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Books & Benchmarks

A Simple Way to Understand Practice Overhead and Profitability

by | Feb 17, 2024

After reviewing financial statements from over 1,000 different practices, it’s no surprise to me what owners say about them: 

  • “I’m just not good at finance stuff.” 
  • “I reconcile my QuickBooks every month. I know it’s right. I just don’t know what it means.” 
  • “The checking account balance is going up, so I must be doing okay.” 

After all, most Profit & Loss (P&L) Statements start just fine, with the basics: Gross Income (Revenue) and Cost of Goods Sold. But after Gross Profit, Operating Expenses are shoe-horned into an alphabetized list of generic expenses. Essentially, two-thirds of a practice’s expenses have no intentional organization at all. 

And to the point of owners not knowing how much they earn, many practices don’t even split salaries between owners and employees. Fewer still split wages between non-OD staff, associate ODs, and owners, let alone splitting payroll taxes and benefits between those categories. 

Start With the Chart 

This is why Books & Benchmarks starts by migrating all our clients’ financials to our chart of accounts in QuickBooks Online. The first step in simplifying and clarifying an optometry practice’s overhead and profitability is to categorize expenses according to the 7 Key Expense Areas: 

  1. Cost of Goods Sold (COGS) 
  2. Non-OD Staff Compensation 
  3. Occupancy Costs 
  4. Equipment Costs 
  5. Marketing Expenses 
  6. General & Administrative Expenses 
  7. OD Compensation 

But even after reducing a generic P&L from let’s say thirty-six operating expense line items to seven, it can still be challenging to assess how you’re performing. After all, when we benchmark COGS, in 2023 the middle 60% of practices spent between 24% and 32% of revenues on COGS. For non-OD staff, the middle 60% spent between 20% and 27% of revenues.   

It’s hard to say which is the right number: 

  • 24% or 32% for COGS? 
  • 20% or 27% for staff? 

Our view at Books & Benchmarks is that even though we can reduce the loss part of a Profit & Loss Statement to 7 Key Expense Areas, those expense areas are derived from three more integral categories: Variable Costs, Fixed Costs, and Practice Net (sometimes called Optometric Net). 

Our Very Favorite Pie Chart 

To quickly define those terms: 

  • Variable Costs (we also call them Cost of Sales) are the expenses that increase as a practice sees more patients: Cost of Goods Sold and non-OD Staff. 
  • Fixed Costs are the expenses a practice incurs regardless of how many patients it sees: Occupancy Costs, Equipment Costs, Marketing Expenses, and General & Administrative Expenses. 
  • Practice Net includes the pay and benefits for all the doctors, plus the operating income of the practice. For more on how a practice can measure profitability, read our blog posts Understanding Benchmarks: Profitability Part 1 and Part 2.

Here’s how those three buckets lay out, on average: 

Historically, Variable Costs were less than 50% of revenues, Fixed Costs were about 20% of revenues, and a good target for Practice Net was 30% or more. 

The key insight has been that the Cost of Goods Sold and Non-OD Staff tend to be related. Practices that focus more on optical services usually have higher COGS but lower staff expenses. Conversely, practices with a strong medical focus have lower COGS but higher staff expenses (more bodies) to handle a larger number of patients. 

However, after the inflation we’ve seen for the past several years, variable costs have soared as wholesale costs and labor costs spiked. In our Cost of Sales Benchmark, the middle 60% of practices spend between 47% and 56% of revenues on COGS and non-OD Staff. This is surprising, and it’s also one of the reasons why we created Books & Benchmarks. We wanted to understand current trends in overhead and profitability. 

Another interesting point is that fixed overhead is a bit lower than we predicted. This is likely a result of the size of our client practices. With a median practice size of $1.55MM in revenue, we see the impact of generating high revenue while keeping fixed expenses at a moderate level. This leads to increased profitability as practices grow. 

Let Books & Benchmarks Help You Simplify 

If you’re looking to get your arms around your financials, don’t go do something, sit where you are! Let our professional bookkeepers take over categorizing and reconciling your QuickBooks file every month. Our benchmarks engine will automatically create the insights you need to understand and advance your practice. Schedule a call with our experts today!

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