How To Deal With Falling Revenue And Declining Profits
Dear Jerry,
Unfortunately, your recent blog on ‘What Happens To Your Net When Your Gross Declines?‘ applies to me.
I created a practice budget projecting a decline in collected gross revenues for 2009. With the help of my staff, we made cuts in our variable expenses and even some staff benefits.
Ten months later, my gross is in fact down around 10%. But, the cutbacks we made have NOT come close to offsetting the losses. Just like your blog said, my net is down 28%!
Now what do I do? Just hang in there? I have not heard of any miraculous methods for making more money in a recession.
We plan to focus on customer service and pray that things turn around soon.
Many thanks for your blog and ideas.
Regards,
RR, OD
RR, OD
Dear RR,
Thanks for your candor and giving me the opportunity to write on this topic. I know there are many other practices in your situation right now. Here is my thinking.
First off, if business is soft in your area, don’t expect a fast turnaround in terms of patients coming in to get exams and buy eyewear as long as unemployment is high (9.8%).
Consumers can’t afford new eyewear if they don’t have jobs and employed workers are holding back because they are afraid of losing the job they have now.
Translation: Depending on your geographic location, patient demand will likely be soft in Q4 and may not pick up until mid 2010.
Start By Assessing Your Financial Situation
If you are faced with declining revenues, the first thing you need to do is make a very honest assessment of your own financial situation.
How big are your cash reserves? Are you in a position to weather the downturn?
Is that 28% decline in your net income merely uncomfortable? Can you operate at that level for another 12 months?
Does a decline that large seriously affect your lifestyle?
Or worse, does going from an annual income of $100,000 to $72,000 (numbers made up) put you on the brink of personal bankruptcy?
Some Quick Benchmarks To Consider
Here are some benchmarks to keep in mind as you assess your current situation and project where you want to be in 2010.
The average dispensing OD practice nets 30%. (Owners’ net may be less in a group practice.)
My rule of thumb is that the total of your ‘cost of goods’ and ‘staff expenses’ should not exceed 50% of your collected revenue.
If your ‘cost of goods’ are over 30%, you have to figure out a way to lower those expenses or increase your fees.
If your staff expenses are over 20%, you might be overstaffed. But, that’s not clear-cut. You may simply be overpaying the right number of people.
Therefore, if you gross $1,000,000, you should net $300,000 and spend no more than $500,000 on ALL cost of goods and staff-related expenses.
If you follow my math, that leaves just $200,000 for everything else such as rent, insurance, equipment, telephone, marketing, etc.
If you are spending less than 50% of your collected gross on those categories in your practice overhead, I say you’re doing fine. Focus on the remaining 20% for any cuts you need to make.
Invest In The Patient Experience
Once your expenses are under control, don’t forget to invest in the ‘patient experience’.
That includes:
• The appearance of your office
• Modern equipment, within the framework of a smart budget
• Staff training
Get A Good Consultant Or Your CPA Involved
If you are at a loss for how to evaluate your overhead expenses, I suggest that you have a serious meeting with an optometric consultant or your accountant to create a working budget for 2010.
Contact Marilee Blackwell, MBA (904-819-5688) or JR Armstrong, CPA (601-636-4762)if you need guidance. They both do a lot of financial advisory work for ODs.
Agree with this blog? Disagree? Have a comment or question of your own? Click here to send me an e-mail.
Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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Asking for a rent reduction
My partner and I had one of those leases with automatic annual increases tied to the CPI for our area. When the economy slowed during 2008, we asked our landlord for a rent reduction and even offered to buy our building with no success.
In the meantime, our lease expired and we were on month to month. Early 2009, we asked for a new lease again with reduced rent - even 10% would have been appreciated. In spite of the hassle and cost of moving we were forced to find a new location and luckily we ended up moving in to a medical building across the street.
Our new landlord was a retired MD who was anxious and happy to have us. He built out the space to accommodate us with some of the costs billed to us over the length of our lease. Our rent was less than half of what we were paying even with the build out cost.
Our old landlord could not rent the building at the rate he wanted and subsequently had to sell. He did get his sale price but the buyer failed to get financing from his bank because, as you know or don't know, the market rental rate for the area is the determining factor for a commercial building's true value. Since we were closest to the building, our rental rate was that factor and as a result, our old landlord lost out big time.
We're just sorry we did not make our move sooner. I hope another doctor can make use of the the lesson learned here.
I would like to know what
I would like to know what your rent is as a percent of annual collected gross?
Dear Jerry,
Dear Jerry,
I am considering a practice analysis through a national consulting group.
During the initial phone conversation, I was asked about general trends. I felt this was appropriate because I should know the overall position of my business. In fact, daily numbers are constantly in my thoughts at the end of the day.
However, I felt the consulting group was more interested in my perusal of their business model. Unfortunately, the consultant did not keep his phone interview with me after I watched the 1 hour DVD about their company. Thank goodness I had only blocked off my lunch hour for his interview.
On another topic, I am in serious negotiation with my landlord for rent reduction. The landlord has recently hired a new management company since the current developer is bankrupt. This is not a small developer and in fact, it was recently a segment on NPR.
In addition to your expertise and "rule of thumb" operation guidelines, I would appreciate any citations that I can present to the new management company in order to build my case. I have started to do an in depth analysis on my own. I have a good accountant, but I'm not sure he is completely on board with the intricacies of optometry.