I recently spoke with a young optometrist who wants to buy the practice he’s working at without taking on any debt. He had a tough time with consumer debt after optometry school and understandably never wanted to feel over-stretched like that again.
I completely understand not wanting to have debt. After all, it’s always better to own things outright when you can. However, borrowing money to acquire or build a practice is not the same as racking up consumer credit card debt.
Let’s consider what debt really is, why practices often use it, how much debt practices typically carry, and what factors should be considered when deciding how to manage it.
What is debt?
One of my favorite ways to describe borrowing money is that it’s like pulling future revenue or income into the present, allowing a business to invest in itself without having to save up over time or deplete its existing cash reserves.
Debt (sometimes called leverage) can accelerate a business’s growth, but it’s not risk-free. By bringing future revenue forward, you’re essentially betting that the business will generate more cash flow, profits, and revenue than it would have without that initial investment. But if that cash flow doesn’t grow enough to cover the cost of repaying the loan, that’s where the risk comes into play.
How much debt do practices carry?
Optometry isn’t considered a capital-intensive profession, meaning it doesn’t require a huge amount of upfront investment to build and equip a practice. Among our Books & Benchmarks clients, our median practice’s long-term debt is 13% of their revenue, and 80% of practices have debt below 37% of their revenue.
So, most practices are not struggling with the burden of debt. Of course, the practices we work with tend to be larger and more established, having already moved past the challenges of the early growth years. But that doesn’t mean that practices can’t overextend themselves with debt. Here are a few straightforward guidelines to keep in mind when considering taking on debt to grow your optometry practice:
- Make sure you have a plan to actually use the equipment when you buy it. It’s not a good idea to spend a significant amount of money or take out a loan for an instrument that ends up collecting dust, much like the unused paperweight on your desk.
- At a minimum, expected revenue from new instruments should exceed a) the monthly payments on a loan or b) an amortized cost to own the instrument over its useful life. For example, a $30,000 instrument with a 5-year life expectancy should generate at least $500 per month ($30,000 ÷ 60 months).
- If you’re expanding your office, keep the increased space costs at or below 10% of your current revenue.
- Before interest rates rose in 2022, there was a solid argument that it made more sense to borrow money at under 3% interest and invest the funds in index funds, which historically return over 7% annually on average. With interest rates now in the 6%–8% range, I think it’s a wash whether you pay cash or take out a loan for larger expenditures.
In our experience working with over 200 practices, we’ve found that one of the most common issues that needs fixing is mistakes in how loans are recorded. For most practices, the low debt they carry means the inaccurate balance sheets aren’t hiding material financial issues. However, all practices will have a better handle on their cash flow with accurate accounting.
Having a precise, up-to-date financial picture is key to making informed decisions and ensuring your practice is on the right track. Whether you’re looking to grow, expand, or simply streamline operations, understanding your debt load and cash flow is crucial.
If you’d like a clearer, more accurate picture of your financial health, consider letting Books & Benchmarks handle your financial statements. With our expert bookkeeping services for optometrists, we can help you stay on top of your books so you can focus on what really matters—growing your practice with confidence. Reach out to us today to get started!
