The Practice Owner’s Financial Overview: A Comprehensive Percentage Breakdown Guide of COGS, Operating Expenses, & Net
KEY POINTS:
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(1) Cost of Goods Sold (COGS) typically ranges from 26% to 32% of gross revenue, varying by practice focus (retail vs. medical).
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(2) Operating Expenses often break down into: Staff (18–24%), OD Payroll (14–20%), Occupancy (5–8%), and Marketing (1–2%).
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(3) Net Income falling within 27–35% of gross revenue indicates solid profitability and efficient financial management.
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(4) Regular Monitoring of these metrics helps identify areas to reduce costs or boost revenues, driving long-term practice success.
Understanding the typical breakdown of expenses in a private optometry practice is crucial for assessing financial health and identifying areas for improvement. While there are no hard and fast rules for financial health of a private practice, general metrics reflect industry averages over the years and give practice owners a baseline for comparison.
Below are current industry metrics for key financial components, including Cost of Goods Sold (COGS), operating expenses, and net income, along with their respective benchmarks. Keep in mind that not meeting the averages does not suggest an unhealthy practice. Demographics can strongly influence both staff expenses and occupancy costs - however, a shrewd business owner will find ways to continually push their practice on its way to achieving and exceeding the
(1) Cost of Goods Sold (COGS) | 26-32%
COGS represents the direct costs associated with the products sold by the practice, such as frames, lenses, contact lenses, and optical accessories. Industry benchmarks indicate that COGS typically range from 26% to 32% of gross revenue. However, this percentage can vary based on the practice's focus; for instance, practices emphasizing medical eye care may have lower COGS, while those with a retail focus might experience higher COGS. (1)
(2) Operating Expenses
Operating expenses encompass the costs required to run the practice, excluding COGS. Key categories include:
(a) Staff Expenses (Non-OD Payroll) | 18-24%
This category includes salaries, wages, payroll taxes, benefits, and training for non-OD staff. A healthy range for staff expenses is between 18% and 24% of gross revenue.(1)
(b) OD Payroll | 14-20%
OD payroll refers to the compensation paid to optometrists within the practice, including both owner and associate ODs. Industry benchmarks suggest that OD compensation typically ranges from 14% to 20% of gross revenue. This percentage can vary based on factors such as the practice's revenue, the experience level of the ODs, and the compensation structure employed (e.g., base salary versus production-based pay). For instance, production-based compensation models often result in OD pay comprising 12% to 16% of the revenue they generate.
- Officer compensation pertains to the remuneration of individuals holding executive positions within the practice, often encompassing owner-doctors. The total compensation for all optometrists, including officers, should ideally not exceed 20% of the practice's gross revenue. (3)
(c) Occupancy Costs | 5-8%
Expenses related to the physical space of the practice, such as rent, property taxes, utilities, maintenance, and insurance. These costs typically constitute 5% to 8% of gross revenue. (3, 4)
(d) Marketing and Promotion | 1-2%
Costs associated with advertising, promotions, and public relations efforts to attract and retain patients. A well-run practice often allocates about 1% to 2% of gross revenue to marketing.
(e) General and Administrative Expenses
This includes office supplies, legal and accounting fees, insurance (excluding property), and other miscellaneous expenses necessary for daily operations. These expenses vary but are essential to track for effective financial management.
(3) Net Income | 27-35%
Net income, or the practice's profitability after all expenses, including COGS and operating expenses, have been deducted from gross revenue, typically ranges from 27% to 35% of net collections. Achieving a net income within this range indicates efficient financial management and operational effectiveness. (5)
Summary:
Regularly monitoring these financial metrics allows optometry practice owners to identify areas where expenses may be reduced or revenues increased, thereby enhancing overall profitability and ensuring the practice's long-term success.
External Sources
- Hayes, Nathan. "What's 'Normal' for Cost of Goods Sold?" Books & Benchmarks, April 20, 2024.
- "Key Financial Metrics to Track—and Improve—for Profitability." Review of Optometric Business, 2023.
- Wright, Mark, OD, FCOVD, and Carole Burns, OD, FCOVD. "The System of Paying ODs that Is Most Likely to Create a Highly Profitable Practice." Review of Optometric Business, July 13, 2022.
- Hayes, Nathan. "How Benchmarking OD Pay Can Inform Associate Bonuses." Books & Benchmarks, 2023.
- "Financial Benchmarking." Optometry Business, 2023.
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