Whether you own five percent of an optometry practice or 100 percent, running a small business does not have to be overwhelming or difficult to know if it is successful. To help determine the business’ level of success—or if your efforts are even worth it, use these two essential ratios. After all, the last thing you want to do is own or buy into a business that only appears to be making money.
The first ratio is PROFIT MARGINS.
This is the net income divided by revenue. This ratio is where optometrists get it wrong. We focus on practice net that does not divide the work of a doctor and the work of a business owner. Doctors should make between 20-24 percent of their net collected production. Traditionally optometry looked at profit margin (practice net) without subtracting an optometrist’s salary. The true “profit margin” of an optometry practice takes out ALL doctors’ pay and benefits as overhead in salaries. Owners are tempted to look at “practice net” because the numbers are an ego-inflating 30-40 percent. However, we should be looking at the margin between what we pay ourselves (say 23 percent of production). So a practice net of 40 percent is actually 17 percent profit margin when a 23 percent of “production” revenue is subtracted to pay the owner optometrist.
The second ratio is RETURN ON EQUITY.
Being a landlord and optometry owner are similar. If you have $100,000 invested into your practice and each year you take home $12,000, then the return on equity (ROE) is 12 percent. This is how we can make decisions if owning a practice really makes good business sense. If you can purchase $100,000 of real estate and the ROE is 15 percent, are you really in the right business? If most optometry practices net 32 percent, then the doctor owner is making 23 percent on production and 9 percent on the business.
The old saying of “work smarter, not harder” rings true in today’s environment of managed health care, ACOs, and increasing overhead costs. Don’t get me wrong, owning a successful optometry practice can be extremely rewarding. Working smarter means that you understand what return you are receiving for all the time, stress, and difficulty of small business ownership. If you are not being financially rewarded for all this, you may be working really hard and not seeing the benefits. Obviously there is more to success in business than money, but if you are not making money, optometry is your hobby.
Do you know of industry norms as to what these ratios should be? These likely would change depending on the size of your practice (such as # of FTE doctors)?
Great question. In regards to “industry norms” I would have to refer to the material we have on “practice net” that is published by resources like MBA (Management/Business Academy) and see that practice net is 32-33% is considered norm. We do not have an industry standard for paying the doctor as it ranges from 15-25% of production, so it depends on what the company is paying their professionals. Due to these variables we have an “industry norm” that is very difficult to pin down, that is why I suggest we look outside the industry and look at what business in general should be generating. Your question is great and would be wonderful for our industry to pinpoint and quit talking about “practice net” as the barometer as it is misleading in how a practice is doing as a BUSINESS. I believe it is fair to say that if you pay all doctors including owners their % of production and the remaining profit margin is 15-25% then you have more than a hobby.
Thank you for the article! I was also wondering about the industry norms:
I assume the 32% – 33% profit margins are based on a revenue number that is after collections (i.e. revenue = total collected cash)? Or is it total billed worked, prior to subtracting out the uncollected portion from insurance companies.
New to the industry. Thank you!
After collections is correct.