income statement

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Profit and Loss…Do I Really Profit and Loss…Do I Really Have A Choice?Have A Choice?

Steven Sunder, BS, ABOC, FNAOPractice Management Consultant

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AgendaAgenda

The most important goal of financial

management is to “maximize the

highest possible profit for the practice” while

providing superior medical eye care to

your patients.

ObjectiveUnderstanding the Profit & Loss statementPractice Operating RatiosOptometric Industry Benchmarks & Your Practice RatiosConclusionQ & ATerms

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ObjectiveObjective

1. How do I read this thing?

2. How do I measure my financial success?

3. How am I doing?

4. How do I compare to my peers/industry?

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Income/Profit and Loss StatementIncome/Profit and Loss Statement

An income statement, otherwise known as a profit and loss, is a financial statement summarizing all the revenue and expense transactions that result in a profit or loss over a period of time.

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Components of an Income Components of an Income StatementStatement

Practice Revenue

Cost of Goods Sold Gross Profit/Margin

Operating Expenses

Net Margin

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Practice Revenue

Cost of Goods Sold

Operating Expenses

Net Margin

Gross Profit/Margin

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Components of an Income Components of an Income Statement Statement

Practice A Statement of EarningsFor The 4 Months Ending April 30, 20__

Actual Budgeted Variance Variance YTD YTD $'s %Revenue:Gross Charges - Optometry 240,783 211,499 29,284 14%Gross Charges - Optical 166,578 149,973 16,605 11%Patient Refunds (510) (573) 63 -11%NSF Checks (125) (96) (29) 31%Adjustments (115,082) (102,922) (12,160) 12%

291,644 257,882 33,762 13%

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Practice Revenue

Cost of Goods Sold

Operating Expenses

Net Margin

Gross Profit/Margin

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Components of an Income Statement Components of an Income Statement

Cost of Sales: Actual Budgeted Variance VariancePurchases - Frames 18,504 12,000 (6,504) -54%Purchases - Lenses 790 122 (668) -549%Purchases - Contact Lenses 0 343 343 100%Lab Costs 41,268 34,000 (7,268) -21%Lab Wages 7,040 7,040 0 0%Lab Wage-Taxes and Insurance 1,830 0 (1,830) #DIV/ 0!Lab Equipment 2,000 0 (2,000) #DIV/ 0!Lab Supplies 1,400 0 (1,400) #DIV/ 0!

72,832 53,505 (19,327) -36%

Does an “in-house” lab truly increase

profit?

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Practice Revenue

Cost of Goods Sold

Operating Expenses

Net Margin

Gross Profit/Margin

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The gross margin on sales minus the total operating expenses provides the net income on operations (pretax).

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Components of an Income Statement Components of an Income Statement

Actual BudgetedVariance Variance YTD YTD $'s %

Revenue:291,644 257,882 33,762 13%

Cost of sales:72,832 53,505 (19,327) -36%

Gross profit 218,812 204,377 (14,435) -7%


Would Frame Board

Management Increase Gross

Profit?

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Practice Revenue

Cost of Goods Sold

Operating Expenses

Net Margin

Gross Profit/Margin

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Components of an Income and Profit & Components of an Income and Profit & Loss Statements Loss Statements

Costs and expenses: Actual Budgeted Variance VarianceComp. 54,490 53,756 (734) -1%Wages 42,786 47,129 4,343 9%Advertising 1,848 2,000 152 8%Medical Supplies 1,110 1,399 288 21%Office Supplies 2,486 1,910 (576) -30%Rent - Building 6,843 7,333 491 7%Rent - Equipment 1,781 2,019 238 12%Repairs & Maint. - Building 2,709 2,837 128 5%Utilities 709 821 112 14%

144,541 145,091 550 0%

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Operating expenses include fixed and variable expenses.

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Profit & Loss StatementProfit & Loss Statement

The Profit and Loss Statement shows how well your practice buys and sells inventory (or services) to make a profit.

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Profit & Loss StatementProfit & Loss Statement

7/22/04 Previous balance $435.99 $435.99

1033 7/26/04 Groceries $123.78 $312.21

8/1/04 Deposit $3,000.00 $3,312.21

1034 8/2/04 Dry cleaner $10.75 $3,301.46

1035 8/9/04 Car payment $450.00 $2,851.46

1036 8/10/04 House payment $1,350.00 $1,501.46

Check RegisterNumber Date Description of transaction Debit (-) Credit (+) Balance

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Using Income and Profit & Loss Using Income and Profit & Loss Statements for FeedbackStatements for Feedback

You use an income/profit and loss statement to track revenues and expenses so that you can determine the operating performance of your business over a period of time.

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Components of an Income and Components of an Income and Profit & Loss Statements Profit & Loss Statements

Examination Fee (92004): $89.00TPA Reimbursement: $45.00Net Revenue to Practice: $45.00Practice “Write Off”: $44.00Gross Profit Margin: 50.5%

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Components of an Income and Components of an Income and Profit & Loss StatementsProfit & Loss Statements

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OPPORTUNITY COST: The amount of income that would result from the best available alternative to a proposed use of cash or its equivalent. In other words, it represents the forgoing of possible income associated with a lost opportunity.

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Components of an Income and Profit Components of an Income and Profit & Loss Statements & Loss Statements

• Controllable Expenses

• Fixed Expenses

• Miscellaneous

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Costs and expenses: Actual Budgeted Variance VarianceComp. 54,490 53,756 (734) -1%Wages 42,786 47,129 4,343 9%Advertising 1,848 2,000 152 8%Medical Supplies 1,110 1,399 288 21%Office Supplies 2,486 1,910 (576) -30%Rent - Building 6,843 7,333 491 7%Rent - Equipment 1,781 2,019 238 12%Repairs & Maint. - Building 2,709 2,837 128 5%Utilities 709 821 112 14%

144,541 145,091 550 0%

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Cost of sales: Actual Budgeted Variance Variance72,832 53,505 (19,327) -36%

Gross profit 218,812 204,377 (14,435) -7%Costs and expenses:

144,541 145,091 550 0%Earnings (loss) from operations 74,271 59,286 14,985 25%

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Actual Budgeted Variance Variance YTD YTD $'s %

Cost of sales:72,832 53,505 (19,327) -36%



Other income and expenses:Interest (436) (436) 0 0%

(436) (436) 0 0%Earnings (loss) before income taxes 73,835 58,850 14,985 25%

Provision for income taxes:TBD TBD TBD 0%


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Cost of sales:72,832 53,505 (19,327) -36%



Other income and expenses:Interest (436) (436) 0 0%

(436) (436) 0 0%Earnings (loss) before income taxes 73,835 58,850 14,985 25%

Provision for income taxes:TBD TBD TBD 0%

Net earnings (loss) for period 73,835 58,850 14,985 25%


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Using the Income and Profit & Loss Using the Income and Profit & Loss Statements for FeedbackStatements for Feedback

How do you know if your practice suffers from “practicea inefficoccus,” also known as practice inefficiency? Would you like to make more money? If so, your practice must become efficient and productive.

To evaluate just how efficient your practice is, you will need to measure three criteria:1. Your practice history2. Your practice ratios3. Optometric industry benchmarks for

comparison

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Creating a profit and loss statement on a regular basis will provide you with a true cash picture of your practice’s profitability and help you decide where to make changes in the budget, collections policies or spending habits.

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“The foundation of effective leadership is thinking through the organization’s difference, defining it and establishing it, clearly and visibly.”

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Practice Operational Ratios Practice Operational Ratios

Practice Ratios:

When evaluating the financial “health” of your practice, practice ratios are used to measure your your financial state.

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Where is the revenue coming from?


Actual Budgeted Variance Variance YTD YTD $'s %Revenue:Gross Charges - Optometry 240,783 211,499 29,284 14% 59.11%

Gross Charges - Optical 166,578 149,973 16,605 11% 40.89%291,644 257,882 33,762 13% NET REVENUE

Practice A Statement of EarningsFor the 4 Months Ending April 30, 20__

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What are my cost of goods sold and gross profit margin?



Revenue:Gross Charges - Optometry 240,783 211,499 29,284 14% 59.11%

Gross Charges - Optical 166,578 149,973 16,605 11% 40.89%291,644 257,882 33,762 13% NET REVENUE

Cost of sales:72,832 53,505 (19,327) -36% 43.72% COST OF GOODS SOLD

Gross profit 218,812 204,377 (14,435) -7% 75.03% GROSS PROFIT MARGIN


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What are my practice operational expenses?


Actual Budgeted Variance Variance YTD YTD $'s %Costs and expenses:Comp. 54,490 53,756 (734) -1% 19.62%Wages 42,786 47,129 4,343 9% 16.44%Advertising 1,848 2,000 152 8% 0.63%Rent - Building 6,843 7,333 491 7% 2.35%Rent - Equipment 1,781 2,019 238 12% 1.01%Utilities 709 821 112 14% 9.51%

144,541 145,091 550 0% 49.56%


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What is my practice net margin?


Actual Budgeted Variance Variance YTD YTD $'s %Revenue:

291,644 257,882 33,762 13% NET REVENUECost of sales:

72,832 53,505 (19,327) -36% 43.72% COST OF GOODS SOLD

Gross profit 218,812 204,377 (14,435) -7% 75.03% GROSS PROFIT MARGINCosts and expenses:

144,541 145,091 550 0% 49.56% AGGREGATE PRACTICE EXPENSESEarnings (loss) from operations 74,271 59,286 14,985 25% 25.47% NET MARGIN RETURN


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Tracking and controlling your practice ratios is a very simple yet a valuable tool used in evaluating your practice for operational efficiency opportunities.

Controlling practice ratios = more $ in your savings account

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Optometric Industry Benchmarks Optometric Industry Benchmarks

Should you care how your practice measures against your peers?

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The 11 Key Industry BenchmarksOptometric Industry Benchmark Analysis

As a Rate to Net Revenue

Revenue IndustryProfessional: 32.00%

Optical: 46.00%Contacts: 22.00%

Total 100.00%Cost of Goods Sold 27.00%

ExpensesCompensation

Staff Optometrist: 21.00%Support Staff: 18.00%

Facility: 8.00%Marketing & Advertising: 4.00%

Equipment: 5.00%General: 6.00%

Net Revenue 30.00%

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Practice A Industry Benchmark Analysis Optometric Industry Benchmark AnalysisAs a Rate to Net Revenue

Revenue Industry Practice A Variance +/-Professional: 32.00% 59.11% 27.11%

Optical: 46.00% 40.89% -5.11%Contacts: 22.00% - -

Total 100.00% 100.00% -Cost of Goods Sold 27.00% 24.97% -2.03%ExpensesCompensation

Staff Optometrist: 21.00% 19.62% -1.38%Support Staff: 18.00% 16.44% -1.56%

Facility: 8.00% 2.35% -5.65%Marketing & Advertising: 4.00% 0.63% -3.37%

Equipment: 5.00% 1.01% -3.99%General: 6.00% 9.51% 3.51%

Net Revenue 30.00% 25.47% -4.53%

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Labor Cost InitiativesDetermine the costs to your practice for:

1. Manual Confirmation Calls2. Hard Copy Recalls3. Frame Board Management System4. Chair Costs

After determining what your current costs are of these processes, evaluate alternatives to increase net margin/ net profit.

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You have attained an understanding of the Profit and Loss Statement, calculating practice ratios and comparing to the optometric industry benchmarks, so what is the next step in evaluating your practice operational efficiencies?

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Optometric Industry Benchmarks Optometric Industry Benchmarks Questions to ask yourself are:

• What are the total number of exams generated?• How much revenue do I generate per hour?• How do I increase my Gross Profit?• How do I reduce my laboratory and frame expense?• How much revenue does my support staff generate per hour?• What is my practice revenue per square foot?• What is my frame inventory turnover rate?• Would “Frame Board Management” improve profit margin?

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TermsTerms

BALANCE SHEET: A financial statement listing the assets, liabilities, and owner’s equity of a business entity as of a specific date. [How much am I worth]

BUDGET: A formal written statement of management’s plans for the future, express in financial terms. [Future projection of revenue, COG’s, expenses, and net revenue]

CASH FLOW: Earnings before depreciation and amortization. [Amount of excess cash available at end of month]

COST OF GOODS SOLD: The cost of the manufactured product sold. Costs include materials purchased from outside suppliers used in the manufacture of your products, as well as any internal expenses directly expended in the process such as finishing lab optician.

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TermsTerms

DEPRECIATION: The decrease in usefulness of all practice assets except land.

EXPENSES: The amount of assets consumed or services used in the process of earning revenue. [What it costs to run your practice]

GROSS PROFIT: The excess of net revenue from sales over the cost of the merchandise sold. [Profit available to pay expenses]

INVENTORY TURNOVER: The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory. [How many times your physical inventory is sold]

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TermsTerms

NET INCOME: The final figure in the income/profit and loss statement when revenues exceed expenses. [What you have left over after paying all practice expenses aka, your savings account]

OPPORTUNITY COST: The amount of income that would result from the best available alternative to a proposed use of cash or its equivalent. In other words, it represents the forgoing of possible income associated with a lost opportunity.

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