Accounting for Discounts and Warranty/Redo’s

Whether comparing performance from year to year, making equipment purchase decisions or determining the value of the lab for estate planning or a sale, it is important to know the business’ accurate profitability and associated liabilities. Exposure for future events should be estimated through reserves and allowances in order to determine an accurate financial picture.  Reserves and allowances, such as allowance for doubtful accounts, vacation accruals, and inventory obsolescence, are well documented in accounting procedures.  In this column, we will explore the calculation of discount allowances and reserves for warranty/redo’s to determine their exposure and then explain how they impact profitability, as they are unique but highly relevant to optical labs.

Discounts—Unfortunately, discounts have become a part of the wholesale optical lab business and need to be properly accounted for. Discounts do have a real cost and liability associated with them. Discounts reduce revenue to arrive at net sales; at the end of any period, accounts receivable should be reduced by potential or likely discounts yet to be taken.

Generally, the discount can be estimated by determining the average monthly discount percentage to gross sales and multiplying that percentage by gross sales for the most recent month. Gross receivables show you what your customers owe; the discount allowance shows what you owe your customers.

Warranty/Redo’s—Warranty/redo’s represent one of the most significant, and yet often unaccounted for, costs to the lab.  They come in many forms from manufacturer’s, scratch, AR, non-adapt, doctor redo’s to lab redo’s. A good way to determine the lab’s warranty/redo liability to customers is to use recent historical units-sold experience percentage for each type of warranty/redo times cost of goods sold for the year, times one half of the warranty period. For example, if you have a two-year scratch coating warranty and typically 2 percent of total units are returned and cost of goods sold is $3,360,000, then (2 percent of units x 3,360,000 x 1[1/2 of 2 years]) = $67,200 is the amount of liability. This means the lab owes approximately $67,200 to its customers for this two-year scratch warranty. A similar calculation would be completed on every form of warranty to determine the total.

Warranty/Redo Exposure—These allowances and reserves can also have a significant impact on profitability.  If discount exposure increases from ($50,000) at the beginning of the period to ($60,000) at the end of the period, costs should be increased by $60,000 - $50,000 = $10,000. The result, good accounting practices translate to an accurate reflection of how your business is actually performing. Absent accurate accounting procedures, the lab owner is only getting part of the actual operating and financial results of their business.

—Thomas F. Puckett, pictured here, managing director & CEO, HPC Puckett & Company ( [email protected]) and Jason A. Meyer, senior vice-president, HPC Puckett & Company ( [email protected]). Based in San Diego, Calif., HPC Puckett & Company specializes in mergers and acquisitions of wholesale optical laboratories.

Surfacing Spectralite Velocity

Bill Heffner at FEA Industries reports that his lab has added a new step in processing Spectralite Velocity which has drastically reduced the number of surface waves on low plus and minus lenses.

Here at FEA Industries, we are using Loh equipment for surfacing. [PRA Blockers, V-Pro Generators, and Toro-X cylinder machines.] Before we block any Spectralite Velocity, we put the blanks in to our A/R degassing oven for a period of four hours.

Basically, the oven is forced air drying chamber that circulates warm air at 60 Degrees C, or 140 Degrees F. After the lenses are removed from the oven, they are blocked within a half hour. After blocking, they are allowed to cool for 1.5 hours in room temperature. Do not force chill the lenses by using cold water. Then surface as normal.

Why does this seem to work? After discussing the lens manufacturing process with AOSola Technical, they indicated that the Spectralite Velocity lenses are half cured at the factory before they are sent to Transitions Optical. After the coating process is completed, Transitions then cures the lens the remainder of the way. When we place the blanks in the A/R degassing ovens, we are actually drying the lens which makes it more brittle, thus a harder, more rigid material to surface.

I have done drop ball testing on these lenses with 1.5 centers to double check that we did not adversely affect impact resistance. Since we have started this new procedure, our spoilage went to almost zero [we still have people in the lab].

From time to time, I have found this technique also works when we wave high minus plastic Transitions lenses.

—William Heffner, III, chief executive officer, FEA Industries, Morton, Pa.

Debbie Mullins of Cherry Optical in Melvindale, Mich.

Debbie Mullins just might be the only person in the optical industry that really started working in “the business” when she was 12—the excuse the rest of us use when we realize that claiming 25 or 30 years in the industry ages us quickly. I couldn’t help but chuckle when she told me. However, her task of washing the blue off glass lenses would coincide with that time period, so she’s legit.

After 26 years, she’ll be the first to tell you she loves it. Who better to show her the ropes but Richard Cherry, her father. “I went to college to be a lawyer, but I missed the optical business,” Debbie explained. “I really liked working for my Dad, so I came back.”

Debbie has worked in every part of the lab from answering phones and pulling lenses to surfacing and finishing. Three years ago, she was promoted to office manager for the business. She oversees all aspects of day-to-day operations and all aspects of marketing from pricing to advertising and all computer information and updates that their customers need.

Not one to sit still, she decided she wanted to be ABO-certified one year ago. On June 21, she met her goal, receiving positive test results and Board certification. “I feel good about this achievement,” Mullins commented. “The certification is recognition of having the knowledge of optics and the knowledge of processing.”  Mullins has already contacted ABO about pursuing advanced certification and master’s achievement.

One of Mullins’ successful marketing events is “Your Eyes University.” The event is free to anyone who wants to attend. The all-day program is social, offering an opportunity for doctors and their staffs to network with their peers as well as offering educational classes and NCLE accredited classes. Over 500 people attended this year and the amount of vendor participation doubled. “I believe in getting involved, learning and understanding the new technology, and sharing that opportunity with our customers,” she explained.

“My goal is to make sure the day is planned to benefit our customers with opportunities for learning from their peers, finding out what is going on in the industry, learning from vendors and receiving credit for their time.” As someone who is very focused on education herself, Mullins is the first to tell you she learns everyday. Now she is diving into the business side of running a lab as well as keeping up with the lab operations and technology. “I really love the industry,” she adds. “I can’t remember meeting anyone who wasn’t nice or willing to help me. It’s like one big family.”

And to keep the family involved, Debbie’s three daughters are now working there during the summer, the oldest works part time while attending college. Her husband also works in the laboratory business. As we end our conversation, Debbie tells me she is off to Portland for a meeting with DVI. Her excitement is infectious. I was energized too – it was refreshing to speak with her and experience her enthusiasm as the next generation in the independent lab business.
—Linda Little

Jim’s Optical Turns on Cruise Control to Boost Business

Dr. Wilson and Janet Vaughn are pictured here, with Vaughn holding a Winner’s Certificate from Jim’s Optical Service.

“Jim’s Optical Service feels as an optical lab, we need to give back to those who work hard for their patients, not only doctors but assistants and office personnel. This is why we are committed to doing ongoing promotions the rest of the year,” said Genise Williams, marketing and educational representative for Jim’s Optical Service, a 28-year-old full-service wholesale lab in Modesto, Calif.

The lab’s most recent promotion, which was co-sponsored by Transitions Optical and Carl Zeiss Vision, awarded a cruise for two to Ensanada, Mexico plus $500 in spending money. The lucky winners were Teresa Leon, an employee in Dr. Richard Portillo’s optometric office in Modesto, and Janet Vaughn, an employee in Dr. Bernard Wilson’s optometric office in Modesto. Both Leon and Vaughn are long-standing employees at their respective offices; Vaughn is a former board member for San Joaquin Optometric Society Symposium.

Jim’s Optical’s next promotion will run from October through December, the "Do You Feel Lucky" Reno bus trip contest. "We take 20 winners and their guests to Reno for the day and have a really great time. This is our most popular promotion," explained Williams. Although Jim's Optical is committed to offering all their accounts an opportunity to win and their manufacturers an opportunity to participate, the real bottom line for these promotions has been selling more progressives and add-ons. The result has been a doubling of jobs per day over three years, from 100 per day to 200 per day.