The Case For Including Staff Salaries In Cost Of Goods
Dear Jerry,
Your writings have been a major influence on how I manage my practice but, I question why I should include my optical staff salaries under cost of goods when calculating my overhead expenses.
You seem to stress this more than other consultants. Are there any other resources or schools of thought this topic?
Thanks,
Patrick Pirotte OD
Dear Pat,
Thanks for the question. The overhead ratios that I developed through the years tend to correlate very closely with the data put out by both the AOA and the CibaVision Essilor MBA program.
What I try to do is speak and write on topics that help private practice OD’s think about how these ratios affect their overhead and ultimately their practice profits.
Staff Expenses And Cost Of Goods
The reason I stress the overhead allocations between staff and cost of goods is because I feel practice owners can make better business decisions when they truly understand where they are spending their money.
Let me use the following example to illustrate.
Dr. Seer has a solo practice with $600,000 in collected gross revenues (CGR).
Last February, Dr. Seer's accountant gave her an annual P&L Statement showing her staff expenses were 20% of CGR ($120,000) and her cost of goods were 30% ($180,000).
However, what this P&L did not take into consideration is that Dr. Seer paid a full-time optician $30,000 per year to cut and edge lenses in a back office lab.
While the optician is on the payroll and that is a completely legitimate staff expense, the P&L does not, in my opinion, reflect what really happened from a business management standpoint.
I think Dr. Seer should allocate all of the optician’s salary to COGS to more accurately reflect what her lab costs really are.
To do that allocation, I would subtract the optician’s salary of $30,000 from staff salaries and add $30,000 to COGS.
The recast practice overhead would now be $90,000 or 15% for staff and $210,000 or 35% for COGS. Those ratios give me a very different picture from a practice management standpoint.
While 20% for Staff and 30% for COGS looks pretty balanced, 15% and 35% suggests to me that Dr. Seer should probably be spending more on staff and that her in-office lab is not as cost efficient as she perhaps thought it was.
I saw many similar scenarios back in my consulting days.
Regards,
Jerry Hayes, OD
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MD/Optician partnership
Hi Jerry,
I am an optician in a 50/50 partnership with an MD in an optical. His medical practice is a separate practice from the optical practice.
The optical practice is responsible for my salary and one full time licensed optician. After all costs are paid, the MD and myself split net profit as a monthly dividend.
My questions are: 1. Is my salary to be considered staffing or "Dr" compensation.
2. How do I record the MDs net income/my net income/ and my salary. I have been breaking down the net income as my salary and our combined dividend income.
I have further broken out the Dr's income under net profit. Doing it this way makes it seem like the MD net income number to be low in ration to total net income.
Sorry about the long disertation.
Thanks, David
Your question is a good one,
Your question is a good one, and my best advice is sit down with your CPA or an experienced eyecare consultant to talk through the options.
At first blush, I am not sure it works to apply the Hayes 7 Key Expense ratios to the optical side of your practice...
One big reason is that I assume all of your income is for the sale of product versus an OD practice that would have a large component of exam fee income in addition to product income.
IMO, your base salary before profits is a legitimate employee expense as you would presumably have to hire someone to do that work if you weren't there. Correct?
If that is the case, I would NOT agree with the way you are allocating your salary in Q #2.
I think the amount you and the MD split 50/50 as co owners is the profit.
"Optical Staff"
My understanding of this definiation from the MBA program is that this includes only optical staff that are hired specifically to run in-house lab equipement (at least primarily).
In other words... Opticians employed to dispense and do frame selection duties would still be counted under traditional staff expenses.
This is how it makes since to me.
If we didn't have an in-house surfacing equipment (or an employee specifically for that) and outsourced all of it we would still have the traditional expense any other office would have with opticians.
Nick, you are correct. This
Nick, you are correct. This only applies to the prorata portion of the time the employee spends in the lab.
For example, if a $30,000 per year employee spends 100% of their time cutting and edging, I say put 100% of their salary in cost of goods.
If the same employee only spends 50% of their time in the lab, put $15,000 in cost of goods.
As you point out, you wouldn't have to pay that salary if you out sourced all your lab work.
Thanks, Jerry