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One step to ‘eradicate practice poverty’ is to reduce debt, review expenses
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NEW ORLEANS —Because of the “cash flow pinch” and because, “growth as a business is not linear,” optometrists must create a system that makes practice profit a decision and reduce practice debt, a speaker said here at SECO.
“We don’t build profit into our system so that we can weather the ups and downs,” said Michael A. Kling, OD, founder and CEO of Invision Optometry, San Diego. “You have to get the profit piece fixed first so you can avoid cash flow pinches ... and continue to survive.”
Kling discussed the mantra of Mike Michalowicz, who wrote Profit First.
“Profit is not a desire, it’s a decision. Profit is not a result, it’s an action. Profit is not an event, it’s a habit. Profit is a choice,” he said, paraphrasing Michalowicz.
“Don’t make financial decisions based upon the balance in your bank account,” Kling said. “Take 95% of the profit every quarter and throw away your debt.”
“The number one crusher of cash flow in a practice is debt,” he said. “I see practices all the time that can’t figure out where the money goes, and we do a debt business analysis and find hundreds of thousands of dollars’ worth of debt on the business.”
Kling said a better strategy is to accumulate the profit and then spend it on capital equipment.
He also recommended a strategy pioneered by financial radio show host Dave Ramsey called the “debt snowball plan” to pay down debt.
In the debt snowball plan, you line up side by side all your debt balances lowest to highest.
“You pay the minimum payment for all of them but the smallest and you throw everything extra at the little one until it is paid off,” he said. “Once the little one is paid off you take everything on the little one and you add it to the second one and once that one is paid off you take everything you were paying on number one and number two and add it to number three and pay that one off until you are done.
“I can tell you when you get to the end of the snowball it goes really fast,” he added.
He also advised to stop borrowing money.
Just as important as paying down debt is eradicating wasteful spending, he said.
Kling recommended sitting down with the practice profit and loss statement with staff members and challenge every line item.
Staff members, “will help you uncover wasteful spending because there are things happening in your business, and money going out the door, I guarantee you, you don’t even know about.”
Kling recommends coding all items: P = profitable, R = replaceable or renegotiable, and U = unnecessary.
“If it directly results in a profit to our business ... we leave it alone,” he said.
Items that are replaceable or renegotiable often means that, “we need to get comfortable contacting our vendors and saying, ‘I need a better price.’
“Get your vendors to work with you,” he added
“You are going to be surprised how many ‘U’s’ you have,” he said. “They are expenses that are creeping up and you are forgetting about. Get rid of all the U’s.”
Describing the human nature of “loss aversion,” he said, “you are going to find a million reasons not to give it up.”
He recommended having people to help you make these decisions because it is irrational to hold onto the expenses.
“The less expenses you have, the more money we make,” Kling said.
“Our businesses can no longer survive on the leftovers ... profit is our reward for taking risk, we deserve it,” he said.
Kling’s presentation was presented as part of MedPRO360. Healio, the online home of Primary Care Optometry News, is MedPRO360’s official media partner.– by Joan-Marie Stiglich, ELS
Reference:
Kling MA. MedPRO360 Presents: The profitable doctor – eradicating practice poverty learning lab. Presented at: SECO; February 20-24, 2019; New Orleans.
Disclosure: Kling is a business coach and speaker for Impact Leadership.