Understanding Expenses, Revenue & Profit

Introduction to Practice Financial Management

Financial management in an optometry practice is more than sending claims and checking the bank balance. It helps you understand whether each eye exam, optical sale, contact lens order, and medical eye visit is creating enough cash and profit to support the practice. Good financial management gives you the facts needed to set prices, schedule staff, manage inventory, and decide when to add equipment or another doctor.

Concept: Expenses

Expenses are the costs required to keep the practice open and serving patients. Common examples include rent, doctor and staff wages, payroll taxes, utilities, electronic health record software, billing fees, frame inventory, contact lenses, lab charges, equipment maintenance, malpractice insurance, and marketing.

Separate fixed costs from costs that rise with patient volume. Rent and software subscriptions are usually fixed. Lab bills, contact lens purchases, and credit card fees often rise as sales increase. Review both groups each month.

Real-World Example: An optometry practice notices that its optical cost of goods has climbed from 28% to 36% of optical sales. The owner reviews frame purchases and finds that staff are ordering too many slow-moving frames. The practice reduces duplicate styles, returns eligible inventory, and sets a monthly inventory budget. The goal is not to have the cheapest operation. The goal is to spend money where it improves patient care or produces a fair return.

Concept: Revenue

Revenue is the money the practice earns from patient care and product sales. It may come from comprehensive eye exams, medical visits, contact lens evaluations, glasses, contact lenses, dry-eye services, myopia management, specialty testing, and other services.

Track revenue by source instead of looking only at the total. A practice can have a full schedule but weak revenue if many appointments are low-paying, claims are denied, optical capture is poor, or patients leave without purchasing needed products. Review both charges and collected cash because billed revenue is not the same as money received.

Real-World Example: A practice adds a dry-eye evaluation that includes imaging, education, and a clear treatment plan. Over three months, the owner tracks completed evaluations, collected revenue, product sales, and follow-up visits. The service increases revenue because it solves a real patient problem, not because staff pressure patients to buy something.

Concept: Profit First

The Profit First method changes the usual formula from Revenue - Expenses = Profit to Revenue - Profit = Expenses. In practical terms, the practice moves a planned share of collected revenue into a separate profit or reserve account before spending the rest.

Start with a modest target that the practice can maintain. For example, an established practice might transfer 5% of weekly patient payments into a profit account and 10% into a tax account. Review the percentages with the practice accountant. Do not use this system to hide cash shortages or avoid paying vendors, employees, taxes, or lenders. It is a discipline for controlling spending and building a safer business.

Real-World Example: A two-doctor practice receives $40,000 in collected payments during a month. It transfers $2,000 to profit and $4,000 to a tax reserve before paying ordinary operating bills. The remaining cash becomes the spending limit. If expenses do not fit, the owner must improve collections, adjust staffing, reduce waste, or increase profitable services rather than quietly taking money from personal savings.

The Importance of Cash Flow Management

Cash flow management tracks when money enters and leaves the practice. This matters because insurance payments may arrive weeks after an exam, optical labs may require quick payment, payroll has a fixed date, and equipment repairs can appear without warning.

Build a simple rolling 13-week cash forecast. List expected insurance and patient payments, payroll, rent, lab bills, inventory purchases, taxes, loan payments, and large planned expenses. Mark expected payments as likely, uncertain, or overdue. Compare the forecast with the actual bank balance each week.

Real-World Example: A practice sees strong exam volume but has a cash shortage because several large insurance claims are delayed and an optical vendor invoice is due. The owner identifies the problem early, follows up on aging claims, pauses nonessential frame purchases, and protects payroll and tax funds. This is much safer than waiting until the account is nearly empty.

Conclusion

Managerial accounting turns practice activity into useful decisions. Know what each service and product line earns, understand which costs are fixed or volume-based, reserve money before it disappears, and review cash flow every week. A profitable optometry practice can pay its team fairly, maintain excellent equipment, invest in patient care, and withstand slower seasons without relying on guesswork.