It’s simple. The profitability of a business can be improved in two ways, increasing revenue or decreasing costs. That might seem as  obvious as saying the key to winning a game is to score more points than your opponent, but while most business owners spend a significant amount of effort increasing revenue, they often do not pay enough attention to costs.
Even small monthly savings can have a large impact on your ultimate profitability. For example, if a dispensary has a net profit margin of 20%, then every 1% savings in costs increases your take home profit by 5%. For a dispensary with net margins of 10%, each 1% savings increases your take home by 10%! Therefore, the successful business owner must pay close attention to each and every cost to obtain maximum profits.
Can Fixed Costs be Variable?
Costs can be divided into fixed and variable costs. Theoretically, fixed costs are just that, not dependent upon sales volume and inflexible. However, is that really the case? Major fixed costs include rent, utilities, cleaning, legal, accounting, insurance, and phone and Internet. While these costs are generally not revenue dependent, each must be periodically reviewed and minimized. For example, the current real estate climate is depressed. Perhaps your landlord would consider a reduction in rent, possibly for an increased term commitment. Phone (including cellular) and Internet fees have become more competitive, so make sure to re-bid these periodically. In addition, ensure that there are no duplications of services. We have seen dispensaries run as a business separate from the practice in which they are located, paying duplicate Internet and phone charges when it is clearly more economical to share these services.
Reevaluate your insurances at regular intervals and ensure that coverage levels are correct. If you have lessened inventory you may be able to decrease coverage. Consider raising deductibles where appropriate as this is generally financially efficient. Discuss with your legal and accounting professionals ways in which you may create savings in their services as well.
Minimize Your Variable Costs
The major variable costs include frame and lens purchases, marketing, shipping, and labor. Frame costs can be controlled by minimizing the number of vendors, thereby increasing the amount of business with each remaining vendor. Once the vendors know that you will be eliminating some lines, you may be surprised at the discounts offered! Take advantage of opportunity buys such as overstock and discontinued frames where advisable. Avoid excessive inventory which decreases your return on investment and results in being stuck with out-of-date frames. Place fewer and larger frame orders to save shipping costs. Ask your sales representatives for advice or special deals. Avoid consignment in lieu of discounts, as you will generally come out ahead with discounts in the long term.
Discuss strategies for controlling lens costs with your laboratory. You may find that they are able to sell certain brands of progressive lenses or anti-reflective treatments at discounted rates. Use stock lenses when available. Take great care to avoid errors and redos. If you have a doctor who has a higher rate of redos than average, consider meeting to discuss ways to alleviate this. Tread carefully, though, because no doctor likes to be told they are a bad refractionist! Avoid the trap of bringing edging in house unless your monthly volume is high enough. Generally, the cost of leasing an edger, supplies, electricity, and breakage outweigh any potential savings unless volume is well over 100 pairs per month.
Don’t Spend More…Spend Smarter
Every business must carefully track marketing costs, but avoid the temptation to cut them during a down economy. This often results in the “death spiral” syndrome, in which decreasing revenue causes decreased marketing causing decreasing revenue. Don’t spend more, spend smarter. Track marketing results. Do not neglect your current customer base because someone else is out there marketing to them! Take advantage of free marketing such as social networking sites like Facebook and Twitter. Join a club or be active in the community.
Carefully evaluate shipping costs, both inbound and outbound. Discuss with vendors preferred shipping methods as your default shipping may be next day which is not always necessary. Stock purchase orders may not have such time urgency and may be shipped ground. Outbound shipping may be less expensive through the U.S. Postal Service, but insurance costs and limited trackability may limit its use. If you use a courier such as FedEx or UPS, make sure that you understand their ground delivery areas. Generally ground delivery will arrive next day within a radius of approximately 200 miles (time and cost maps are available online). We have often seen businesses ship using the more expensive next-day service when ground would have also arrived next day.
The Potential of People
Labor costs include salary and benefits. Review all benefits for potential savings. Make certain that terminated employees have been removed from benefit plans. Consider raising inpatient deductibles or having a waiting period before eligibility. Create an enjoyable working environment. Your employees may be willing to forego higher pay elsewhere to work in a more pleasant environment. Our advice has generally been that labor costs are the last place to cut, since happy productive employees are the life blood of your business. Happy employees are more productive, and this increased productivity should more than pay for itself.
Each business has its own unique set of costs. What is common among all businesses is the effect of costs on the bottom line. A $200 per month savings adds up to $24,000 over 10 years, which may be a significant percentage of your earnings. You must be careful not to let quality and service suffer, but careful attention to your costs will result in a healthier, more profitable business in a better position to grow and prosper.
Judd Sky is the President of optical management company Partners In Vision. Contact feedback@visioncareventure.com with comments and/or suggestions for future topics.
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