So, you want to install an in-office finishing lab? Congratulationsyoure taking a very important step that can improve both customer service and the bottom line of your practice. But, before you shell out the money for that new edger, drill and/or tinting unit, please take the necessary time and effort to ensure that you are indeed making a wise financial decision.

Such a decision needs to be based on cold, hard finances. The installation of a finishing lab will require a serious look at your budget and projected income. Dont let your emotions get in the way; any perceived benefit that doesnt pan out will skew your budget, at the very least. So, lets take a look at how to ensure that you can recoup your investment on an in-office finishing lab.

What Will It Cost?

First, consider the actual costs involved in putting a finishing lab into a modern eye care office. For simplicitys sake, well assume that you have the necessary empty space prepared, including plumbing, wiring, cabinetry and countertops.

By the way, a very efficient finishing lab can fit into a space as small as 64 square feet.Optimal size for a finishing lab, however, varies between 120 and 200 square feet.

Also, make sure that you have enough work to justify your finishing labsay, at least five to eight jobs per day that you could do in-house. When determining this quantity, consider if your patients insurance plans allow individual labs to fill the order. This may affect your potential daily job count.

Again, for the sake of simplicity, lets assume that you will be either purchasing or leasing new equipment. Why? With new equipment, you get the full support and training of the equipment company and its representativesa great aid when undertaking such a major endeavor. Also, youre covered under a full warranty. Theres no problem with buying used equipment if its a good deal, but youre taking a calculated riskyou dont truly know the condition that its in or how well it has been maintained. And, the support and training that the manufacturer will provide may be limited when you purchase a used piece of equipment. Dont assume that the operation and maintenance for your new equipment will be easy, especially if youve never operated similar technology before.

Heres what youll need:

Assume that a modern, automated edging system, with all the bells and whistles (i.e., it can edge, groove and drill all materials), will run between $28,000 and $60,000so, on average, $44,000.

Dont forget your tinting unit and gradient tint machine.

And, youll need assorted dyes and chemicals.

Purchase a hand stone for doing fine hand-finished work and a felt wheel polisher for that lustrous finish on high-index lenses.

Also, for an additional $3,000, plan on purchasing various assorted hand tools and a Dremel-type drill for miscellaneous work.

The total initial outlay for equipment will be about $47,000. Set aside an additional budget of about $10,000 for uncut single-vision lenses, CR-39 clear lenses, CR-39 anti-reflective (AR) lenses and high-index 1.67 AR lenses. If you are a polycarbonate fan, allot for a working inventory of those as well.

Crunch Those Numbers!

Now comes the number crunching. The cost of installing the lab and obtaining the uncut lenses would run about $57,000, if we use our figures above. If you get a line of credit from your bank instead of leasing the equipment, not only are you actually purchasing the equipment, but also you can take the full Section 179 accelerated depreciation deduction, affording you the option of simply paying it off as early as you like.

Leases often end up costing you far more than it would appear on the surface, and the terms can be particularly difficult to modify if circumstances change. For example, lets use the figure of $57,000 spread over five years (60 months) at an interest rate of 8%. Your monthly payments on the equipment would be $1,155.75 per monthresulting in a total debt of $69,345, or $12,375 more than the cost of the equipment.

Lets say that you spend $45 for a good pair of uncut single-vision CR-39 lenses from your lab with average AR, and $52 for the same job fully edged and mounted. And, you pay about $140 for a pair of uncut single-vision 1.67 lenses with high-quality AR from a typical lab, and $148 for the same job fully edged and mounted. You retail the single-vision CR-39 AR lens for $140 and the high-index 1.67 single-vision AR lens for $240. For
a breakdown of costs and gross profit margins realized for the finished job from an outside lab, the uncut lenses from an outside lab, or your stock lenses, see Costs and Profit Margins, below.

Costs and Profit  Margins

Single-vision CR-39 lens with AR

Retail: $140

LabFull Job LabUncut Lenses Stock Uncut Lenses
Cost: $52 Cost: $45 Cost: $8
Gross Profit: $88 Gross Profit: $95 Gross Profit: $132

Single-vision 1.67 lens with AR

Retail: $240

LabFull Job LabUncut Lenses Stock Uncut Lenses
Cost: $148 Cost: $140  Cost: $36
Gross Profit: $92 Gross Profit: $100 Gross Profit: $204

Note the difference in gross profit margins for both lens styles.

In both of these examples, you are nearly doubling your profit margin by using stock uncut lenses rather than ordering them from a lab. This is where the rubber meets the road when trying to determine the economic feasibility of adding a finishing lab. Your exact figures for what you charge and pay for lenses may differ, but you should find that the spread between lab-ordered lenses and stock uncuts from a discount source will remain proportional.

To continue with our example, lets say that you can count on doing at least five pairs of single-vision lenses per day at least four days each week. Of these, two will be high-index 1.67 lenses and the other three will be CR-39 lenses. The difference between having lab-ordered uncuts and stocking the uncut lenses is:

Single-vision CR-39 AR lenses. A realized profit of $132 (gross profitstock uncut), minus $95 (gross profitlab uncut) equals an additional $37 per pair of single-vision uncut CR-39 lenses with AR that you order in bulk from a discount source.

High-index 1.67 single-vision AR lenses. The realized profit of $204 (gross profitstock uncut), minus $100 (gross profitlab uncut) shows an additional $104 per pair of uncut 1.67 lenses with AR ordered in bulk from a discount source.

So, if you did two pairs of high index lenses and three pairs of CR-39 lenses per day for four days, you would earn a profit of $832 per week from high-index lenses, and $444 per week from CR-39 lenses. Multiply this by four weeks to get a total realized profit of $5,104 per monthjust by being smart about how you buy and stock your uncut SV lenses!

You now have some options. You have to make the lease payment, $1155.75 per month. You could accelerate the payments and pay down the debt faster (if this option is available to you in the terms of your lease), or you could channel the extra cash into other itemsframe displays, promotion, etc.

Or, if you took out a line of credit with your bank, you might be able to negotiate a lower interest rate than will be available to you in a lease. (For that matter, consider keeping a line of credit of at least $50,000 open with your bank that you can utilize as necessary.) And, with a bank line of credit, you can pay off your debt as early as you like with no penalty, and you will be able to take the full Section 179 equipment deduction in the year that you purchase the equipment.

Actually, taking out a line of credit may improve your relationship or standing with your bank. A personal banker who understands your needs is a great partner in achieving your financial goals.

Nevertheless, buying single-vision uncut lenses in bulk and edging them in-house is a very reliable way to build your net income and to increase your net-to-gross ratio. We always aim for a net-to-gross ratio of 37%after all expenses have been met, youd realize an income equivalent to 37% of the offices gross income. So, if an office grossed $1,000,000 per year and ran on a net-to-gross ratio of 37%, the owner would take home $370,000 (before accounting for personal income taxes).

Whats the Down Side?

When you stock and cut your own lenses, remakes are on your dime, and you usually absorb 100% of the original cost, so you will need to figure that into your net profit too. So,  keep re-dos and remakes under very, very strict control in your office.

Do not assume that you can turn untrained staff loose on the edging machine. The new generation of machines makes the process easier and much more accurate, but you still must have a firm grasp of optical principles to do consistent and excellent work on every job, every day. Utilize a staff members bench experience, train a staff person with general optical experience, do the work yourself, or hire a dedicated person for this task. Dont forget to factor the technicians wages into your actual net profit.

The process of analyzing net profit is not glamorous, but it is necessary for every purchase you make. Too often, practitioners base decisions on emotions (perceived benefit) instead of financial planning, accurate practice data, and/or reasonable financial projections.
Drs. Travis and Cheryl Adlington are in private practice in Reno, Nev. They also offer optometric consulting services through their company, A River Runs Through It, LLC. Contact them:

Vol. No: 145:03Issue: 3/14/2008