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By Brad Williams, President and Founder
of Williams Group™
As the song says, “come fly with me.” I’m
inviting you to take a trip with me in my personal jet. Pack
enough clothes for one week. Don’t worry; your practice
will be just fine until you get back. One hundred years from
now, nobody will even remember you left town.
Where are we
going? To visit a few successful practices across this great
land and have some fun along the way. What do
I mean successful? Granted, success can mean several things…fancy
office, big gross, big net, booked ahead five years, most
ribbons on a name badge in the exhibit hall, big house, big
car… whatever.
Okay, okay, I’ll get serious.
For the sake of this tour, let’s visit those offices
that have learned to maximize their net-to-gross ratio
or profitability. In other
words, after all their practice expenses are paid, excluding
the doctor(s) wages, let’s observe how they manage
to squeeze the most blood out of their turnip.
There can be
a big difference between a net income and a satisfactory net income. For example, let’s say the
annual gross of a practice is $500,000. After all the bills
are paid, excluding the doctor(s) wages, the net income is
$170,000. That is a net-to-gross ratio of 34% ($170,000 divided
by $500,000). For a practice grossing $1,300,000 and a net
income of $364,000, excluding doctor(s) wages, the net income
percentage or net-to-gross ratio is 28%. Even though the
larger volume practice brings in more bacon (net income),
the smaller practice has a higher net-to-gross ratio because
it has done a better job of controlling the relationship
between income and expenses.
Just think… if the larger
practice above could have managed a 2% increase or 30% net-to-gross
percentage, it
would calculate to a net income of $390,000, excluding the
doctor(s) wages. That’s a whopping $26,000 gain! The
point is…few practices across this great land
have reached their full pre-tax net potential and most aren’t
even aware of it!
Sometimes we don’t know what we should
know. The practices we will visit have learned what they
need to know for maximizing
both their net-to-gross ratio and net income. They are happy
campers.
Yes, I’m aware many colleagues are happy with
their practice success. And they should be. I hear them say
things
like, “my practice has been doing well. After all,
my gross and net have been going up every year, so I must
be doing something right.” I know many are tickled
pink with their gross and net income results. However, even
though they aren’t aware of it, most will not achieve
their maximum net-to-gross potential. Unknowingly, they
will relinquish thousands of dollars of net income over the
span
of their practice career. Why is that? I’ll try to
explain.
In essence, my definition of success for this trip
has nothing to do with practice size but more with the ability
to control
the relationship between revenues and expenses. It’s
what I call practice fulfillment, which equates into happiness
while owning a practice. Even though practices differ in
many ways, they all have one thing in common. They have learned
and implemented a process for controlling and maximizing
their net income year after year.
They realize just being
good doctors, having a good staff and keeping the appointment
book full are no longer sufficient
to maximize profitability. All those factors certainly help
but it’s not enough. The benchmarks of gross and net
are important to them as well, but they have learned how
to work as a team and affect other benchmarks that also impact
profitability significantly.
Are they smarter? Maybe… maybe
not. Have they had more accounting courses? Not many. Do
they wear a Superwoman or
Superman shirt and cape? Not in the office… maybe at
home. Then what makes them so different? What’s the
big thing they have in common?
They have simply learned how
to manage their practice by objectives. What is that exactly?
Well, it’s the ability
to analyze and affect practice statistics. It’s a process.
There is much more to it than that. Here is the secret. They
have learned they can’t maximize their net-to-gross
ratio or net income without a budget. Surveys show less than
5% of independent practitioners in the U.S. has a budget.
If they do, most haven’t implemented a process to manage
it effectively.
Granted, most doctors watch certain statistics
from month to month such as gross sales, monthly receipts,
new and former
patients, revenue per patient, new contact lens patients,
production booked, multiple pair sales, laser vision patients,
etc. Unfortunately, most just watch these monthly statistics
without any process to report, analyze and affect them. Just
watching practice statistics without being able to affect
them as a team is called “management by hope.” In
other words, the doctor continues to work hard, crank the
gross and hope for the best.
I realize most colleagues would
have more fun dragging a rock around in their back yard than
preparing a budget. Most
would say, “Who needs it! Things are going pretty good.
Besides my accountant does all that stuff!”
The question
is…what does an accountant know about
managing an optometric practice? Do they know how to reduce
cost of goods, and maximize net income through "controlled" financial
objectives? Not hardly. They tell you to keep cranking more
gross sales and net income. They just can’t tell you
how to do it.
I agree…up until ten or twelve years
ago, a budget (statistical objectives, marketing calendar,
etc.) really
wasn’t necessary. All you had to do in the “good
ol’ days” was show up for work on time, throw
in a breath mint, provide great patient care and the practice
flourished! In this day and age of less reimbursement for
excellent care, the days of just keeping the appointment
book full and cranking a greater gross each year is no longer
sufficient to maximize net income. So learning and implementing
better business care strategies is just as important as implementing
new patient care strategies.
Successful practices know that
maximum profitability can only happen through a budgetary
management process. It is
the starting point and the backbone of profitability. And
when used properly, a budget is the foundational building
block management process – paving the way for reaching
greater profitability and a satisfactory net-to-gross ratio.
A solid budget (balancing revenues, expenses and capital
expenditures) is needed to reach full net income potential
because a well-defined budget projects specific and realistic
statistical objectives. It lays a track to follow.
And finally, having a budget that consists of statistical
objectives was useless without adding other pieces to the
management process is useless. It's important to utilize
staff to help accumulate certain game breaking statistics,
analyze the condition of these and report the results on
a timely basis. And most importantly, welcome staff input
to affect or make these statistical projections become
reality as a team.
Once the team learns how they INDIVIDUALLY affect
budgetary objectives during weekly business meetings and
are compensated
with production bonus incentives, it was all over but the
shouting. What better way to increase your bottom line and
their take home pay than with bonus-based incentives? This
is truly a game-breaking morale booster.
In closing thoughts… think
about using and tracking a budgetary management process in
your practice. Regardless
of how well your practice is doing – being able to "sock
it to the bottom line" won't hurt a thing. And embracing
your team as an active part of increasing profitability will
make practice ownership not only more enjoyable, but more
profitable!!
Do I have a personal jet? Well no, but this
little secret of budgetary management is the ticket to
taking your practice
to the next level of profitability. Best wishes!
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