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54 S P E C I A L E D I T I O N 2 0 1 5 • O P T O M E T R I C M A N A G E M E N T . C O M BUSINESS FINANCIAL FOUNDATIONS A S OPTOMETRISTS, we must stay on top of innovative products and technology in order to better serve patients. As business men and wom- en, it's important to make sure that investments into new products are smart fnancial decisions. To make the best business deci- sion, invest a little time to project your proftability before you invest a lot of money and time into buying something new. THREE RATIOS When you look at the fnancial side of the equation here, there are three ratios you can look at to evalu- ate fnancial Return on Investment on a piece of equipment, product or service: 1. Product proftability ratio. De- termine the average Cost of Goods Sold (COGS) for a given line of prod- ucts. Te more specifc you are, the better. Ten determine your average revenue per unit sale. If the average revenue per unit sale is greater than the COGS, then start planning how to put this item into your product portfolio. Te more detailed you are at determining both COGS and revenue per unit sale, the more accurate your projections will be and, thus, the more accurate in- formation you will have when mak- ing your decision. 2. Te TCO Ratio. Calculate the Total Cost of Ownership (TCO) of the product or service. Tis is found using the following equation TCO = Te purchase price + ([maintenance fees + technical support charges + anticipated hardware fees] x 5 years) + training costs. You will also need to calculate the Total Revenue (TR) possible. TR = Number of possible procedures (in one month) x 60 months x reim- bursement throughout the ofce (or potential increases in efciency). Compare the TCO to the TR to determine whether you will get a positive return on investment for the product or service you are consider- ing. If TCO is greater than TR, do not purchase the item. Te costs are greater than possible revenue stream in your current situation. An example: A piece of equipment costs $30,000. Maintenance fees are $1,500 per year and you will need $500 of hardware and four hours of support time at $100 per hour. Train- ing cost was $500. So, TCO would be TCO = 30,000 + ([1,500 + 500 + 400] x 5) + 500 = $42,500 Based on your previous month's experience, there were 20 patients who would have qualifed because the procedure was medically neces- sary. Tese procedures would have been performed at a rate of $50 per procedure reimbursement. TR = 20 x 60 x $50 = 60,000 Based on the math, the equipment is worth it to purchase it. 3. Te Chair Cost ROI Ratio. Calculate your chair cost (CC). Chair cost can be found by divid- ing the total fxed expenses by the total number of hours of operation, regardless of whether patient care is being delivered. Next, calculate the Potential Rev- enue (PR). PR = number of possible service encounters in the given time period x the average anticipated re- tail cost of the service. If CC is greater than PR, this means the cost of using the product or service is greater than the pos- sible revenue stream. You can either choose not to purchase the equip- ment, or fgure out a way to decrease chair costs or charge more for the service you want to provide. DO THE MATH In summary, do your homework and make sound buying and pric- ing decisions. Doing so will not only make your business more prof- itable, but, more importantly, it will save a lot of time and energy in the long run. OM SCOT MORRIS, O.D., F.A.A.O., is chief optometric editor for OM, director of Eye Consultants of Colorado and managing partner of Morris Educating and Consulting Associates. Email smorris@eccvvision.com or visit tinyurl. com/OMcomment to comment. PUT PURCHASES TO THE TEST Three Key Criteria A new piece of equipment or product should meet the following criteria before it is considered for purchase: • Will it improve patient care and/or consumer satisfaction? • Will it create a positive revenue stream through a given period of time? • Is it more costly not to have it? CALCULATE THESE THREE EQUATIONS BEFORE PURCHASING NEW TECHNOLOGY