Bizvet, Inc.; Tufts University Cummings School of Veterinary Medicine, Walpole, MA, USA
Profit is an elusive term for many veterinarians. For many, the very simplest of definitions for profit is any surplus remaining when all expenses are deducted from all revenues. The problem is that some veterinarians may not pay themselves a reasonable salary commensurate with their time and expertise, and keep the difference between revenues and costs as their reward, calling it a "profit". The problem is that this does not recognize their inherent value in delivering veterinary services, managing the practice etc.
The best way to understand profit is to imagine that the practice owner needs to pay others a going wage for doing all jobs within the practice as though the owner was an absentee landlord. When this exercise is performed, many veterinary practices are only marginally profitable, and some are actually losing money. The situation is even more complicated when veterinarians own the practice real estate rather than lease. In many instances, the value of the land is worth more for purposes other than a veterinary hospital. When this "opportunity cost" is factored in, profit for veterinary hospitals becomes even more elusive.
For these reasons, and many others, veterinary hospitals need to concentrate on profit. Without profit, there is no possibility for the practice to survive and advance, to pay its staff reasonable salaries and benefits, to buy new equipment, and to be able to eventually sell the practice for a reasonable price that would reflect all the effort that went into it. Follow these guidelines to better understand and appreciate profit within your practice.
Pay yourself first
Understand where the money goes
Grow the top line
Develop profit centers
Perform value analysis on equipment purchases
Set prices reasonably
Data mining and compliance
Benchmark and respond
Develop strategic planning protocols
Pay Yourself First
While this seems simple, many veterinarians actually pay themselves ... last. There seems to be this illusion that whatever is left when everything and everybody else is paid is profit, and this is the entitlement of ownership. Of course, this is not true. If you didn't own the hospital and you were working as an associate elsewhere, what type of salary would you command based on the number of hours worked, or the amount of client revenue derived? Whatever this salary is, pay it, on the same schedule as the other employees. If you suddenly find that cash flow is tight, this might be the first realization that the practice is not as profitable as originally suspected, and this is a worthwhile realization. If the practice owner also does management duties, this also needs to be reflected in salary, since if the owner doesn't do it, someone else would need to do this task. Having a spouse do it without any compensation is not a reasonable expectation. It is not unusual for 3% of total revenues to be needed to compensate for management duties.
Understand Where the Money Goes
Veterinarians practice medicine, but veterinary hospitals are businesses, and they must be generating profits if they are to continue as worthwhile investments. For every hospital, there is a finite amount of money to be spent, based on the revenues collected from services provided and products sold. This is somewhat variable based on the country in which the practice operates and the type of practice.
Staffing is by far the largest practice expense. It includes compensation and benefits for all doctors in the practice, paraprofessional staff, administrative staff, and other personnel. Materials and supplies are used in the practice of medicine, and include all pharmaceuticals, diets, laboratory supplies, radiographic supplies, surgical supplies, etc. General and administrative expenses include rent, mortgage or lease payments, utilities, telephone, insurance, administrative supplies and other things needed to run a veterinary practice.
Grow the Top Line (Revenues)
After considering the expense of running a veterinary practice, the temptation is to try to increase profit by cutting costs. This approach almost never solves the problem. The most likely way to increase profit is by increasing the "top line" of financial statements--revenues. The reason is that most expenses in a veterinary practice are fixed--such as rent, staff salaries, utilities, and many more. A smaller percentage of expenses are variable; they vary with the amount of business being conducted. Other than the standard stock of radiographic film and supplies, more is only purchased if the existing stock is being used by taking (and hopefully charging for) radiographs.
Because so much of a practice's expenses are fixed, increasing revenues tends to only marginally affect costs. So, if a practice went from taking 40 radiographs a week to 60 radiographs a week, the revenue would increase by 50% (from 40 to 60) but the cost would only increase by much less, only the expense of the films and their development (perhaps 5%), for a solid net gain in profits. This net gain cannot be achieved by cost-cutting.
In many small veterinary practices, veterinarians not only see clients and order diagnostic tests and treatments, but are often active participants in collecting laboratory samples, taking radiographs, placing catheters, etc. When a practice isn't busy and there is "overcapacity" (i.e., appointment slots open and no client demand to fill them), then this may be a productive and cost-saving use of veterinary talent. However, as the practice becomes busier, using veterinarians to perform tasks that could just as competently be performed by lower-paid paraprofessional staff is inherently inefficient and robs the practice of additional revenue generation.
In general, veterinary technicians and assistants receive salaries much less than that of veterinarians, so leveraging staff is important in being able to increase revenues on a per-doctor basis. If veterinarians can see additional appointments, or perform additional procedures for which only they are qualified, while paraprofessionals are performing duties for which they are qualified, then revenues climb at a rate higher than expenses. In most efficient small animal hospitals, there can be 3-4 non-veterinary staff leveraged across every veterinarian. In very busy high revenue-generating practices, there may be 10 or more non-veterinary staff for every veterinarian in the practice.
Veterinarians are often the bottlenecks in revenue generation. In very basic veterinary hospital models, revenue is only generated by the veterinarian. If the veterinarian is performing surgery, no medical appointments are being seen. If the veterinarian is seeing medical appointments, no surgeries are being performed. The practice is still paying fixed expenses for both, which leads to inefficiency and loss of revenue generation. Leveraging staff allows revenue to continue to flow from many fronts, even when the veterinarian is personally engaged in only one task.
Develop Profit Centers
Most veterinary hospitals are full-service, providing clinical visits, surgery, imaging, laboratory testing, hospitalization and other services. In the end, the profit is often a composite of all of these services. However, in human medicine, they have long ago learned that it is not cost-effective for doctors to provide all of these services. No doubt, the same will occur in veterinary medicine. If veterinarians are to offer a variety of services, they must be able to determine which of these services is profitably offered and which ones actually lose the practice money. This is accomplished by establishing profit centers within the hospital.
Profit centers are established to determine the profitability of individual services within a hospital, spreading the expenses of the hospital across each profit center. While the number of profit centers varies somewhat from hospital to hospital, some common profit centers include examinations, anesthesia & surgery, laboratory testing, hospitalization, imaging, pharmacy, diets & retail, medical treatment, dentistry, boarding, grooming, etc.
As part of the profit center assessment, assign all profit-center specific expenses (e.g., equipment leases, materials used solely by profit center) to the particular profit center, and then divide all of the hospital expenses (staff, overhead, general materials) by a fair method which allocates a relative proportion of total expenses to each profit center. In so doing, it usually becomes apparent that some services within a hospital are being "carried" by others, not being profitable on their own merits. This allows the hospital to understand and appreciate their most profitable services and to make changes to services that are only marginally profitable, or may be actually losing money for the practice.
Use Value Analysis for Equipment Purchases
Along with profit center analysis, it is important to develop policies in which new profit centers, or new expenses related to equipment are only approved if a clear value to the practice can be determined. Reinvestment in the practice is important, but asset acquisition should be evaluated in light of its potential to improve practice profits. New equipment must either provide medical value-added qualities that allow a higher quality of medicine to be performed and have value to the practice, or client value-added qualities that are immediately appreciated by clients and they would be willing to pay for services utilizing that equipment. Here are examples of some equipment that usually justifies their expense.
Dental prophylaxis equipment is of modest expense and allows thorough cleaning of pets' teeth. This is increasingly recognized by both veterinarians and clients as not just a cosmetic tool, but one that can improve the overall health of animals. Since about 85% of all pets over 4 years of age have some degree of periodontal disease, there is potentially wide application of this technology.
Radiowave surgery (e.g., Ellman Surgitron) uses high-frequency radiowaves to both cut and coagulate tissues. Much cheaper and typically more versatile than a laser, it provides cutting and coagulating, with applications including soft-tissue surgeries, and uses in dermatology, dentistry, ophthalmology, neurology, and oncology. It also provides almost bloodless surgery in birds and exotics.
Photographic capability is a powerful marketing tool in veterinary practices. This not only provides owners with images of problems they can't easily see themselves, but also provides a valuable addition to the medical record.
Other valuable equipment than can be profitable but warrants value analysis for each individual practice includes in-hospital laboratory equipment, blood pressure monitors, tonometry, etc.
Set Prices Reasonably
While veterinary practices are small business, pricing is often a reflection of charges by other veterinary hospitals in a community, and not necessarily based on the costs of offering those services. While it may be necessary to price some services on the basis of community expectations, veterinary practices would be well advised to use a more objective measure of setting fees, such as cost-plus pricing.
In most industries, cost-plus pricing is the fairest way to set fees, since it is a composite of actual costs, not guesswork. For any service provided in a veterinary hospital, a fair fee can be determined if labor, overhead, and materials are considered, as well as a desired profit margin. To keep the calculations simple, it is best to calculate overhead and labor rates on a per-minute basis, and materials have both a direct and an indirect cost. Finally, creating a final price to the client requires using an appropriate formula to calculate profit "off the top". Using a "mark up" is not the same as a profit margin. The appropriate formula is:
P = TC + π(P),
where P = Price to the client, TC = total costs, and π= profit desired, expressed as a decimal or percentage.
Data Mining & Compliance
Effective internal marketing requires knowledge of the pets being served by the practice, contact information for owners, and some way to measure compliance. Whether the system is computerized or manual, if the information is not available in the records, then it is hard to use it productively for internal marketing efforts.
The practice must be able to track this information and direct client educational materials to those owners who have been notified but have not yet acted. The information of what services are outstanding for any individual animals must be available as a central resource, not just buried in the medical records.
Benchmarking is becoming more and more popular in veterinary medicine, as more practices start to embrace more standardized methods of reporting. There now several excellent resources for benchmarking income and expense elements, veterinary fees, and compensation and benefits, but these are not universally available in all countries. In the United States, there is a free online resource for benchmarking provided by the National Commission on Veterinary Economic Issues.
For countries that have not established benchmarks, or fee schedules, it is worthwhile for veterinarians to work collectively to produce such standards. In too many instances, veterinarians compete against one another forcing prices down, rather than working collaboratively to ensure that all make a decent living. The goal is not collusion or price-fixing but to work together for fair pricing and reasonable expectations.
Develop Strategic Planning Protocols
Creating an organizational plan for a practice to experience significant financial improvement requires forward-thinking strategic initiatives. Improving existing operations will likely lead to improved circumstances, but substantial improvement (typically greater than 25%) typically requires changes in hospital processes themselves. Whereas examination of financial reports can tell a practice what it has done over the recent and distant past, it cannot provide a "roadmap" for substantial improvement going forward. This is the job of strategic profit planning.
Future success is better defined by incorporating staff and business process changes that are likely to be responsive to client needs, and to do soon relatively short notice. One of the best ways to encourage this process is to use established strategic planning tools. There have been several such approaches used in industry, including the Balanced Scorecard. The Business Assessment Report Kard (BARKSM) was developed by Dr. Lowell Ackerman as a strategic planning model specifically designed for veterinary practices.
1. Ackerman, L: Business Basics for Veterinarians. ASJA Press, 2002
2. Ackerman, L: Management Basics for Veterinarians. ASJA Press, 2003
3. Ackerman, L: Five-Minute Veterinary Practice Management Consult. Blackwell Publishing, 2006
4. Stowe, JD; Ackerman, LJ: Effective Veterinary Practice. Lifelearn, 2004