This article is the first in our Navigating the Business Side of Optometry series.

Highlights

• The optometry industry is becoming more competitive, and assessing your financial health can help your practice thrive.
• Important metrics to evaluate your cash flow include current ratio, operating margins, and working capital.
• Other critical elements of your practice’s finances to examine include revenue streams, expenses, and profit margins. 
• A cloud-based practice management system can help you access valuable data to implement targeted financial health tips and grow your practice.

---

The optometry business is booming. Around 31,598 optometry locations are operating nationwide as of 2023, and with a projected 10% growth rate in industry employment, the optometry market is set to become even more competitive by 2031. Effectively managing your practice’s finances is an excellent way to stay ahead of the competition and grow your business.

Before diving into the details of your practice’s financial health, take a step back and assess the current state of your business. Understanding where you stand today can guide you in setting realistic goals and implementing strategies to achieve them.

Key Metrics to Track Your Practice’s Financial Health

Running a successful optometry practice is not just about providing excellent eye care; it also involves managing the financial health of your practice. Monitoring key metrics can help you perform a monthly financial health check and ensure your practice thrives. Essential metrics you should be tracking include:

Current Ratio

The current ratio is a simple but crucial measure in financial analysis for any optometry business. “Current” means turning assets into cash or settling liabilities within a year. Current assets include cash, accounts receivable, and inventory. Current liabilities are bills due within a year, like payables, taxes, and interest.

To calculate the current ratio, divide current liabilities by current assets.

Current Ratio = Current Assets / Current Liabilities

A ratio above 1.0 means you have more current assets than current liabilities, suggesting that you can cover short-term obligations. However, a high ratio might also indicate your practice is holding too much cash or other current assets that could be used more effectively.

A ratio below 1.0 suggests that you may have difficulty meeting short-term obligations with your current assets alone, which is a sign of potential liquidity challenges.

Operating Margin

Your operating margin is a financial health check that shows how much money remains after covering the practice’s variable costs, such as employee salaries, the cost of eyewear, and utilities. This leftover money helps pay for fixed costs, like rent, software subscriptions, and equipment.

You can calculate your operating margin by dividing your operating income (the money left over after variable costs) by your total revenue. Then, multiply this number by 100 to get the percentage.

Operating Margin = (Operating Income / Total Revenue) * 100

The higher your percentage, the healthier your operating margin. A low or negative operating margin might signal trouble — it could mean your practice isn’t generating enough income to cover variable and fixed costs.

Days in Accounts Receivable

Days in Accounts Receivable is like a financial clock that measures how quickly your practice turns receivables like money owed by patients and insurance companies into cash. When this number is low, it’s a sign that your practice can efficiently collect what’s owed.

To calculate days in A/R, divide your accounts receivable by your revenue and then multiply the result by 365. This gives you the average number of days it takes to convert your receivables into cash.

Days in Accounts Receivable (DAR) = (Accounts Receivable / Total Credit Sales) * Number of Days

If the number of days in A/R is increasing, it means your cash flow is slowing. Investigate the reasons behind the increase and brainstorm strategies to lower it.

Days in Accounts Payable

Similar to the way days in A/R measures how fast you collect money, days in A/P shows how promptly you’re paying your own bills. This ratio tells you how many days, on average, it takes for you to settle your financial obligations.

To calculate your days in A/P, divide your ending accounts payable by the cost of sales and then divide that by the number of days.

Days in Accounts Payable (DAP) = (Accounts Payable / Cost of Goods Sold) * Number of Days

If your days in A/P are high, it could signal that your practice is taking too long to pay its bills. While this might seem like a simple delay, striking the right balance is essential because paying bills too early can strain your cash flow in the short term.

However, paying bills too late isn’t a great strategy, either. It can land your practice in financial hot water and lead to potential legal troubles.

Working Capital

Think of capital as your optometry practice’s financial safety net. This liquidity or solvency ratio is like having extra cash in the bank to ensure you can pay your bills promptly, even when things take an unexpected dip.

Calculate your capital by subtracting your current liabilities (that’s the money you owe in the short term, like bills due soon) from your current assets (what you have that can quickly be converted into cash, like accounts receivable or inventory).

Working Capital = Current Assets – Current Liabilities

The bigger this number, the larger your working capital and the larger your safety net.

Other Areas to Assess the Financial Health of Your Practice

When it comes to the financial health status of your optometry practice, there’s more to consider than just metrics measuring your dollars in the bank. Let’s explore a few other areas that can give you a comprehensive picture of your optometry practice’s finances.

Revenue Streams

Revenue streams are the financial arteries of your optometry practice. They encompass various income sources from eye exams to eyewear sales. An excellent revenue stream is offering specialty services that set your practice apart, such as pediatric eye exams, dry eye management, orthokeratology, and low vision services.

To navigate this financial landscape, know when certain services surge with the seasons or when eyewear fashion trends spike. This insight helps you plan your resources wisely

You might also consider adding innovative revenue-generating strategies to your practice. Explore digital platforms, telehealth services, and emerging technologies, for example.

And don’t forget to assess the power of promotions. Are your discounts boosting sales? Using the data analytics feature on your practice management software can help you pinpoint where you are profiting and where you need to boost your marketing efforts.

Identifying what’s driving revenue ensures you’re not just seeing the numbers but understanding the pulse of your practice’s financial health.

Expenses

Managing expenses in your optometry practice requires attention to detail. Divide your costs into fixed (steady) and variable (changing) categories and scrutinize return on investment (ROI) for major expenses like advertising or new equipment. Keep utility costs in check and explore energy-saving strategies to reduce overhead.

By managing these expenses smartly, you’re not just watching the bottom line; you’re crafting a financially healthy future for your optometry practice.

Key expenses to consider include:

• Cost of goods sold (COGS): COGS assessment is vital for profitability. This includes the cost of frames, lenses, contacts, solutions, and supplements. Try to keep it around 30% or less of your overall practice expenses.
• Staff: This category covers all staff-related costs, from salaries and taxes to insurance and continuing education. Aim for around 20-25% of total expenses.
• Rent and utilities: These costs should include all maintenance associated with your building rental or property. A good benchmark is around 7% of total expenses, ensuring a comfortable and professional space.
• Equipment: Allocate 2-3% of expenses for instrumentation, including payments related to loans for these tools. Keeping your practice modern and up to date can help generate patients and customers.
• Marketing: Dedicate around 3% to get the word out — balancing print, online ads, events, and postage. However, if you have a new practice, you may need to allocate a larger portion of your budget to marketing to build awareness of your business.
• General office overhead: Your general overhead, which should hover around 7% of expenses, includes anything that doesn’t fit into your other expense categories. It is essential to watch this percentage carefully as it can quickly eat into your profits.

Profit Margins

Profit margins are the secret sauce for financial success in your optometry practice. By evaluating which services or products are delivering higher margins, you pinpoint where to focus and improve.

Industry benchmarks are excellent guidelines to help you understand the percentage profit margins you should be aiming for. For example, most eyewear sales generate around 61% gross profit, while contact lens sales have a profit margin of around 47%.

Once you identify your high-profit-margin products, promote them to increase profitability. A well-balanced menu of services and products ensures a healthy bottom line.

Other ways to optimize profit margins could include strategic pricing, cost-reduction strategies, and bundling services.

Patient Satisfaction

Patient satisfaction is all about making sure your patients leave with a smile. But how do you measure happiness? Collect their feedback through post-visit surveys or online reviews. This lets you examine their experience and understand what’s working and what needs improvement.

You also need to monitor patient retention. Maintaining positive relationships with your current patients is more profitable and less expensive than taking on a new customer. By increasing retention rates by just 5%, you can expect an approximate 25% increase in profits. Are they coming back for follow-ups? High retention rates mean they’re satisfied and trust in your care.

In the digital age, online reputation matters. Monitor reviews and comments. If a patient is unhappy, address it. Show you care and are eager to fix any issues. Happy patients become loyal ones, and they bring more customers with word-of-mouth referrals.

RevolutionEHR Help Optimize Your Practice’s Finances

RevolutionEHR is a comprehensive solution that enhances your financial performance, improves patient experiences, and ensures smoother operations. It’s a powerful ally in optimizing your practice’s finances.

In addition to the all-in-one practice dashboard to streamline your workflow, RevolutionEHR comes with numerous add-on services that enable you to increase your cash flow by:

• Tracking data
• Simplifying payments
• Increasing claims reimbursement rates
• Optimizing your marketing efforts

RevAspire, a built-in feature, helps you navigate CMS requirements, ensuring you’re on the right track with MIPS. RevBilling is a revenue-boosting powerhouse, optimizing claims, ensuring swift reimbursements, and providing follow-up, all with a dedicated team of experts at your side.

RevPayments simplifies payments, giving patients flexible options, including credit cards, Google Pay™, and Apple Pay™. This makes it more convenient for patients to pay upfront and increases convenience, efficiency, and revenue with secure storage for future transactions. Plus, the newly available E-PAY lets patients settle balances online, boosting payment speed and patient satisfaction.

SmartFLOW streamlines product ordering by contacting you directly with suppliers. This eliminates portals, increases efficiency and accuracy, providing better patient service.

RevConnect engages patients with reminders, updates, and campaigns, helping with patient retention and boosting your marketing efforts. It also helps you manage your practice’s online reputation so you can tailor the patient experience based on feedback.

Support Your Practice’s Financial Health With RevolutionEHR

Tracking your practice’s financial health and setting your practice up for ongoing success is essential in today’s fast-paced optometry environment.  RevolutionEHR’s cloud-based software streamlines your practice and ensures an outstanding patient experience with secure billing and payment features.

Ready to join the revolution? Request a demo and see how RevolutionEHR can improve your practice’s workflow, giving you the freedom to focus on your patients while setting your practice on the path to financial wellness, regardless of the economic climate.