Author: Bob Hutchinson

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The Rules of Finance

Thinking about buying equipment or improving your practice, then think carefully.

Like buying houses or cars the project is full of emotion which normally means the nearer we get to selection the less our heads play a part in selection and the more do our hearts.

This is just as true for us in optical practice who are far more used to selling than buying large price items.

So, before you fall in love with your hoped-for future purchase just ensure that you have all the facts in front of you which will encourage you to drive a hard bargain and get better value for money.

Eros Consultants spends much of its time advising optical and audiology practices to assess the charging of Direct Sales taxes and to assist in a greater reclamation of VAT on purchases.

We do this with the owners and proprietors or their accountants and auditors of whom unsurprisingly many do not understand the laws on partial exemption and de minimis, nor the process of using the only approved methodology of Full Cost Apportionment.

As opticians and audiologists we are a very small sector of the retail market and therefore we are a niche market in accountancy terms which is why the new requirements under MTD (Make Tax Digital) are hard for us to adhere to with “off the shelf” accountancy packages which do not take into account de minimis percentage vat purchase reclaims.

It is during our VAT investigations that we discover many practices are running on luck rather than accurate forecasting and budgeting. Yet here is the very start of measuring what the practice can afford and the cost benefit that will be achieved by a makeover or new equipment.

For simplicity let us look at equipment purchase.

A new piece of equipment might provide either better technology and  sound results than the one you have already in clinic, or it could improve the speed of clinical process, provide a greater safety in diagnosis, or an easier retention of recordings for future comparisons over time.

It might require further assistants or more space or an increase in clinic rooms, thus having a negative income affect.

If improperly introduced to the patient whilst they may benefit from the clinical results, they will never understand the improved outcome in your care for them.

So, if you want to put improved footfall on the positive side of your scoping list to decide on a particular product make sure you build in time to explain to every patient the benefits of your newly purchased kit. And tell them what it is and does, why you bought it and a ballpark figure for its costs. Only then will it become a conversation amongst their friends.

OK, so you have chosen to look at a piece of equipment, now what?

As seen every year at Optical Exhibitions you will find there is a very large and broad range of equipment dealers.

But you needn’t wait to do your research at a fair, the internet will provide you with most of the information online to compare and contrast each machine in each category.

Often buyers as with cars have an affiliation with a brand but this can be restrictive and widening the search amongst all companies will assist in improved appraisal and greater savings. Your patients are not worried about the branding!

Several equipment companies now cater for the “best of” within a range, choosing from all over the world rather than being restricted to a one company solution.
If there are two similar options, then use these as possible bargaining tools when discussing with the sellers. This is a buyers’ market to compare value and costs and re look at your budget.

Decision made, price confirmed and ready to make the purchase.

Wow wait on………How close are you to breaking your de minimis limits each quarter? A mistake in payment type now could wipe out your reclamation of a large percentage of your purchase VAT.

Your purchase is almost certain to be treated as an exempt purchase and with its VAT content of up to £16000 and a maximum de minimis level of a max of £1875 a quarter that figure plus the percentage treated as exempt in your non-attributable purchase vat will cost the business dearly.

That goes for refurbs of the clinical areas as well.

The answer is to lease the purchase of the equipment over a set period of years thus reducing the exempt vat content by a 1/36th or 1/60th or 1/84th per month assisting you to stay below the de minimis.

Just as we suggest you check your budget and your quarterly vat calculations before you consider buying we also suggest you look at the last years completed vat calculations as well as any quarter that had a high exempt + % non-attributable sum, take this away from £1875 for a quarter or £7500 for a year and you will know what leeway you have to buy and add more leases.

It is also a good idea to research the lending market before you start the purchase process. In fact, get comfortable with your lender and make your own choice not that of the equipment seller. Otherwise it would be like using the lender of a mortgage that your house seller insists you choose!

Dealers select lenders to advise you to use for many different reasons, friendship, ease and speed of selling their equipment or possibly for pecuniary advantage. Select your own, agree the best rates and head to your dealer with a pre-emptive offer.

What to look for in leasing with a lenders package.

To the untrained eye one lease looks and sounds from the advertising blurb very much the same as another. Not True!

Until recently, when arranging finance for equipment and refits you had to choose between having 100% Tax Relief in the 1st year by a capital purchase or leasing and losing the relief to protect exceeding your VAT de Minimis. Now you can have the best of both worlds, through a recent compromise solution specifically for the Optical Market named Optilease

OPTILEASE is designed specifically for Opticians and optimises your tax relief, giving you 100% Tax Relief in the 1st year AND protecting your important VAT de Minimis position.

Optilease was originally brought to the market 6 years ago by Snowbird Finance at Optrafair and to those who understood Partial Exemption in those days was greeted with great zeal. More now understand its importance and Optilease as a system is being offered by a few other lenders.

However Optilease as a lending system can be manipulated by lenders to suit their requirements so while it contains the elements of capital relief and de minimis reduction some offering it wrap it within as a minimum term agreement rather than a fixed term agreement as originally and still provided by Snowbird Finance.

Under the Snowbird Optilease agreement at the end of the term (7 years + one month) you own the equipment for a small nominal fee.

Minimum term agreements mean that your monthly charge continues rather like continuing to pay monthly for your smart phone and sim even after the phone has been paid for!

What you should look for

Looking at the market currently the Snowbird Option provides:

For the last 6 years Snowbird Finance has been providing Opticians with an OPTILEASE Solution where Opticians can:

* Claim 100% Capital Allowance in the 1st Year if Optilease.

* Own the equipment at the end of the term

* Fixed rates for minimum 7 Years

* Optimises Tax Relief

* Spread the VAT over the term of the agreement – Protecting their VAT de Minimis position

Like the equipment vendors who provide a spread of reputable brands to cover all requirements, so does for example Snowbird Finance who will work out the best finance package for the customer through their network of lenders. One size in lending does not fit all.

As VAT advisors we have regularly been called in to assist purchasers in checking their de minimis levels by finance houses.

Consulting assistance provides guidance to the Optician and accountant about how to best handle this.

Remember you can use additional finance loans, leases or lease purchase for much more than equipment, such as refurbs, tax bills and other smaller purchases allowing you to iron out any hot spots in your capital expenditure during the year.
Eros Consultants has been providing optical practices large and small as well as other industry players in equipment and computing finance advice for over 20 years and this article has been updated to the current position today along with our experiences with companies over that period.

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Budgeting and Forecasting

Practice Management Software: What Are The Basics For Optical Practice Today?

Practice Management Software: What Are The Basics For Optical Practice Today?

Originally IT systems were only conceived as an automatic method for sending recall letters. So it sat on the desk, you’ve paid for it, and only use 15% of its working capability. Makes no sense does it?

Flexibility, ease of use, robustness and a range of modular tools that you can gradually engage; these are the buzzwords to look for. As is the ability to get all the information you have fed into the box out in a readable and useful way. Whatever it produces in reports, there is a great advantage in getting .csv files out and into Excel type spreadsheets to play around with yourself.

This is a must for retrieving sales and purchase information for applying MTD (Make Tax Digital) for HMRC VAT returns.

Some systems make it nigh on impossible to pull out information without a degree in computer science and when advising clients on business improvements we like to see a system that can show your business positioning and trending and like a barometer will advise of storms ahead.

Practices have many varying agreements with Customs over VAT on dispensing and therefore they need a flexible till system and unobtrusive security to protect staff and your business from fraud.

Look for stock control that will provide answers to stocking problems and be interactive and historical in its ability to make stock mix selection simple. As regular quarterly stock takes are a must for any business to watch its product type gross profit metrics make sure it’s quick and simple to do the job.

3 pricing fields are preferred, cost price (the purchase cost after discounts you paid), long price (the undiscounted price) which you should mark up from and finally the retail price containing VAT.

Best practice in management allows us to experiment with “if and what games. So we like to be able to change information and prices and see what happens, forwards and backwards on past data without affecting the operation of your PMS system.

The beauty of a well set up PMS is that within days it reduces the time it takes to use old day books and petty cash sheets as well as the difficulties of tracking debtors and expediting jobs, whilst at the same time the system is busy gathering information you will one day find invaluable to your business.

There should be no extra feeding of information in; it collects all the facts it needs as you use the system properly in the practice .Using IT properly and fully in the practice does mean you save yourself time in which you can act on the results it gives you.

Whilst the decision making on choice is often made by the owner/optometrist this often means that the clinical ability of the machine overwhelms the other reasons for selection. But don’t sacrifice the business end of the machine as this will be your main helper in profit improvement in the future.

Be very careful of clinical note taking and the later reporting of findings, the system must give enough selection in choice on clinical reporting to ensure you are complying with GOC rules. Many systems now offer large free writing areas within the notes which should not be ignored.

When faced with a litigation matter you might be alarmed at the limited read outs that you are left providing insurance companies.

At Eros Consultants we are here to assist in PMS selection having been actively involved in at least 3 PMS systems development over the years. 

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Retailing and Merchandising skills

The Advantages of Using Stock Modules to improve VAT position

The Advantages of Using Stock Modules to improve VAT position

Bob Hutchinson
Principal, Eros Business Consulting

Many practitioners see the use of a stock module as an additional luxury which adds time with little benefit to the practice. This is because they have never been shown how stock knowledge can increase profitability, help with promotions, ensure gross profitability levels are retained or maximised and even improve your VAT apportionment agreement or reduce sales tax payments.

There are two business briefings that will demonstrate the advantages of stock control.

In this we will discuss how better stock information and stock history can assist in an improved vat position.

You can read a second briefing on how a stock module can improve profitability and increase footfall later.

This briefing concerns improving your VAT attribution.

VAT and the cost apportionment treatment of spectacles and contact lenses puts stock history and control in centre stage.

Practices appear to be running with three or four types of apportionment agreements.

Those with recently agreed percentages with HMRC have calculated the average cost of frames and lenses (net cost price) and after applying VAT have apportioned the sum of these against the cost of providing the dispensing service. Without a stock module showing stock sales history, calculating the actual cost of frame sold can be very time consuming. (This is well known to the writer who has had to spend a great deal of time ferreting out this information when not available for clients.)

There are other ways of finding out frame prices. One method is to average the purchasing costs over a year but these provide false figures with higher cost prices of frames than the actual sale generally because lower cost items are sold more often in a practice. You also need to find out how many frames were dispensed and how many dispensings were lens only which is also time consuming, but a very useful KPI when measuring dispensing activity.

Having this information is invaluable for the business as we will discuss later, but it’s a must when agreeing a Full Cost Apportionment agreement with HMRC which can gain £1000’s each year of net profit in a profitable business. (Many of the writer’s clients have saved in excess of £6000 per year in overpaid VAT and some have been rewarded with an overpaid past payment refund of over £10,000).

There is also a group of practitioners still using old “cost plus” agreements which are in the most part considered no longer valid although we still find the odd renegade officer applying them with usually far too high a percentage. Normally these tax payers are ones who have not yet had an HMRC officer visit nor are the applying the new MTD (Make Tax Digital) methodology.

These agreements, often enforced except in rare occasions need rescinding but if “cost plus” is to remain in use you must have a simple sales reporting system for frames and lenses, and again especially in frames. This is because cost plus asks you to total the net cost of all frames and lenses dispensed in a period and add an artificial percentage which creates an artificial selling price to which in most cases the VAT rate is added (but in rare cases the VAT is regarded as inclusive).

Many practitioners without a stock module basically add up all frame and lens purchases from invoices and apply the cost plus. But of course many of those frame purchases will still be sitting on the frame bars or under the counter and yet VAT will have been attributed on them as a sale even when they remain unsold. Often retrospective discounts are applied later by manufacturers which had they been accounted for within a stock module would have reduced the VAT element.

So it is evident that a stock module for many will provide instant relief in VAT payments, which will continue year on year and easily pay for itself and the small additional work in setting up a stock file, but what else can it do?

In conclusion stock control modules are not a luxury but a vital part of a business’s armoury in ensuring for a profitable business.

Read on for better stock control analysis in this second PHN Business Briefing now

Keeping Your Stock Levels to the Minimum Required to Create Customer Interest

Bob Hutchinson, Eros Business Consulting

 

Categories
Retailing and Merchandising skills

Keeping Your Stock Levels to the Minimum Required to Create Customer Interest

Keeping Your Stock Levels to the Minimum Required to Create Customer Interest

Bob Hutchinson, Eros Business Consulting

This briefing follows on from our briefing on how to use a stock module as a tool on your PMS system to investigate better figures to improve your cost apportionment percentage for VAT attribution. Also to allow better categorisation to ensure the correct vat is being applied to each product type. Both actions can instantly add value on the bottom line.

But in this briefing we are presenting ways that a stock module can be used to improve gross profits, practice security and create better stock mixes to increase footfall.

Having your stock on file provides instant information on stock values so you can reduce the stock level to the minimum level in order to provide the necessary customer interest and best stock turnover allowing your stock to always look fresh. Removing old stock which has been on the bars for more than a year by repricing for promotions not only clears old stock but allows you to depreciate stock values and save on corporate or income tax.

Many practices forget to re-order sold stock items that might well have been the season’s best repeat sellers, so their stock mix becomes skued towards poorer selling frames. Stock Mix Control (SMC) is the key to the most successful retail businesses as sales follow your stock merchandising. So why not review your frame sales by gender, price and material then you can then look at how your stock mix suits your sales history and customers’ selection.

By adjusting your stock mix to suit your customer’s sales type, firstly you can affect their selection by having a greater selection in the frame types they like, now add a higher percentage increase in retail price mark to this “hot” selection and you will find that your clientele will follow your stock mix, accept the price range and your average sales will be improved. Sounds magical and it is.

Looking at historical sales with net costs and retail sales exc. of VAT allows you to exactly measure gross profitability on individual frames and frame types and downloading this information to a spreadsheet allows you to play “if and what” planning for future price increases by virtually adjusting mark ups on different frame sectors using the numbers sold over a period for each frame or frame type. This will show how sliding scale price changes will affect future GP over the whole frame stock. This is a powerful tool when using stock mix decisions and price mark up allowing your stock to provide maximum GP without looking highly priced on the wall.

Receiving new or replenished frames into a stock module asks the questions that are often overlooked such as:

• Has the “cost in” changed since last time?
• Has the correct discount been awarded?
• What is the minimum retail price you must sell at to make the correct margin?
• Can you charge more for a good looking frame?
• Does this fit in with your required stock mix or are you duplicating stock?

Own more than one practice? Then stock tracking is essential for frame movements between practices and allows greater GP and sales comparisons between practices. It’s a must.

Finally if you really want to measure your success or otherwise period by period (say quarterly) and not want to wait 18 months till your accountant provides the profit and loss information you need, you really should do a stock take.

Simple stock take systems using stock modules take very little time to complete and allow opening and closing stock valuation figures to show exactly the cost of stock leaving the premises. This will therefore provide accurate GPs to show profitability. It also shows how many frames are being lost to pilfering when compared to known sales and how many frames are being wasted in the practice when parts are scavenged or cannibalised for repairs.

In conclusion stock control modules are not a luxury but a vital part of a business’s armoury in ensuring for a profitable business.

 

Bob Hutchinson has been working in the centre of the optical sector since becoming an optometrist in the 70’s.

His client base also includes large industrial companies in equipment and IT involved in the optical industry to name a few.

Eros Business Consulting
Solutions@erosconsultants.com