Do You Know Where Your Practice Money Goes?
In the veterinary practice, patients drive the medicine and therefore the business, so owners and managers must pay attention to the practice’s profit levels to ensure the level of patient care is continually elevated. Declines in profit impact a practice’s ability to pay the bills, offer competitive wages and benefits, and buy new equipment. Profit is necessary to protect the business investment value.
The return on investment (ROI), or profit, is the revenue remaining after all operating expenses (ie, variable, fixed, and facility expenses; team member compensation) are paid. In a Well-Managed Practice (WellMP), ROI/profit averages 12%, compared with 8% to 10% in the average practice. The best of the best average between 16% and 20%.1
Variable expenses: 23%
Fixed expenses: 7%
Team member compensation: 22%
Facility expenses: 8%
Amount available for veterinarian compensation & reinvestment: 100% - 60% = 40%
|100% - 60% = 40%|
Veterinarian compensation: 20%
Owner management compensation: 3%
Practice owner ROI: 40% - 23% = 17%
|40% - 23% = 17%|
Remaining profit: 17% - 3% = 14%
|17% - 3% = 14%|
What makes the difference? To come out on top, astute managers pay attention to the dollars and cents. So, where does a dollar go in a well-managed veterinary practice?
Breaking Down the Dollar
Following is a breakdown of each dollar a well-managed practice spends1:
- Variable expenses: $0.22 to $0.25
- Fixed expenses: $0.07 to $0.09
- Facility expenses: $0.07 to $0.08
- Team member compensation: $0.22 to $0.25
- Veterinarian compensation: $0.16 to $0.21
- Owner management compensation: $0.01 to $0.03
- Owner ROI/profit: $0.10 to $0.20
Savvy managers understand the revenue and expense items that are important to short-term cash flow and those critical to long-term growth. Practices can develop action plans to respond to problems and opportunities to keep their goals on track.
Action Plan Example
A practice set an annual 80% compliance goal for heartworm testing for its 4000 canine patients (ie, testing 3200 patients during the year). However, a gap analysis showed only 2000 tests were completed, so the actual compliance rate was 50%. Therefore, to reach the compliance goal, the practice team developed an action plan that included the following steps.
- Modifying client reminders to provide more clarity and emphasize the need for heartworm testing
- Conducting internal CE for team members on how to effectively educate clients about the importance of heartworm testing, including role play for each team member to practice his or her presentation
- Updating the practice website and using social media posts to promote the importance of heartworm testing
- Regularly tracking progress toward the compliance goal
Keeping expense levels at the lower end of the target range is key for improving profitability.
Two of the largest operating expenses merit a closer look.
A practice struggling with high inventory costs can begin cutting expenses by eliminating as many redundant and/or duplicate medications as possible. Redundancy is common in multi-veterinarian practices because of individual preferences, so it is important for managers to work with veterinarians to reach a consensus about which drugs the practice will carry in-house, move to the online pharmacy, or no longer carry.
Staying on top of reorder points (ie, the level of inventory that triggers a purchase to replenish a particular inventory item) is important. Managers must set a minimum amount of each product to be held in stock and reorder the item when its numbers fall to that amount.
WellMPs have a goal of 10 to 12 inventory turnovers a year, which is approximately one month’s inventory on the shelf at any given time or approximately $10 000 to $16 000 of inventory per full-time equivalent veterinarian.1
Do not forget the revenue aspect of expense management. What appears to be an expense issue may be a revenue issue if the practice:
- Has an inappropriate fee structure given the quality of care provided
- Has fees that do not match the economics of the geographic location
- Does not bill clients for all provided care
Team Member Compensation
Correcting revenue issues can often resolve a practice’s expense issues, particularly when it comes to team member compensation. Inefficiency and low productivity are often the root cause of high team member costs. Pushing communication and CE to the back burner to focus on seeing more patients to improve profit may be easy, but savvy owners and managers recognize that effective communication and enhanced skills help keep every team member on the same page, while also strengthening their contributions to the practice, which leads to higher productivity and improved job satisfaction.
Maintaining efficiency, productivity, and profitability are the biggest challenges WellMP owners and managers face when running a practice. Paying attention to patient care and the dollars and cents is key to continued success and improving ROI.
1Maintain and build effective communication skills, and offer CE opportunities to help team members increase productivity because high-level team production and efficiency are critical to practice profitability.
2Establish revenue goals and develop action plans to help ensure the practice reaches its goals.
3Determine areas in which the practice can begin lowering variable expenses (eg, eliminating redundant or duplicate medications).