What Happens To Your Net When Your Gross Declines?

Just so you will know, I am not into doom and gloom. In fact, I tend to be optimistic and positive minded in most any situation.

 

My true hope is that all my readers have an up year for revenues and this article is a total waste of time for you and me. But, I don’t think it’s smart for you or me to ignore the reality that the US economy is in a recession.

 

 

Recessions come, recessions go. We can be sure that consumer confidence will rebound. The question is, how quickly?

 

While we are waiting for the answer, I want you to give some thought as to what would happen to your practice, your profits and your lifestyle, if your annual revenues fell by 5%? What about 10%?

 

 

To see how a decline in revenues might affect your practice profits, we have to break down your overhead structure into fixed expenses and variable expenses.

 

Variable Expenses: Dispensing ODs only have one meaningful Variable Expense, Cost Of Goods (COG). Cost Of Goods is variable because your frame, lens and lab bills fluctuate in direct proportion to patient volume.

 

Fixed Expenses: Fixed Expenses are what you pay for rent, salaries, equipment, etc. Yes, you can choose to turn down the heat or lay off an employee. But by definition, Fixed Expenses remain relatively constant, even if patient volume goes up or down.

 

 

Now, let’s look at the overhead structure of an OD we’ll call Dr. Seewell who has a typical dispensing practice grossing $500,000 and netting 30% or $150,000.

 

For the sake of example, we will assume the Cost Of Goods for Dr. Seewell’s practice is 30% of collected gross revenue. Therefore, simple math tells us her Fixed Overhead is 40%.

 

 

$500,000 Gross Income
- $200,000 Fixed Expenses (40%)
- $150,000 Cost Of Goods (30%)
$150,000 Pre-tax Net Income (30%)

 

 

• Dr. Seewell’s patient load declines by 5% in 2009.
• The remaining 95% of her patients spend at the same rate.
• Her fixed overhead stays the same. Note: That is unlikely because of raises and other cost-of-living increases.

 

Dr. Seewell’s overhead and profits would now look like this:

$475,000 Gross Income (down 5%)
- $200,000 Fixed Expenses (no change)
- $142,500 Cost Of Goods (down 5%)
$132,500 Pre-tax Net Income (down 11.7%)

 

 

• Dr. Seewell’s patient load declines by 10% in 2009.
• The remaining 90% of her patients spend at the same rate.
• Her fixed overhead stays the same. Again, not likely because of raises and other cost-of-living increases.

 

Dr. Seewell’s overhead and profits would now look like this:

$450,000 Gross Income (down 10%)
- $200,000 Fixed Expenses (no change)
- $135,000 Cost Of Goods (down 10%)
$115,000 Pre-tax Net Income (down 23.3%)

 

Of course, the true impact of a revenue decline will vary from practice to practice based on your volume, your margins, product mix and the actual amount of the decline.

 

 

Here are some quick tips. I hope my readers will send in some of their own.

 

1. If you are the practice owner, set the example by exhibiting an outwardly positive attitude to both your staff and patients… even if you don’t feel like it.

 

2. Develop a practice budget so you and your staff know how much you are spending.

 

3. Raise fees. Not easy to do in this environment. But the better your margins, the less you will be affected by a revenue decline.

 

4. Meet with your staff to come up with a list of ways to save money.

 

5. Monitor and, if necessary, reduce your personal spending. This is NOT the time to be spending more than you make.

 

6. Put off discretionary purchases at home and in the office until your budget is in place.

 

7. Conserve your cash when you do buy. Don’t hesitate to use OPM (Other People’s Money) by leasing or borrowing when you must purchase equipment or other expensive items.

 

The lesson here is, unless you do something to reduce your fixed expenses, any reduction in your practice revenue will cause your profits to decline at an even faster rate.

 

Agree with this blog? Disagree? Have a comment or question of your own? Click here to send me an e-mail.