Financial Indicators of Practice Activity / Europe Is Not America
World Small Animal Veterinary Association World Congress Proceedings, 2004
Philippe Moreau, DVM, MS, DECVIM-CA, DECVN
Medi-Productions
Limoges, France

INTRODUCTION

For healthy and efficient management it is now necessary to measure and control business performance. This is also true for micro corporations or small businesses such as veterinary clinics. To ignore these methods and to work without any objective measurement of services and products sold through the practice, is taking a serious risk for the long term health of the practice. It is like navigating with no visibility instead of navigating with instruments... As the good "medical veterinarian" relies on proper diagnostics to prescribe relevant medical treatments, give appropriate prognosis and make correct decisions, the good "managing veterinarian" should rely on some financial indicators that will tell him how to make appropriate decisions related to his business, his practice...

To develop such indicators and make sure these are useful... and utilised, it is necessary that their measurement remains simple, rapid, efficient and objective and that these indicators are a true evaluation, sort of the "barometer" of the practice health. It is a true diagnostic tool of basic practice management. In this seminar, we will present some indicators that are used in the USA and compare their efficiency and economical relevance in Europe.

A. CONVENTIONAL INDICATORS

Pure finance people will consult classical tables and reports, including annual company results, business summary, and general accounting. This also includes also simple gross revenue reports. In such reports one can analyze the daily, weekly and monthly gross income and compare it to last years results for similar periods. One can also deduct from such results some variable costs and therefore obtain a better evaluation of the margin. Once this is done, you can deduct fixed costs to know your benefit prior to taxes. After deduction of all taxes, you simply obtain your benefit after taxes.

1. Gross Revenues (GR)

In a service business, such a veterinary practice, it is important to understand that the sales of services and products represent the strength that pull the business and that costs most often follow in proportion and according to the revenues that are generated. Costs can therefore be estimated and are to a certain extent easy to control. One can determine for example that the daily revenues = the number of clients x average transaction/ client. The variation in results can therefore be explained through the fluctuation in the number of clients and to the average transaction/client.

2. Number of clients

It is quite interesting to evaluate its measurement and the way this parameter is changing with time. One can measure for example over a year:

 Initial clients (at the beginning of the fiscal year): ex: 5000

 New clients: ex: 750

 Clients that didn't return or clients owning an animal that died: ex: 350

 Final clients (at the end of the fiscal year): ex: 5400

Several interesting indicators can be evaluated from these data:

1.  Growth percentage=final clients-initial clients/initial clients ex: (5400-5000)/5000 = 8 %

2.  Renewal percentage=new clients/initial clients ex: 750/5000 = 15 %

3.  Deperdition percentage=lost clients /initial clients ex: 350/5000 = 7%

4.  4. Retention percentage = kept clients (initial-lost)/initial clients ex: (5000-350)-5000 = 93 %

3. Mean Transaction

It is the gross revenue for the period divided by the number of transactions for the same period. A transaction is determined by an invoice number. To facilitate the evaluation of this criteria, one would group under one invoice and under one virtual client, all transactions that do not have a dedicated invoice. Some will detail sales of services versus sales of products, or even identify sales of OTC (Over The Counter) products or sales of pet-food.

4. Client Loyalty (number of transactions per client)

It is the number of transactions divided by the number of clients for the period. It is a good estimation parameter of client loyalty to the practice and should be measured on a monthly basis.

5. Growth

Growth can be represented by the percentage of variability between two periods. The "purist manager" will choose a period for which the number of open days is quite similar (the year vs the month). A monthly indicator has the advantage of allowing a prompt reactivity as for example in case of a sudden decrease in growth.

B. LESS CONVENTIONAL INDICATORS

1. The Diagnostic Ratio (DR)

This is the total Gross Revenue of Services (excluding all OTC sales and non medical revenues such as grooming or boarding) divided by the Diagnostic Services Revenues entered through ancillary diagnostic procedures (laboratory, ultrasound, radiology, endoscopy, etc.). In the USA, it is usually preferred that this ratio remain under 5. If this is not the case, it could reveal that the practice is not using diagnostic resources as it should and relying too much on empirical diagnostic methods.

2. Vaccination Ratio (VR)

Vaccines are historically an important part of veterinary practice income. However it is dangerous to rely too much on these services and veterinarians should diversify their services as much as possible to avoid being dependant on a potentially future decrease of revenues. It is a fact that over the next few years there is a threat that vaccines may become either less and less prescribed or performed by veterinarians and/or would be performed by other professionals or by the owners themselves. Veterinarians should not be "vaccine dependant".

In order to calculate this ratio, one can multiply the number of vaccines purchased by the clinic consultation fee (unless the computer data details such services automatically).

Then this vaccine consultation income is used to divide the Gross Revenue of Services (GRS) (excluding all OTC sales and non-medical revenues such as grooming or boarding). One can also simply divide the GRS by the number of vaccines used for the period. This ratio is a good indicator of clinical services. Medical and surgical services require investments and increase clinical variable costs which increase the ratio (GRS/vaccines) per prescribed vaccine. A progressive clinic should demonstrate high revenues per vaccine (independence from vaccines).

3. Hourly Income per Veterinarian

This is a measure of veterinarian activity and income. To obtain such an indicator one divides the GI (Gross Income) produced by each veterinarian by the number of hours of work of each vet for that period. This parameter will show each practitioner his or her relative profitability compared to the working time (time related efficiency)

4. Fixed Costs

These are costs unrelated to the number of services and to the gross revenue. In a clinic these cover classically rent, insurance policies, maintenance costs (electricity, heat). It is usually estimated that these expenses should not be over 20% of gross income.

5. Variable Costs

In a well managed veterinary practice variable costs of goods include the stock, salaries and wages. If the stock is not monitored it is no longer a variable, it becomes an expense that penalizes clinic profitability.

In a well managed clinic, variable costs should not go much over 40% of overall income.

6. Profits

Once you have paid the bills, extracted variable costs, the salaries, the fixed costs, whatever remains are the benefits before income taxes. It is preferable if these are over 15% of the gross income.

7. Costs and Sales of Retail Products (drugs and food)

It is important (even if this sounds really basic) that sales are higher than the cost of products.

8. Client Surveys

You should always listen to your clients. The best source of information and an excellent form of "audit" is a survey obtain from your own clientele. It is also better to repeat this exercise regularly (once a year) to really observe the variance. If this well done, it is an excellent source of quality control.

CONCLUSIONS

Many indicators can be used and will depend on the practice, the clients and the imagination of each veterinarian. It is remarkable how computers have contributed to data mining and have leveraged on this information that we accumulate over time. It is interesting to observe that certain criteria that have been used in the USA for some time can easily be adapted to our own practice. Some of these non conventional indicators are quite interesting because they look beyond the factual numbers and help us analyze the trends of our professional activity.

Speaker Information
(click the speaker's name to view other papers and abstracts submitted by this speaker)

Philippe Moreau, DVM, MS, DECVIM-CA, DECVN
Medi-Productions
Limoges, France


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