Last week, I shared how a practice asked us to split their Maui Jim bill between plano and Rx work so they could more accurately measure and control their frame spending. Using that as a jumping-off point, I noted that while controlling costs is an important part of managing your practice’s financials, having the wisdom and courage to spend to achieve your goals is the real work of business budgeting. You can read last week’s blog post to learn more.
But let’s come back to managing the Cost of Goods Sold (COGS) and frames in particular. How should we think about controlling costs?
Lagging Indicators
If you think about it, most expenses in your practice involve a choice you make before you incur an expense. You choose a space before you start paying rent, hire staff before they’re added to the payroll, select an EHR before paying a software license, and pick out computers before paying for them.
COGS are different. In general, a patient buys a pair of glasses or a supply of contact lenses before your practice pays the wholesale cost of the product you sold. Unlike almost every other expense, revenue comes first, which is great.
So, apart from going crazy with buying contact lens inventories or having a ton of lens remakes, it’s kind of hard to lose control of your materials costs.
This is where I get squeamish about setting “budgets” for COGS. Since most COGS are the result of patients buying products, why would we limit what we spend? Are we not going to sell an annual supply of daily disposables because we’ve already hit our spending limit?
The exception, of course, is frames. Frames are the one area where practices will spend tens of thousands of dollars to stock their boards and displays before selling a single pair of glasses. Just consider: if you have 700 frames at an average cost of $80 per frame, that’s $56,000 worth of product in your office, regardless of whether you sell it to your patients or not.
Inventory Management > Cost Management
Still, once you stock your frame inventory, frame expenses should start acting like labs and contact lenses. Either you’ll re-order a frame when it sells (ideally within a week; don’t wait for your rep to re-stock your board), or you’ll drop ship to the lab when a patient buys glasses.
And yet, practices still find that their frame bills diverge from patient purchases. The solution to this isn’t to try and cap spending on frames. If you have a great month of sales, you will either need to pay to drop ship frames to your lab or pay to re-stock what you sold. What blows up frame spending is a lack of discipline.
You can and should put a cap on the number of frames you keep in inventory, remembering that what’s showing is only one part of your inventory if you keep understock on hand too. This has two key implications if and when your team wants to bring in a new collection:
- They need to make the case that you have the sales volume to justify more inventory, and that the new collection represents a style and price point not filled by your current merchandise, or
- Determine which non-performing line needs to be discounted and moved out (or returned) before you bring in new products.
Remember, non-performing lines and understock can easily constitute thousands of dollars of cash that’s not driving revenue for your practice.
Measuring Frame Performance
Controlling your frame inventory is only part of the equation. Beyond not just adding more and more products, we need to know how the products in inventory are performing. The way to measure an inventory’s performance is its “turns” which are defined as:
Units Sold Annually ÷ Units In Inventory = Inventory Turns
For instance, if you sell 2,100 frames in a year against an inventory of 700 frames, you had three frame turns for that year. In general, an efficient inventory will turn over at least three times per year. But keep in mind that each collection within your inventory might have a different target for its turns. Best-selling or lower-cost collections might turn over twenty times per year, whereas one turn might be plenty for high-priced or couture collections.
Measuring, Made Simple
If you need help understanding your overhead and profitability, Books & Benchmarks makes it simple by providing full-service accounting of your practice’s revenue, expenses, and profits combined with automated reports showing how your results compare with other independent practices across the country.
To learn more, schedule a discovery call today.
