How to Understand Your Practice Overhead and Profitability with the Forensic Study

by | Jun 15, 2022

In a business environment that grows ever-more complicated, it often becomes difficult to understand how your practice expenses relate to your revenue.

Harder still is untangling the relationship between overhead expenses and direct expenses.

What is Overhead?

Overhead expenses are necessary business costs that are not directly associated with the services you provide or the products that you sell. For instance, it’s obvious that you will have a rent or mortgage expense on your business. After all, every brick-and-mortar business has to have someplace to exist. It’s also likely that you will need to create a website, and handle the expenses that come with it, and you’ll also need to insure your business. These are all examples of “indirect” or “overhead” expenses. They are not directly related to providing eye exams and vision care, but they are necessary in order to enable those services.

How Overhead Relates to Profitability

In order to evaluate how each of your profit centers are functioning, you need to be able to understand how much net profit they provide to your bottom line. Sounds simple, right? “I sold these glasses for $495, and they cost me $215 on my lab bill, so my profit is $280, the difference between the two, right?” Not so fast. How much did you pay your optician for the 30 minutes of time required to fit the patient? And what were the overhead expenses associated with the sale? That sale didn’t happen in the parking lot, so there is a certain value to the space itself, the utilities that were running at the time, the cost of the janitorial service that made sure the room was clean and ready for business and so on. As you can guess, evaluating overhead expenses can get pretty muddy (and exhausting) pretty quickly.

The Forensic Study

Overhead calculations can involve lengthy, unpleasant calculations and time-consuming journeys through your P&L statements. Or you can leverage an easy-to-use tool that will simply allow you to plug in the components of your business revenue and expenses (including your overhead), and help you assign value to each of your profit centers. The Forensic Study by GPN has all of the math already done. All you have to do is plug in your top-line numbers, and make a few simple settings. The result is a clear, meaningful report that helps you understand how much each of your business centers (optical, clinic and contact lens) are costing you in overhead expenses.

The Monday Morning Number

You may be tempted to question whether you really need to understand much about overhead and indirect expenses. After all, if you have money left in your bank account at the end of the month/quarter/year, then you’re ahead of the game, right? Imagine if you had a clear understanding of how much revenue each profit center needs to generate just to exist. In plain language, how much does it cost you just to open the door of your optical every week? We call that figure the “Monday Morning Number.” If you know that number, then you understand how much net revenue each part of your practice needs to generate in order to support itself.

It’s easy to overlook overhead. Honestly, it can be really hard to figure out. But if you leverage the Forensic Study, you can get there without the effort. You will be better equipped to understand your practice profitability as a whole, and far less likely to get blindsided by your P&L at the end of the year.

By Heidi Della Pesca

Exploring innovative management concepts - just for fun.

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