash accounting or accrual accounting. Cash accounting provides you with a play-by-play of the number in your bank account. On the other hand, accrual accounting means inputting services at cash value and disregarding payment plans, delayed batching, and more. So, if you perform a service in July but don’t receive the payment until August, the actual payment will still appear in your P/L in July. Many find that cash accounting is easier to understand.
The equity plus the liability should always equal your assets. If these numbers don’t add up, then there’s something wrong. Remember that a balance sheet is simply a “snapshot,” a frozen-in-time depiction of your assets. To simplify, this sheet indicates what you own, what you owe, and what’s left over. Debt may not be clearly represented on these sheets, and that is why many practice owners trust their CPAs with this aspect of finance.
Cash Flow Statements
Kling recommends that you take your cash flow statements one month at a time. These are incredibly important to keep an eye on, but you will also notice that some trends are inexplicable. They can act as somewhat of a projection or forecast of the future, but they’re especially useful in comparing where you started vs where you are now.
Don’t get too bogged down by these tools. Understand that these are important, but mostly as a way of determining whether you are on track. They can be used to indicate goals, and that’s where KPIs come in.
The most important thing to consider when goal-setting is, “how many exams do I have in my chair?” This metric indicates a lot about the health of your practice and also can be used to forecast where revenue will come from.
Kling compares creating too many KPIs from the get-go as opening up a can of worms. He uses 12 main metrics, but breaks them down into 3-4 smaller categories. Listed here are a few of the main goals you should begin by focusing on:
Are your doctors being kept busy?
How productive are your doctors?
How productive is the staff as a whole?
What is the capture rate for frames, lenses, and other retail?
By tracking these simple performance indicators, you will have a clear indication of where your practice may be falling behind.
One important metric is the labor efficiency ratio. It’s quite simple: Divide your total revenue by your payroll. For every dollar you’re spending on staff, you’re either losing or gaining overall profitability. If the ratio is too high, you might consider bringing on more staff. If it’s too low, then it’s time for some introspection—are your team members spending too much time just sitting around? Create a plan to maximize your labor efficiency.
Focus on a labor efficiency number between 20 and 30. Every member of your staff is important in the overall functionality of your practice, and each represents a return on investment, whether it’s a clearly tangible number or not. While opticals often generate 70-80% of a practice’s revenue, the administrator handling the phones and scheduling appointments is what brings those customers in the door.
Profit Margins and Compensation
Remember, accounting is an art, not a science. Your practice’s net operating income versus your net profit will be different, although it may not seem like it at first. The net profit doesn’t take into account the cost of goods, taxes, and other costs associated with running a business.
“So, how much do I pay...myself?” Many practice owners find themselves asking this question at some point. As an owner, you will often find yourself wearing two hats, as Kling puts it. You’re striking a balance between seeing patients and being an investor. Ultimately, it comes down to an important distinction: how much can you pay yourself and how much should you?
The answer is fluid. It depends on the size of your practice and your budget. Personal income is taxed differently than business earnings, so many are tempted to skimp on one or the other. It’s essential to maintain a balance. Pay yourself too much and you’ll overspend on taxes. Pay yourself too little and you’ll risk a visit from the IRS. Live within your means, and compensate yourself fairly for your work.
When starting your career, focus on paying off your debt and living reasonably. Kling mentions the largely untapped market for ODs in smaller towns and rural areas. Maybe sacrifice your dream of living in a huge city on the west coast and enjoy the huge demand for ODs in these places. Or, be cognizant of the fact that your practice might start out as a part-time office, with proportionally lower salaries. Keep occupancy costs proportional to your revenue. Adapt accordingly and take up a side gig for a few years. It’s better to start off on the right foot than to be fixing your own mistakes years down the line.
Now is a great time to be an OD. Unemployment rates are low and your skills are in demand. As you expand in your career, focus on personal finance, as well. These basic principles can be translated between individuals and larger entities, such as businesses. Gain familiarity with budgeting now and enjoy smooth sailing later on.