Controlling Cost of goods
What you can do to identify—and then manage—these bottom-line influencers
By Kirk Kastens
Are you doing everything you can to ensure that you have the proper tools and systems in place to help you control costs? Do you know what the greatest expense in your practice is? If you have no idea, then put it on your list of things to accomplish for this month.
In over 25 years of consulting experience, we've found that over 90 percent of the time, the highest expense is cost of goods sold (COGS). So, let's look at this specific expense and consider what you can do to help control it.
To get started, every business needs to have some controls in place to help them analyze where every dollar is being spent. Once this is done, the numbers can be used to help measure, monitor, and make changes to ensure that expenses can be managed in the practice. When you have your systems in place (which should include a budget), ask yourself what you can do to help improve the bottom line. The following can help you control or gain more control of your COGS.
1. MAKE YOUR LAB A BUSINESS PARTNER
Do the labs you're doing business with simply provide product or are they trying to build a relationship with you to help you run your business better? Do you only hear from your lab after you've complained about something, or do they check in occasionally and share reports that help you understand what your lens usage and remake percentages are? They should be helping you understand what you can do to help lower your remake percentage if it is out of control. Most labs have a remake goal of about six to eight percent.
As you ponder the relationship that you have with your lab, consider how many labs you do business with as well. Can you improve your COGS by simply reducing the number of labs you are currently utilizing by one or maybe even two?
This leads to the next opportunity for improving your COGS.
2. NEGOTIATE PRODUCT COSTS
After you have analyzed your budget and a new goal has been set for the next 12 months, set up a meeting with your labs and see if they can help you achieve that goal.
If you can eliminate one lab, then you can certainly promise more business to another one and perhaps get a higher volume discount. You won't know until you ask.
3. CONSIDER A BUYING GROUP
Sometimes this is difficult to evaluate, and it's not always an option that everyone even wants. However, it's an option that many of our clients have used to help lower expenses.
4. MINIMIZE LENS REMAKES
Again, your lab should be helping you control this through staff education and training. Make sure your staff is properly trained and put a system in place to ensure that they are at the forefront of new technology.
5. CONSIDER AN IN-HOUSE LAB
Determine what your break-even point would be so that you know how many jobs a day you need to do in order to consider adding an in-house lab.
6. IMPROVE YOUR INVENTORY MANAGEMENT
If you have a lot of money tied up in extra inventory, consider ways to free some of that up to work for you in other ways. Consider putting a system in place to control how many frames you have and maintain the proper levels. If you don't know how many frames you have in stock, then you probably have more than you should.
Here's a basic rule: your frame board inventory should turn at least three times a year. For example, if you move about 1,500 frames a year, then you should have an inventory of no more than 500.
7. INCREASE COLLECTED REVENUES
If patients are walking out of your office paying you 50 percent of what they owe you then there is room for improvement.
Review this with staff and make sure that they understand your office policies when it comes to payments.
If the final balance is not 100 percent due at time of service, then you should probably change your policy or implement a new one.
Instruct your staff to give the patient an option of how to pay—cash, check, or charge—and not an option of how much to pay.
8. CUT BACK ON DISCOUNTING
I'm all for any type of strategy that increases revenues, but savings and discounts are given too often— and most importantly, they fail to make the practice more profitable.
We find that many of our new clients' fees are already too low and to discount them further makes no sense. Often, focusing on low prices becomes the main focus of the practice instead of excellent service and high-quality products.
Price is always a factor in a patient's decision-making process, so do everything you can to minimize a patient's risk and maximize their interest and perception of value. Your patients don't know what they don't know unless we educate them about our services and products.
There are certainly many more strategies that you can put in place to help you control your expenses.
But whatever you do, don't make the mistake of sitting back and expecting things to change on their own.
Instead, take initiative and make change happen by putting a plan in place to control everything that you can. EB
Kirk Kastens is a senior consultant at Williams Group.