Why Comparing Financial Ratios is Critical for Your Optometry Practice
Six Critical Metrics to Help Your Optometry Practice Unlock Hidden Cash
A thriving optometry practice is about more than delivering excellent patient care. It requires financial acumen. But how do you know if your practice is performing at its best? Monitoring some key financial ratios is a powerful way to improve your practice.
Your financial statements tell you a story. You can use that story to identify inefficiencies, optimize cash flow, and unlock hidden profits. Here are six financial ratios that will show you how to fix cash flow problems in your practice.
Ratios to Measure Cash Generating Activities
Sales to Assets Ratio
How much revenue do you generate for each dollar invested in equipment? A low result may mean you can increase income without buying more stuff. A high result is what you want. But be careful. It could also mean you'll run into capacity issues soon.
Calculation: Sales / Assets = Sales to Assets Ratio
✔ Benchmarking Benefit: Calculating a ratio is useless unless it's compared to something else. Use industry averages as a minimum threshold and work to exceed them.
Gross Profit Margin
How much revenue do you get to keep to spend on other things? Gross profit is your top-line revenue minus your cost of goods sold, (frames, lenses, and lab fees).
Calculation: Gross Profit / Sales = Gross Profit Margin
✔ Optimization Tip: What if your margin is lower than industry standards? You may need to renegotiate supplier contracts, adjust pricing strategies, or improve product mix.
Net Profit Margin
How much money do you keep after expenses? This needs to fund your debt payments, taxes, and savings to grow. A low net profit margin could be a sign your overhead is too high.
Calculation: Net Income Before Taxes / Sales = Net Profit Margin
✔ Competitive Edge: You may not need to cut costs to improve this ratio. Your payroll is part of the overhead. It is also your next biggest revenue-producing asset. Explore staff processes and efficiencies to help enhance profitability.
Ratios to Measure Cash Conversion Activities
Inventory Turnover (in Days)
Is your inventory at an optimal level? Or do you have too much cash tied up here? This ratio measures how long your inventory sits on a shelf. If your turnover is too slow, it's time to reassess your strategy. It could be as simple as not ordering as much product next time.
Calculation: (Inventory / Cost of Goods Sold) * 365 = Days in Inventory
✔ Profit-Boosting Strategy: Use this to set the optimal inventory level for your practice. This forces you to be more mindful of your product mix.
Accounts Receivable Days
How fast do you collect the money you're due? This metric tracks how many days it takes to collect from patients and insurance providers. A high result here can create cash flow problems. This delays your ability to pay expenses or invest in growth.
Calculation: (Accounts Receivable / Sales) * 365 = Accounts Receivable Days
✔ Actionable Fix: Improve billing processes, enforce stricter payment terms, and develop efficient insurance claim management.
Accounts Payable Days
How many days does it take to pay your bills? This ratio shows how fast you pay suppliers. Paying too fast can strain cash flow. Slow payments may damage vendor relationships or lead to late fees. It is best to keep this steady most of the time.
Calculation: (Accounts Payable / COGS) * 365 = Accounts Payable Days
✔ Cash Flow Control: Use all three ratios in this section to determine your cash gap. The period of time where you've paid your bills but are still waiting for the money to come in or the inventory to sell.
The Power of Financial Analysis
Use these financial ratios on a regular basis. You'll gain valuable insights into your practice’s strengths and weaknesses.
Pinpoint Areas for Improvement – Identify inefficiencies that may be draining cash.
Improve Cash Flow – Adjust billing, inventory, and expenses for better financial stability.
Increase Profitability – Learn where to optimize pricing and cut unnecessary costs.
Enhance Business Value – A well-managed, high-performing practice is more attractive to potential buyers or investors.
How to Take Action
Benchmark Your Practice
Gather your financial data and compare your ratios to industry standards to start. Working with a financial expert can help you understand where you rank.
Create an Improvement Plan
The ratios show you the precise areas of your business that need the most attention. Focus on strategies in the appropriate areas to optimize cash flow and profitability.
Monitor and Adjust
Financial health isn’t a one-time checkup—it’s an ongoing process. Regularly track your ratios to ensure your practice is in top financial shape.
Ready to Uncover Hidden Cash in Your Practice?
If you’re serious about maximizing your optometry practice’s financial performance, don’t leave money on the table. Schedule a complimentary "Mining for Hidden Cash" session with Eric Levenhagen. We'll analyze your numbers with you and create a roadmap to a more profitable future.
Take the first step toward better cash flow and a stronger business today!
Schedule Your Session Now »
