Cash Generation vs. Cash Conversion—Why Both Matter to Your Practice
1. Cash-Generation Metrics
Sales-to-Assets Ratio: How many dollars of revenue each dollar of assets produces.
Benchmark ≈ 4.7× revenue for every $1 tied up in assets
Gross-Profit Margin: What’s left after covering cost of goods (frames, lenses, labs).
Benchmark ≈ 72 % retained before overhead
Net-Income Margin: True take-home profit after every expense.
Benchmark ≥ 15 % is a floor for professional practices
*Benchmarks are a starting point, not a ceiling. Use them to spot gaps, then aim higher than “average.”
Why it matters:
High sales-to-assets means your exam lanes, optical inventory and equipment are producing. Strong margins show you’re pricing correctly, buying wisely and controlling expenses. Together, these three numbers answer the question: “Are we generating enough profit from what we already have?”
2. Cash-Conversion Metrics
Think of these in days—the shorter, the better.
Inventory Days: Ideal Target ≈ 121 days (≈ 3 turns/year)
Frames aren’t collecting dust; tied-up cash is freed quickly.
Accounts-Receivable Days: Ideal Target ≤ 20 days from billing
Insurance and patient balances hit your account while they’re still fresh.
Accounts-Payable Days: Ideal Target ≈ 30 days
You keep cash a sensible length of time without jeopardizing vendor goodwill.
Why it matters:
A high gross margin is useless if most of it sits in unsold frames or uncollected insurance claims. Tight conversion cycles ensure today’s sales fund tomorrow’s payroll, marketing and growth.
3. Reading Benchmarks the Right Way
Industry averages are merely the midpoint between the best and the worst performers, and they can be skewed by incomplete surveys or sloppy bookkeeping. Treat them as warning lights, not finish lines:
Compare, then customize. If your receivables run 35 days while the benchmark is 20, dig into why—but set your goal based on your own payer mix and staffing reality.
Look for lift. Once you meet the average, set the bar higher. Continuous improvement compounds quickly.
Tie numbers to action. Ratios improve only when linked to concrete steps—renegotiating lab terms, tightening recall protocols, automating statements, etc.
4. Putting It All Together
Imagine two practices with identical revenue:
Practice A matches benchmark margins but waits 45 days for insurance checks.
Practice B collects in 15 days and carries leaner inventory.
Which owner sleeps better? Which can seize an opportunity—a new OCT, a second location—without a bank loan? Cash-conversion speed often separates a stressed clinic from a thriving one.
Next Steps for Your Practice
Calculate all six ratios using your most recent financials.
Spot the outliers. Anything far from the targets deserves a closer look.
Prioritize one change in generation and one in conversion for the next quarter.
Track monthly. Improvement is motivation; stagnation is a red flag.
By mastering both sides of the equation—making cash and moving cash—you build a practice that’s profitable, liquid and primed for growth.
