Are Your Practice Expenses In Line? Here Are Some Common Benchmarks For ODs
One of my ongoing themes as a practice management writer and speaker is to give optometrists reliable benchmarks for overhead expenses, practice profitability and staff productivity.
These are NOT necessarily the numbers I would recommend for each overhead category in your practice.
These ARE the numbers reported by a sampling of hundreds of independent practice owners from across the country.
The data come from three highly correlated sources:
1. My past experience with numerous consulting clients
2. Surveys conducted by Hayes Consulting
3. The American Optometric Association’s mass surveys
National Expense Averages
To clarify, these norms are for all expenses in a traditional dispensing optometric practice expressed as a percent of total collected annual revenues:
• Cost of goods (27% to 33%). Always your biggest expense, cost of goods includes everything you spend on lenses, frames and contact lenses. This category also includes the cost of your lab equipment and the portion of salary you pay your staff to do lab work.
• Staff (15% to 22%). Your second highest expense. Include everything you spend on staff such as bonuses, payroll taxes, uniforms, insurance and continuing education. Remember to deduct what you pay your staff to do lab work and calculate that with cost of goods.
• Occupancy costs (5% to 8%). This includes rent, insurance, property taxes, utilities, maintenance and janitorial. If you own your building, act as your own landlord and charge your practice fair market value for rent.
• Examination equipment (3% to 5%). Because the IRS allows over $100,000 in deductions per year, this expense can prove misleading. If your deductions exceed 5% of your gross, I recommend you analyze this expense as if you were leasing over 5 to 7 years.
• Marketing and promotion (1% to 2%). We find that the larger the practice, the less the doctor tends to spend on marketing as a percent of gross.
• General office overhead (6% to 9%). Use this as a catch-all for the expenses that don’t fit anywhere else (e.g., your office computer, phone system, postage, legal, accounting, dues and subscriptions).
• Doctor’s compensation (30% to 40%). This includes any salary, draw, bonuses, insurance and other personal benefits you derive from the practice as an owner. The national average is right at 30%, but I like all of my clients to manage for a net of 35% to 40%.
Do The Numbers Really Matter?
Very much so. The point of giving you specific benchmarks is not to tell you that the right number for your cost of goods is 33% or for your staff is 18%.
Rather, it’s to give you a basis for comparing your practice to those of your peers and to then provide you with a model to help manage your overhead for maximum profitability.
If your practice profits are lower than you’d like, then decide what percent of gross you want to net and use the rest of these benchmarks to create a written budget that will yield the desired bottom line. This takes some work and time, but the payoff in higher profits is huge.
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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Jerry, what is your
Jerry, what is your definition of "full time"? Days per week, hours per day, full comprehensive exams per day, etc. Thanks EK
Jerry Hayes, OD says:
I would consider a good metric for an OD's FTE (Full Time Equivalent) to be 40 to 45 hours per week.
Thanks for asking. Jerry
Jerry, I discussed the
Jerry, I discussed the percentages with my CPA who was interested in knowing the average gross of the practices surveyed. Would you provide me with this information?
$500,000 per OD ‘full time
$500,000 per OD ‘full time equivalent’ in collected gross revenues is a good number. Therefore one full time OD should produce approximately $500,000 per year. 1.5 OD’s would produce $750,000, 2 full time OD’s $1,000,000, etc.
you mention cost of goods to
you mention cost of goods to be 27-33%.......
What is the % for frames?
What is the % for spectacle lenses?
What is the % for contact lenses?
Hard to say, as these
Hard to say, as these percentages can vary greatly depending on the mix in your practice from high end frames and lenses and the amount of contact lenses fit.
Second pair discounts will
Second pair discounts will drive up my cost of goods. However, I will realize additional profits that would not have been earned otherwise.
Good point, you get extra
Good point, you get extra dollars from second pair sales. However, your mark up is less is on the discounted pair so that will decrease your margins. Its a trade off.
Thanks Jerry, I always enjoy
Thanks Jerry, I always enjoy your comments.
My pleasure… I am more than
My pleasure… I am more than happy to pass on my thoughts for increasing practice profitability.