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Program-Based Budgeting

Thomas E. Catanzaro, DVM, MHA, FACHEDiplomate, American College of Healthcare Executives

The First Rule of Budgeting - the front door must swing.

The accounting approach to budgeting is one of cost control. The traditional veterinary methods of fiscal management are to beat the expense percentages to death when compared to a national average. The veterinary-specific software systems generally tell you everything about income centers, but none are yet linked to any expense center comparisons. The accountant's system is to catalog your checks into as many categories as possible so the Profit & Loss (P&L) Statement (Income Statement) looks impressive. However, note that "sales" is usually the ONLY income category. Then you wonder why most veterinary practices do not have a dynamic budgeting process.

THE DYNAMIC BUDGETING PROCESS

When I reference a "dynamic budgeting process," I envision income centers that are matched to expense centers. These are similar, but in greater, tailored detail, to the AAHA Chart of Accounts, now provided in the ISUP text, Building The Successful Veterinary Practice: Programs & Procedures (Volume 2), as well as in the new Signature Series monograph, Fundamental Money Management (with diskette), available at www.v-p-c.com. When I speak of significant ratios, I refer to expense compared to income for the same line item, or specific program income compared to outpatient visits, or of fluid therapy units compared to general anesthetic cases, or even diagnostic sales compared to pharmacy sales (by DVM and by practice). Let's try a few tests:

Question:

Drugs and medical supply cost of goods sold for a companion animal practice are 18.3 percent of gross income, food sales is another 2.5 percent, and laboratory/X-ray/ECG diagnostic costs are 8.5 percent of gross sales. Which percentage(s) appear inappropriately high or low?

 

Answer:

Do not jump into this discussion with both feet until you know "the rest of the story." Here are the income factors: Drug & Medical Supplies brought in $375,000 in sales, food brought in $19,500, and laboratory/X-ray/ECG diagnostic sales accounted for $98,500 of the practice gross. Total gross was $985,400 for the period in this study. Now your answers would be:

•  Pharmacy sales were over two times expenses, so there is a good return based on the mark-up.

•  There is over $5000 of product missing (even if we sold the food at cost) since even maintenance diets should have about 25 percent net.

•  The diagnostics only brought in about $15,000 net, a net income figure almost ten times below expectations because the reported expenses were way higher than expected. Film and developing fluid, ECG paper and contact cream, outside laboratory costs and reagents are low cost. Someone probably added equipment or maintenance to the wrong expense categories.

Okay, so you feel I tricked you, but how often do you make a snap judgement on practice operations based on old habits, old information, or someone else's perspective, like these generalized articles in periodicals. The focus must be on your practice, your community, and your clients, if you want the front door to swing! A similar set of numbers exists for mixed animal practices, especially in farm call pricing, mileage, sale barn fees, or when they compete with the "white truck" selling drugs up and down the back roads. A dynamic budget means we know how much money it took to create how much income within a specific practice program (dentistry, X-ray, laboratory, vaccinations, etc.).

Vaccinations . . . how many practices still hide their consultation fee from the client and charge $45 to $60 for the annual vaccination visit and exam? Why? Most of our consulting clients have started to use the term "doctor's consultation" on the invoice and on the telephone to differentiate the wellness examination by a paraprofessional staff member from the doctor's presence and discussions. This differentiation is critical when you exist in a community where other veterinarians, super pet stores, and vaccine clinics have made price a commodity to shop for in pet health care. Heck, I don't mind a ten minute vaccine appointment with a paraprofessional wellness exam, but if they want a doctor's consultation, they need to be scheduled for at least 20 minutes. The secret motivator is not that secret. The front door must swing for ANY program to be effective!

A dynamic budget process means we accept the forecast as targets, and if we hit the target we are okay. If we hit the bulls-eye every time, we are exceptional (and more likely, a falsifier of data). Each quarter, we look at what our in-service training plan did to affect which programs, and assess if the expense and income ratio changed based on the new knowledge shared within the team. If it did as expected, we must change the next quarter's budget to reflect the new trends, and make new forecasts on lateral areas of interest. What does this mean in application? Please look at this simple example:

ISSUE:

The practice decides they must start to use a laboratory test waiver before any general anesthesia for forensic reasons. It was added to the bottom of the Surgery and Hospitalization Authorization Form (from the AVMA Directory). The practice leadership decided to add a minimum level to the practice's existing "over six-years-old profile" policy (PCV, T.P., and BUN costing about two dollars using only a hematocrit tube-refractometer, use-urine, stick-screening test and selling it for $9.50; CBC and Chem Panel for $45.50). Each client would be asked to waive the animal's rights to this screening so the practice can save them money.

 

RESULTS:

Surprisingly, 60 percent of the owners of "under-six-years-old" pets opted for the basic $9.50 screen, and with the existing surgery pace, that brought in an additional $600 sales (for $120 cost) per month, or $1800 for the quarter. To their utter astonishment, another 25 percent of the "under six-years-olds" selected the full profile and made the practice an extra $1000 monthly gross they had not expected ($3000 per quarter). Since no one expected any impact, just a lot of waivers, the practice must now adjust the next quarter's projections. Where will the adjustments occur? Sure, pre-anesthetic, but what about the geriatric animal baseline laboratory profiles which were offered only by exception in the past during annual exams? In fact, the doctors became so comfortable with the increased client awareness of laboratory profiles, the "senior friends program" enabled many more over-six-years-old pets to receive baseline profiles. Slowly, in about a year, they started to offer baseline profiles when animals entered "their adult stage" of life, so there was a set of values to compare to when there was a crisis.

There are many applications of "looking at the programs," such as having four levels of dentistry prophy (1+, 2+, 3+, and 4+, based on the four pictures on the back of the CET brochure). The average "single price" for dentistries should be the 2+ cost, and the more severe mouth has two more levels (where the 4+ is about twice the 2+). Now the "dentistry program" can be priced and promoted to the client who takes good care of their pet's mouth, giving them a "price break" based on the worse case scenario. Similarly, there can be four levels of bandaging (joint and bandage dependent) and four levels of hospitalization (o.d./b.i.d. to ICU). To keep the front door swinging, good clients must feel they are appreciated, and having levels of care allows them either recognition or options. Both are elements which will bring them back to your practice, as well as "spread the word" about their recognitions.

There are many other "programs" which should be addressed, but each practice is limited by their past and the vision of their leadership. These are only examples of "practice entry" into program-based budgeting, and the examples have been taken from "real life" veterinary practices. The clients perceive a benefit when presented as "two yes options" (see the Veterinary Forum article, "Increasing Client Options -- Changing the Way We Look at Office Calls," January 1993, pgs 54-56). Satisfied clients make the front door swing! There are challenges to making this system work, and must be addressed in the earliest development phases, either with your consultant's help, or with a strong personal belief and vision.

IMPLEMENTATION OF PROGRAM-BASED BUDGETING

How do you get enough time to do all this "new stuff" needed for program-based budgeting? Simple. You don't! It must be a team effort. Every staff member must be involved in the new programs and processes. The leadership becomes visionaries and trainers. The following six elements must be accepted as a minimum set of requirements and expectations for program-based budgeting to work:

First:

The practice must have a team that believes. They must believe in the core values of the practice and the standards of quality healthcare delivery. They must believe in the "why" of the programs as patient advocates, not as just "new income sources" for the boss.

 

Second:

The leadership must be willing to "train to trust." Each member of the staff must have the in-service training opportunity to gain confidence and competency in the new programs and the support procedures. A "trusted" staff member will receive an "outcome" accountability and the doctor or manager will not worry, or even care, about the process. Success measurements will be founded in outcomes and results.

 

Third:

The practice leadership will practice daily the three Rs of building self-worth in ALL the staff members: Respect, Responsibility, and Recognition. Respect for all immediately, responsibility concurrent with training to trust, and recognition, since behavior rewarded is behavior repeated.

 

Fourth:

Be ready to change every habit and modify every new program to respond to community needs. Strategic response replaces the outdated strategic planning process. Be ready to do unique and unusual things as if they were usual and do the usual in a new and unusual way. Continuous quality improvement (CQI) means EVERY staff member is accountable for unilaterally causing improvement and change on a regular basis for the benefit of the client, the staff, or the practice entity.

 

Fifth:

Be ready to track more things, specific to programs, based on procedures as well as dollars. Be ready to upgrade computer knowledge and increase the trend assessment discussions within the staff. Start getting balanced financial reports. Pair income to expense centers, with expenses not alphabetized, but rather, in order of importance. Be ready to change accountants if the firm will not support your effort. Be ready to have every member initiate new programs and target actions every quarter. Embrace practice performance planning rather than performance appraisals of the past.

 

Sixth:

Accept the fact that this is a new practice process, not a gimmick or new program. Once started, you can't go back. Once started, you are committed to change the future, forever. Change will be the norm, and if "it" seems okay, "it" hasn't been assessed well enough for adaptation to the future.

ADDITIONAL READING:

1  Building The Successful Veterinary Practice: Programs & Procedures (Volume 2), Iowa State University Press text

2  New Signature Series monograph, Fundamental Money Management (with diskette), from www.v-p-c.com

VETERINARY PRACTICE CHECKLIST FOR SELF-ASSESSMENT

(Please circle the number, or assign a mid-point number)

General Questions:

1. Does your current invoicing system allow efficient preparation and printing?

Yes = 0

No = 10

Not Important To Us = 2

 

2. Does your current system allow close tracking of receivables?

Yes, easily  = 0

Not close enough  = 4

Not Important To Us  = 6

Not easily  = 8

No  = 10

 

3. Does your current system automate monthly client billing?

Yes, easily  = 0

Not Important To Us  = 2

Yes, but with difficulty  = 5

No  = 10

 

4. Can your current system change client message based on aging of accounts?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

5. Does your current system allow you to manage cash flow and payables?

Yes, easily and automatically  = 0

With close personal effort  = 5

Takes substantial analysis to maintain  = 8

Not managed well  = 10

 

6. Are you on an automated vendor check printing system?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

7. Does you current system maintain a perpetual balance inventory?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

8. Are client estimates an automated process?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

9. Do the end-of-month financial reports match income centers to expense centers?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

10. Does it take extensive staff training time to learn the tracking systems?

No, easy and automated system  = 0

Not much; procedures are keyed to recurring reports  = 4

With multiple recycling  = 6

Yes  = 10

 

11. Are end-of-month financial reports generated in-house?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

12. Does the accountant convert the cash-based program data to tax-based data?

Yes, easily and automatically  = 0

Yes, quarterly, with our guidance  = 4

Annually, with close personal effort  = 7

No  = 10

System Flexibility Issues:

1. Have you modified the AAHA Chart of Accounts to meet your own needs?

Yes  = 0

Use them unchanged  = 3

We use one from our accountant  = 6

We don't have a system  = 10

 

2. Do your current tracking systems change with the practice's evolution?

Yes, easily  = 0

No  = 10

 

3. Can your current system develop customized reports to track trends?

Yes, easily and automatically  = 0

With close personal effort  = 5

No  = 10

 

4. Is your word processing integrated with a spread sheet system?

Yes, easily and automatically  = 0

Separate programs, manual combining  = 5

No  = 10

 

5. Are you willing to change computer systems or add accounting software?

Yes  = 0

Yes, but not happily  = 4

Only if you can prove a major cost benefit  = 8

No  = 10

Networking Concerns:

1. Are you "on the net" for veterinary computerized resource access?

Yes, VIN or NOAH (or both)  = 0

Yes, but not for clinical exchanges  = 4

No  = 10

 

2. Do you use a management review system for your practice operational data?

Yes, practice consultant  = 0

Yes, "twenties-type" group  = 4

Yes, regionalized    = 6

Yes, with a close friend  = 8

No  = 10

 

3. Is your accountant monitoring the practice data against National trends?

Yes  = 0

Yes, but only when we provide it  = 4

No  = 10

 

4. Do you use a management/leadership team to review the practice program data?

Yes, informally monthly and formally quarterly  = 0

Yes, but not routinely  = 4

No  = 10

 

5. Does the management/leadership team have staff members represented?

Yes, informally and formally  = 0

Yes, but not routinely  = 4

No  = 10

Reporting Systems:

1. How long does it take after the close of the month to complete the reports?

10 staff hours or less  = 0

11-40 staff hours  = 5

11-40 doctor hours  = 8

We don't do it  = 10

 

2. Would you prefer a supporting organization compile reports?

Yes, with practice specific contract  = 0

Yes, but as group  = 4

No  = 10

 

3. Does the monthly tracking system effectively track tax and benefit issues?

Yes, informally monthly and formally quarterly  = 0

Yes, but not routinely  = 4

No  = 10

 

4. Do you have an annual budget?

Yes, program-based  = 0

Yes, expense-based  = 5

Yes, but not routinely used  = 8

No  = 10

 

5. Does the monthly tracking feed the practice's program planning process?

Yes, informally monthly and formally quarterly  = 0

Yes, but not routinely  = 4

No  = 10

QUANTITATIVE SCORING:

50 points or less - your current system puts your veterinary practice into the top ten percent. You may want to contact a consultant to fine-tune your system, but the consultant should have an integrated, people-based approach. You crunch your numbers well!

51-100 points - your current system is not grossly obsolete, and you are still securely in the top half of the veterinary practices (above average). There may be upgrades which can assist your practice; a good candidate for fine-tuning assistance.

101-150 points - you have an average practice (average = best of the worst or worst of the best). This means program planning is probably not operating effectively, and program-budget systems are not well integrated. With the help of your consultant, you can make money.

151-200 points - your current system is most likely inadequate to keep pace with the changing demands of this profession. Problems are likely to overtake you and add frustration (burnout). If you are not working with a consultant, you should start shopping for one now!

201 points or more - to score this high, your current system would have to be almost nonexistent. This means a major practice philosophy change, more team work, and a relook at the future vision of the practice leadership. The consultant you select (since your score proves you can't do it yourself) must be able to: 1) integrate the programs with training and non-threatening tracking techniques, 2) have veterinary profession-specific experience, 3) provide a multi-faceted team to support your efforts, and 4) convince you change is critical for survival.

NOTE: If your score exceeds 100 points, a veterinary-specific consulting group, such as Catanzaro & Associates, Inc., should be added to your research list of potential practice resources. Catanzaro & Associates, Inc., has a diverse team of consultants and a telephone consulting capability which makes tailoring programs to practice personalities and practice philosophies far easier than those offered by outsiders to our profession or the "one-deep" veterinary consulting firms. Contact this consulting team at: 303-277-9800, fax 303-277-9888, or e-mail DRTOMCAT on VIN or with NOAH at 102124,1624, for additional information.


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