Dealing With A Recession: Jerry’s Spending Rules For Dispensing Practices
Equipment And Office Space If the experts are correct, we are going to see a reduction in economic activity across the US during the last half of 2008 and the first half of 2009.
How this slowdown will affect eyecare providers and the retail optical market remains to be seen. Hopefully, your practice will continue to grow and stay healthy over the next year.
This, however, is clearly one of those times when practice owners need to manage their finances wisely to maintain profitability and avoid getting caught in the credit crunch.
Here are my five keys for how much to spend on fixed assets such as your office space and equipment:
1. I recommend that you stay conservative in terms of major new purchases for equipment and office space until you see how the economy affects your practice.
2. If you do decide to buy new equipment or real estate, don't be afraid to use OPM (Other People's Money). There is nothing wrong with a reasonable amount of business debt if you manage it properly.
3. Assuming you have an established practice grossing above $400,000 per year, the total spent each year on all your leases and loan payments for patient care equipment should not exceed 4% of collected gross revenues.
Therefore, a $600,000 practice should not spend more than $24,000 ($600,000 x 4%) per year on equipment loans and leases. Note: This assumes that you allocate expenses for optical lab equipment under ‘Cost Of Goods’.
4. Conserve your cash. I strongly recommend that you finance, or lease, any equipment purchase that exceeds 1% of your practice gross. ($600,000 x 1% = $6,000).
I have seen ODs put themselves in a financial bind by taking too much cash out of their practice during good income months.
In other words, don’t go out and pay $25,000 cash for a new retinal camera just because your checkbook is running a big balance that month. That is a decision you will regret if the economy hits a slow stretch and your revenues stagnate or decline.
Exception: I don't recommend it, but financially established practice owners with investment reserves exceeding 2-3 years' net income may prefer to pay cash for equipment in the situation above.
5. Office space: Total payments for all your occupancy costs; that is principal, interest, insurance, taxes and upkeep, should not exceed 8% of your collected gross revenues. The same percentage would apply to those who rent.
For example, a $600,000 practice should not spend more than $48,000 ($600,000 x 8%) per year on PITI and maintenance.
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. ©2008 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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I wish I had these guidelines
I wish I had these guidelines when I decided to get an Optomap. If the Optos lease payments are to be applied to the 4%, and given that the typical Optos monthly minimum is 1600 to 2000 dollars, than no one who grosses less than 500,000 dollars a year should even consider an Optos machine.
I would have to agree with
I would have to agree with Dr. Jones. Of all your expenditure guidelines, occupancy costs, for me, have never been tamed ! I would love to be paying $16-$18 for my 2,000 sqft, but the reality is much higher and if practice growth is flat (like they predict), occupancy costs by percentage will increase. Amazingly, even in this shaky economy office space to lease or purchase is still premium priced.
First off, remember the
First off, remember the percentages are not 'limits', just guidelines for what your peers are spending.
Would I include the Optos in that percentage, even though it generates revenue? Yes, for the simple reason that you have to account for how much you spend on overhead somewhere.
In theory, your phoroptor and your slit lamp both produce income and I would certainly include them as overhead items...
Opinions from other OD's on this? JH
Dear Jerry, Do your
Dear Jerry,
Do your recommended limits on leasing remain the same for leases on equipment such as an Optos, which generates income?
Thank you for sharing this valuable information. I have had my solo practice for nearly 12 years and have never seen guidelines such as these to help me conform to recommended percentages of rent/maintanence vrs annual gross figures.
Thank you again,
Michael Raff, OD
Hello Jerry, I thougth I'd
Hello Jerry,
I thougth I'd let you know that I put some info about your blog on my blog
http://mainosmemos.blogspot.com/ ... thanks for all you do for the profession of optometry!
Thanks!
Thanks!
Jerry, It seems to me it
Jerry, It seems to me it would not be easy to put a set percentage of gross on your office space costs. There is such a large variance on the cost of space across the country.
I live and practice in Williamson County in Tennessee. This is one of the top 50 counties in the U.S. for gross income. I have a small practice that grosses about $400,000.00 a year. Using your formula, my 2000 square foot office should be renting for $16.00 per square foot. You can't touch space in this area for under $20.00 to $25.00 a square foot!
Keep this in mind when you are making recommendations on where your office costs should be.
Respectfully,
William L. Jones OD
Hi Jerry, we just
Hi Jerry, we just incorporated in 2007, and would like to defer/transfer some car expenses, ie one current vehicle that has about 3 years to pay off, and am going to get a another used car, but new to me. what is the best way to do this. equal car expense allowance for the two partners ?, buy the used car in the name of the office ? not sure what the best way to proceed is.
I appreciate your
I appreciate your comments.
thank you!