Introduction
Reading an article like this can provide good insight into how to improve the profitability of your practice. However, as a clinician, first and foremost, there may well be a natural resistance to plough through all this detail. But there is a reward. Humint software can provide you with a single page featuring nine lines, which allows you to control the financial well-being of your business. This article does not suggest that you become the accountant/bookkeeper of your practice, but as the decision maker, you need to understand the importance of what is covered here. With Humint you can take control with a report you can assess in seconds. Converting turnover to a maximum net profit does not happen automatically; it requires control and up-to-date information.
The right information
Having the right information available at the right time, in a format that you, the optometrist, can easily relate to, is key to taking charge of your business's financial management. Failing to stay on top of the practice can result in potentially disastrous financial losses, as illustrated below. Humint, because it has an integrated accounting package, can generate concise reports that provide the right information at the right time, in a format you can relate to. This will empower you to grow your practice into a high-performance business.
The income statement as a management tool
This is what it can do for you:
- The turnover forecast provides a target to aim for
- It measures performance - Net profit
- It provides an early warning system when things go wrong
Management accounts should be available for scrutiny by the 10th of the new month. The strength of the income statement as a management tool lies in the comparison it allows one to make against the forecast. This is a true measure of the practice’s financial performance. The variance column on the income statement immediately shows which line items require attention. The astute manager will use this information to fix these problems before they become disastrous.
The Mini Income Statement – the nine-line page that allows you control and only takes seconds to read.
- Turnover (Budget)
- Cost of sales (35%)
- Gross Profit % (65%)
- Expenses:
- Salaries (22%)
- Rent (15%)
- Finance charges (depends on loans)
- Other expenses 10%
- Net Profit (18% )
The mini income statement summarises the whole income statement in nine-item lines. The benchmarks in brackets, as a percentage of turnover, are the targets our practice should aim to achieve. Benchmarks will differ depending on location, but the goal should be to make a 20% net profit. The Mini Income Statement becomes a one-minute check on the practice's financial well-being.
Expenses shown as "other" in the mini income statement must be and can be 10 percent or less of turnover. If not, it will be reflected in, for example, an out-of-control telephone account. This can easily be tracked in the variance column, and further investigation will always reveal the cause.
The primary issue is the net profit. The owner should be very clear about what the year-to-date net profit should be. If the net profit does not meet expectations, the mini income statement will give an immediate indication of where to start looking for the problem.
Salaries and rent are the two most significant expenses. The salaries item, as a percentage of turnover, indicates whether an organisation is over- or understaffed. Experience and records should show what turnover is possible with a certain number of workers.
All of these percentages should be taken in the context of the turnover. A really bad month will throw everything out of kilter, but the reason will be the low turnover that messes up the percentages. Before making a new staff appointment, it would be prudent to verify the salary percentage.
Although the rent is, by and large, beyond one’s control, it helps to keep it fresh in one’s mind. However, if it is getting out of control as a percentage of turnover, there is a case to be made with the landlord, backed up with good financial reports.
The interest and depreciation line in the mini income statement relates to repayable loans or an operating lease for, say, equipment. The repayments over time usually equal interest plus depreciation. Beware that this can be quite complex. When purchasing an item on lease, it is essential to consider the impact on the income statement. The mini income statement will immediately reflect this position.
Repayable loans and leases will vary significantly from one practice to the next, depending on the level of gearing. This will usually be a heavier burden on new practices. Benchmarks will vary in terms of salaries and rent for mall practices, value mart practices, and rural practices. Over time, the numbers become significant to each practice.
The stock-take
An accurate monthly stock-take is essential to verify the accuracy of the physical stockholding. The stock variance figure represents the difference between the physical stock and the amount recorded in the accounting records. It is comprised of items such as shrinkage (theft), breakage, and promotions. This figure is a cost to the business and should be included in the cost of sales figure. This, in turn, allows one to present an accurate gross profit percentage – an essential management tool. It is essential to know the monthly stock-take variance. Should there be a shrinkage problem, it is best to know its extent every month, as opposed to receiving a big surprise at year-end. The conventional system was to conduct a stocktake only at year-end. This is seriously outdated and a bad business practice. Just imagine what can go wrong with the stock in twelve months.
Gross profit percentage (GP%)
Gross profit is the rand value of the difference between what you pay for goods and what you sell them for. The GP% represents the gross profit as a percentage of turnover.
This percentage is crucial for managing the business effectively. The easiest way to improve a business is to improve the gross profit, but it is also the easiest way to mess it up if the gross profit percentage (GP%) is not controlled proactively. Post mortems are useless.
Practice management software must allow for daily management of the GP%. It is surprising how often the GP% is misunderstood, yet it is so important.
The formula is as follows:
Gross profit (mark-up) ÷ the selling price × 100 = GP%
or
Cost price ÷ selling price × 100 = cost of sales percentage
The sum of the two will always equal 100. For example, if the GP% is 65%, the cost of sales percentage is 35%. Note that the GP% can only be influenced by factors that affect the cost of goods or the price at which they are sold. For example, rent or telephone has no impact on the GP%.
The GP% is a great management tool. In the Cape Winelands, one often sees roses planted among the grape vines. This is because the roses provide early warning signals of diseases that can affect the vines. The GP% can do the same for a business. It can warn the owner that any of the factors mentioned above are hurting net profit.
Knowing the industry benchmark for GP% can be an effective way of measuring business performance. Optometrists should achieve a GP% of 65 percent. High-performance practices can post a GP% as high as 70 percent. Once a GP% lags below the benchmark, it is essential to immediately establish the cause and manage it on a weekly basis.
Avoid poor buying
Three things can drive down the price of frames. The size of the order, terms of payment, and out-of-date styles. Those outdated styles are often discounted, but it's best to leave them alone. However, every effort must be made to capitalise on volume and cash buying. Impulsive buying, done without a clear strategy, is probably the biggest threat to the GP%. Discounts will be forfeited by placing small orders with almost every sales representative who knocks on the door.
Work out the average invoice per patient
This number is derived by dividing the monthly turnover by the number of transactions done over the same period. This is not the average cost of a pair of spectacles – this includes all transactions, big and small. Over time, it becomes a valuable indicator of how well the team is performing in sales. For instance, the number may run at R3 000 for a practice. Should it drop suddenly, it is vital for the owner to know this and to determine the reason for the drop. It is possible that a new dispenser is not selling many frames with new prescriptions. The average turnover per patient can also serve as an incentive for all the sellers in the practice. Raising it by a mere R100 can bring about surprising results to the bottom line.
Manage the remakes
Based on the writer's experience over many years, remakes are acceptable at a rate of two percent of turnover in a practice with a cutting and fitting workshop. However, it remains one of the areas within the business that requires careful monitoring. Once again, there is very little to gain by having a retrospective discussion about the remake figures. A report should be made available to the owner on a weekly basis. A remake report should be detailed so that it can be traced back to the source.
No-shows
Patients who fail to attend their scheduled appointments are considered a loss to the practice. You have a choice: Ignore it and lose them, or put management systems in place to get them back. Two no-shows per day can add up to a huge amount over 12 months. By converting this potential loss into rands and showing it in monthly reports, you have a good incentive to turn the situation around. For example, one no-show per day (valued at, say, R3 000 turnover each) over a 26-working-day month will amount to staggering losses per year.
R3 000 × 26 days = R78 000 × 12 months = R936 000 potential loss in turnover per annum.
Disaster Report
The hypothetical scenario presented in the Disaster Report in Table 1 below tells a scary story. Practice A has a monthly turnover of R200,000 and a net profit of R50,000, generating a healthy profit of 25 percent per month. Practice B, which performs the same turnover, encounters trouble because most of the issues discussed occur simultaneously. It makes a net profit of R21 400 (11 percent).
A swing of R28,600 for the month can mean that, if left unchecked, the practice will be R343,200 worse off at year-end. While it is unlikely that all of these things will go wrong every month and all at the same time, it certainly can happen some of the time. This supports the case for monthly controls through the use of accurate, real-time information.
It is much easier to detect and eradicate problems if the system is geared to address them on a monthly and even weekly basis. Doing an annual audit report after the horse has bolted does not serve many purposes.
The above scenario shows that instead of posting a net profit of R600 000, profits were eroded to a mere R256 800 per annum.
Conclusion
Converting turnover to a maximum net profit requires control and up-to-date information. Two key factors are essential: a bookkeeper who can set up the correct chart of accounts and a software package that provides accurate information with ease and simplicity. This is what Humint can do for you. It is an online software package with all the necessary features. It surpasses anything that has been available to optometrists in South Africa to date. Having the right information, at the right time, in a format you can relate to, is the key to a high-performance practice.
Contact: Simoné Cowan
Tel: +27 81 282 4128
Helpline: +27 10 109 0997
Email: info@humint.co.za
S893 Champion Drive, Bridle park, 1684
www.humint.co.za