Protect your practice with sufficient cash reserves
ATLANTA – Bankers recommend that a business has 7% to 10% of 1 year’s revenue in cash reserves as an emergency fund, Mick Kling, OD, said during a MedPro360 presentation here at SECO.
“That seems like a lot of money,” he said. “It’s not like your practice is going to shut down overnight, right?” The audience laughed in response to Kling’s reference to the initial effects of the coronavirus pandemic.
Optometrists should consider their practice’s liquidity, which is how much cash the practice has and needs; solvency, which refers to amount of debt; operating efficiency; and profitability, which determines if the business is sustainable.
Regarding liquidity, 7% to 10%, “is not a lot of money,” Kling said. “Five percent swings in our revenue are pretty typical. January is a big month. We do a lot of business, but our contact lens or frame or lab bill comes due February. February is a short revenue month and a big expense month. That’s where we get into cash flow problems. We have to be prepared with a reservoir of cash so we can act as our own line of credit.”
Generally, optometrists have too much debt, Kling said.
“How much debt can I afford?” he said. “Divide debt by practice revenue. If it’s greater than 10%, that’s a major issue.”
Determine if you are running your business efficiently.
“Am I making all the right business decisions relative to the practice income so we are getting as much profitability out of business as possible?” he said.
Get comfortable with your practice’s profit and loss report to get an idea of your revenue and net operating income and how that relates to the efficiency of running the practice, Kling said.
Your net operating income should be close to 30% of your practice revenue.
“That says all of the other expenses are in line of what a typical practice ought to be,” he said.
“Always check up on this number. It will have a huge impact on the value of the business if you choose to move on,” Kling added.
Profitability of your business is, “what allows us to remodel, reinvest in technology or people, or buy a second location and create more jobs,” he said.
Make sure the optometrist’s compensation is fair. He cautioned against “burying” personal expenses, such as trips, country club memberships, supplies used in the home, in the business.
“This can lower the profitability of your business,” he said.
Kling advises all practice owners to measure:
- Practice revenue. Increasing practice revenue does not necessarily mean increasing profitability, he said.
- Cost of goods sold should be 25% to 28% of revenue.
- People costs should be 20% to 25% of revenue. Beware of legacy employees whose wage outweighs their value, Kling said.
- Place costs should be 8% to 10%. “If you run this metric and it’s too high, you can move, renegotiate or grow into it,” he said.
- “Things costs,” which are general operating and overhead expenses, should be 10% to 12% of revenue. “Hidden compensation lives here,” he said.
- Owner’s compensation.
Immediately start tracking revenue per exam, exams per doctor hour, average eye wear sales, contact lens revenue per contact lens exam and revenue per staff hour, Kling concluded.
Primary Care Optometry News/Healio is the official media partner of the MedPro360 program.
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Kling M. MedPro360: Assessing the financial health of your practice. Presented at: SECO; Atlanta, Georgia; April 28-May 2, 2021.
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