How to turn your practice into a
high performance business  with Humint O 

BY CHRIS FAUL

Introduction

Reading an article like this can provide good insight 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 O software can give you a single page with nine lines on it, with which you can 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 O 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, but in a format that you, the optometrist can comfortably relate to, is the key to taking charge of the financial management of your business. Not having your finger on the pulse of the practice can result in potentially disastrous financial losses, as will be shown below. Humint O, because it has an integrated accounting package, can generate concise reports, providing the right information at the right time, but 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:

1. The turnover forecast provides a target to aim for   
   

2.    It measures performance - Nett profit
   

3.    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.

1. Turnover (Budget)

2. Cost of sales (35%)

3. Gross Profit % (65%)

4. Expenses:

5. Salaries (22%)

6. Rent (15%)

7. Finance charges (depends on loans)

8. Other expenses 10%

9. 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, is what your practice should 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 financial well-being of the practice.

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 biggest items under expenses. The salaries item, as a percentage of turnover, reveals whether one is over or under-staffed. 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 a new staff appointment is made, it would be prudent to check on 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 a lease, it is important to always bear in mind the impact on the income statement. The mini income statement will immediately reflect this position.

Repayable loans and leases will vary greatly from one practice to the next, depending on the gearing. This will usually be a heavier burden on new practices. Benchmarks will vary in terms of salaries, and in rent for mall practices to 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 is the difference between the physical stock and the figure represented in the accounting. It is made up 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 the extent of it every month, as opposed to receiving a big surprise at year-end. The conventional system was to do a stock-take at year-end only. This is seriously outdated and bad business practice. Just imagine what can go wrong with 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% is a representation of the gross profit as a percentage of turnover.

This percentage is key to managing the business. 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 add up to 100. For example, if the GP% is 65 percent, the cost of sales percentage is 35 percent. Note that the GP% can only be influenced by factors that can affect the cost of goods, or what they are sold for. 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 that you immediately establish the cause and manage it every week.

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 styles that are outdated are often discounted but are best left alone. However, every effort must be made to capitalise on volume and cash buying. Impulsive buying in the absence of a clear strategy is probably the biggest threat to the GP%. Discounts will be forfeited by placing small orders from just about 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 very useful indicator of how well the team is selling. For instance, the number may run at R1 000 for a practice. Should it drop suddenly, it is vital for the owner to know this and to find out why it has dropped. It may well be that a new dispenser is not selling many frames with new prescriptions. The average turnover per patient can also act as an incentive to all of the sellers in the practice. Raising it by a mere R100 can bring about surprising results to the bottom line.

Manage the remakes

From the writer’s experience over many years, remakes are acceptable at two percent of turnover in a practice with a cutting and fitting workshop. However, it remains one of the areas within the business that needs to be carefully monitored. Once again, there is very little to gain by having a retrospective discussion about the remake figures. A report should be available to the owner every week. A remake report should be detailed so that it can be tracked to the source.

REMAKE REPORT
Date
Source	For the month	Year to date
Optometrist error
Dispensing error
Trial failure
Patient rejection
Reading add
Orders error
Supplier error
Lab error

 

No-shows

Patients who do not show up for their appointments must be seen as 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 turnover of R200 000 per month and makes a healthy profit of R50 000 (25 percent) per month. Practice B, doing the same turnover, runs into trouble because most of the issues discussed go wrong, all at the same time. 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 is 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 makes a case for monthly controls through accurate, real-time information.

It is so much easier to detect and eradicate problems if the system is geared to deal with them on a monthly and even weekly basis. Doing an annual audit report after the horse has bolted, does not serve many purposes.

DISASTER REPORT
	Practice A			Practice B
	Month	Year	%	Month	Year	%
Turnover	R200 000	R2 400 000		R200 000	R2 400 000
No-shows				-R25 000	-R300 000	1/day
Average invoice (R100 short)				-R20 000	-R240 000	10%
Turnover after adjustments				R155 000	R1 860 000
Cost of sales	-R70 000	-R840 000	35%	-R70 000	-R840 000	-35%
Remakes	–	–		R1 400	R16 800	0.7%
Stock variance	–	–		R10 000	R120 000	5.0%
Shrinkage	–	–		R5 000	R60 000	2.5%
Cost of sales after adjustments				-R53 600	-R643 200
Gross profit	R130 000	R1 560 000	65%	R101 400	R1 216 800	51%
Expenses	-R80 000	-R960 000	40%	-R80 000	-R960 000	40%
Net profit	R50 000	R600 000	25%	R21 400	R256 800	11%

 

Notes
	# Per day	Amount		Value
Inventory level				R200 000
No-shows	1	R1 000		25-day month
Average standard invoice		R1 000
Remakes norm is 2%

 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 things are important: A bookkeeper who can set up the right chart of accounts and a software package that can provide the correct information with ease and simplicity. This is what Humint O can do for you. It is an online software package with all the bells and whistles. 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