If you’re worried about rising costs, you are not alone. It seems like the price of pretty much everything is through the roof, and business owners all over the country are taking steps to tighten their belts and reduce spending.
Your lab bill can (and probably does) change frequently, as your vendors are also adjusting their pricing to accommodate economic changes, and you probably know that a full, in-depth Cost of Goods (COGs) analysis can be labor-intensive and time-consuming. Don’t panic! There’s a simple check you can do in just a few minutes that will help you keep track of your costs so you can make your own adjustments when and if you need to, keeping you ahead of the curve in profitability.
What You Need
To do a simple thumbnail check of your COGS in any product category (frames, lenses, or contact lenses), you need two pieces of information that should be readily available to you:
- Your total revenue for the category (all your patient payments, plus any 3rd-party reimbursements);
- Your P&L line item for costs in that category.
Select Your Time Frame
Allow a few weeks for the dust to settle, and then pull these reports for the period you want to analyze; it takes time for all payments to arrive. You also need to be 100% certain that you’re measuring the costs (P&L) and revenue (sales) during the same time frame. I recommend that you keep your time period short but not too short; a month is just about right, but this method works well for quarters, too.
In EDGEPro, we refer to the total revenue (patient pay and insurance payments) generated by a sale or a product category as “True Revenue.” If you’re an EDGEPro user, you can find that information by navigating to your Sales Summary, selecting your time frame in the date picker, and setting your pricing filter to “True.” That will give you your total revenue numbers in each of your product categories easily. If you don’t have EDGEPro, you’ll need to use your PMS to find the total revenue generated by each product category you want to check.
A couple of important things to remember when you’re checking these numbers. Third-party reimbursements can take a few weeks to arrive, so make sure you allow enough time for those receipts to be posted. Secondly, your insurance payments really need to be applied on a line-item basis in order for this to be as accurate as possible.
P&L Category Expenses
Pull your P&L for the same time period. When your lab bill is posted in your accounting software, hopefully you (or your practice manager) are assigning your expenses by product type. If you’re not, you’ll need to pile up the lab bills and do a little bit of calculator math. I would also highly recommend making that change in your bookkeeping if at all possible. It will make this even easier going forward.
Do the Math
Once you have your revenue and your costs for the same period, just do the calculation. Divide the cost by the revenue, and check the ratios. I’ve listed our recommendations for the percentage of Cost of Goods Sold for each category below. If your ratio is running high the first time you check, then keep an eye on it. If that category becomes a repeat offender, then you need to dig into details and potentially make some adjustments.
Frames: 35% or less
Ophthalmic Lenses: 25% or less
Contact Lenses: 62% or less
There are only two ways you can change your Cost of Goods Sold as a ratio. Either you generate more revenue with your products (review your pricing strategy) or you reduce your product costs. Both of these are solid options, and should be considered carefully.
Re-evaluate your markup strategy first and foremost. Yes, you want to make sure you’re competitive in your marketplace, but industry wisdom is currently recommending a minimum of 2.5x markup. A 3x markup is extremely common. Check your competitors, talk to your peers and your reps about what other practices are doing, and take a hard look at your options. You may need to make some adjustments, particularly if you serve a large number of managed vision care patients. Make sure your pricing strategy works especially well under those plans.
This option can be a little tougher, but even simple steps can make a big difference. Start by reviewing your lab bill to ensure that you are receiving all the discounts you are entitled to. Double-check with your lab and product reps as well as your affiliate or buying group to see if any additional discounts are available. Consider high margin products (like clearance or closeout frames) where available and appropriate, and take a look at your redo’s and breakage rates. All of these will help you make the most of every dollar that comes through the door.
This quick-check procedure is not by any means comprehensive, and there may be times when you really need to drill down to the details on your product costs. However, keeping a weather eye on the big picture and routinely checking these ratios will greatly increase your ability to head off problems due to rising costs. Stay on top of your COGS and stay ahead of the game!