As I visit with optometrists about the potential purchase or sale of a practice, there is one health indicator that gauges the value of the practice. This gauge is the practice net and it assists you as the CEO in managing the health of the practice. There are many ways to calculate the risk of an optometry practice. It is important to understand and know the cash flow of the practice which ultimately is in the net income of the practice. At the end of the month, how much money is leftover to celebrate the hard work of being an optometrist and CEO.
As my wings spread in coaching ODs regarding the buying and selling of their practice I find that numerous ODs do not regularly calculate their practice net or the practice net is not calculated correctly. I find this very surprising as your practice net serves as a barometer of practice health. Sometimes there is confusion in calculating the net, so a slide from a presentation that I have done is included for reference. (reference First in Practice Academy – MBA) It outlines all items that are a part of the practice net and not a part of overall expenses.
SELLER: If you are looking to sell your practice and you have calculated the net and not included all items as listed, you may be under calculating your practice net which can lead to a lower valuation of your practice.
BUYER: As you look to purchase a practice it is important for you or your CPA (CPA I recommend for buying/selling a practice) to review the books and verify that the current practice net is being calculated correctly and the higher the net the more you should be willing to pay for the practice. This is one of many factors to consider as it serves as a good principle to follow when purchasing a practice.
Knowing your true practice net is paramount to running a successful optometry practice.
Great article.
Quick question, though…does the calculation of Practice Net seem to get muddied in a practice where finances are improperly managed? For example, assume the practice owner takes home more than she reasonably should in order to pay down personal debts. Further assume that this then creates a loss for the period of concern on the P&L or Statement of Cash Flow.
If one looks at the Dr’s take home pay and sees it amounts to 45% of the income for the period, this can’t be a “true” net, right?
If the P&L shows net income of say $10k in a month, but the owner paid herself $15k, the practice actually lost money. I hope that makes sense. Any advice for calculating the Practice Net in a situation like this?
Thank you for the question. I will do my best to answer your question. Your “true” net has nothing to do with the actual take home of the doctor. The calculated net would remain the same. Just because the doctor took home more money that month than the amount leftover after expenses, does not mean the net changed. The only thing that changed was the bank balance that was less than the previous month since the doctor took more than what was made and paid him or herself. (For example, if the gross collected for the month is $20,000 and all expenses that are not as outlined in “Do you calculate the Practice Net correctly?” equals $15,000, then your net for the month is $5,000. This would be a 25% net and if the doctor took out $10,000 that month, the net would still be 25% but there would be an additional draw against the next month or the money was from previous profits which were a part of another months net.)
I believe the bigger concern is the boundaries that have been set regarding a doctor taking out more money during the month than what the practice earned. This works if the amount of additional money is subtracted from that doctors share of the profits for the year. Hopefully that helps.
Thanks, Dr. Fleming. Whole-heartedly agree with that last paragraph.
Would it be correct to look at the true net as the bottom line on the P&L + any associate pay that was included in the P&L as “employee salary”? I guess this is where I’m getting confused….
I’m regularly looking at P&Ls and Cash Flow Statements. P&L consistently shows a profit (which would be even more if the associate salary was deducted from being an expense), but cash flow consistently shows less cash in the bank as a result of high owner salary + long and short term obligations.
For example, let’s say a P&L showed receipts of $50,000 and a profit of $10K (or 20%) for May. Part of the expenses on that P&L for May was $10K to an associate. I think what you are saying is that the more accurate net (for a prospective buyer) would be $20k (or 40%)?
Where I get caught up, I guess, is then looking at a Cash Flow statement where that $10K profit is the top line, but all the obligations and excessive owner draw results in a negative flow. Yes, the business technically turned a profit on the P&L, but the office actually lost money. So if a buyer looked at the 40% net alone, they might be impressed but a closer look at cash flow would leave them quite confused (as it has me).
Thoughts? Thanks!
Your example is correct. I agree with your confusion since it appears that more money is being taken home than what is made. A prospective buyer would hopefully understand this or have a CPA evaluate it and it would be noticed immediately. Calculating the “net” is irrelevant to the amount of money the owner is taking from the bank. The office did not “lose” money, it had a negative cash flow. The office did not lose b/c one of the owners is taking home the money 🙂 These are two separate calculations that you maybe getting confused. You seem to be thinking correctly but the emotional component of your frustration is clouding this. There does not appear to be a problem if the overdrawing doctor would stop. I hope this helps.