Often, the net profit listed on a Profit and Loss statement (P&L) does not give an informed understanding on how your practice is doing.
First, the P&L numbers should be an accurate description of the income and expenses of the practice. However, this is not the case when the P&L statement includes depreciation. Depreciation is an imaginary number that makes the net profit appear higher than it really is. To have an accurate understanding of practice profit, depreciation must be addressed in the numbers. Additionally, some owners run other expenses through the practice that are not really practice expenses. The IRS allows some leeway here, and owners often take advantage of deducting these additional expenses, as it will lower their net profit, which then lowers their tax exposure. The correction of depreciation and other expenses that are not really practice expenses is the Adjusted Net.
Second, instead of paying themselves a wage, many practice owners pay all expenses then take anything left over and call it net. This is not a good practice. When the owner is working in the practice as an optometrist, the pay for that work is a true practice expense that must be considered. That optometrist wage needs to be added to the practice expenses.
Once you have all the true expenses of the practice, then you can subtract that total from the practice gross revenue collected to determine the true practice profit, or as Robert Schultz (CEO of Vision One Credit Union) calls it: the “Ownership Premium.” Mr. Schultz sets up the ownership premium in an article he wrote for Review of Optometric Business this way:
“An independent optometric practice owner is paid two ways directly from the practice:
1. Practicing as an OD seeing patients
2. The Ownership Premium
The Adjusted Net or the Ownership Premium can serve as the scorecard for the practice.
The question that needs to be answered is: How did the practice do this year over last year? The answer is to look at your Ownership Premium. Did the Ownership Premium go up, down, or stay the same? If it went up, then you are doing well. If the Ownership Premium either stayed the same or went down, then you have problems that need to be addressed.
You should look at your Ownership Premium at least monthly to understand how your practice is doing.