What Makes a Successful Veterinary Practice?

This can be measured in many ways; however, the focus of these notes is just looking at this from a financial perspective. The author has used terminology familiar in the UK, but the principles will be relevant whatever the location of the practice around the world.

Financial success can be considered from several perspectives, e.g., sales growth, staff efficiency etc., but ultimately what matters is profitability and cash generation. Each owner may have different aspirations of success using such measures depending on their own circumstances, but this article considers how the author views overall success.

Essentially there are three key drivers of profitability:

 Turnover

 Gross profit performance

 Staff cost efficiency

Practices that get these three things right generally see a better profit performance than those that do not. This article outlines why this is the case.

Other overheads are clearly important but generally have less of an overall impact on the profitability of the practice than the above areas.

Turnover

A good starting point is to identify how many clients a practice needs (Figure 1).

Figure 1. Statistics on turnover from the UK.

Most veterinary software systems will be able to identify the number of clients registered.

Having identified the number of clients, income generation follows. Understanding the key components driving your turnover and how individual vets perform in these areas is very important (Figure 2).

Figure 2. The main turnover categories.

Measuring these key components of turnover on a regular (monthly) basis is very important. Consideration should be given as to whether this is done at a practice, branch or individual level. All would be preferable as the data will be revealing.

Successful veterinary practices will have all of the above data and track it regularly. They will be analysing it to identify opportunities and weaknesses to continue to drive the sales of the practice. Comparing the data is critical as a minimum for your own practice. Looking at external data comparisons, e.g., market surveys, will also prove beneficial. Small changes in each category of income can make a big difference to the financial performance of the practice. As an example, if each vet generates £40 extra per day (220 working days in the year), this amounts to an additional £8,800 of income per annum. Most vets would be capable of this.

Gross Profit Performance

Gross profit is calculated as shown in Figure 3.

Figure 3. Calculation of gross profit.

An average UK practice therefore has a gross profit margin of 72.7%. It is important that if you compare your performance to other practices, or the above, that your gross profit is calculated in the same way. Within this there are key components:

 Mix of sales

 Buying terms

 Pricing strategy

 Charging

Mix of Sales

As identified above £1 of fee generates £1 of sales, i.e., 100% gross profit margin. £1 of drug sales generates a gross profit based on the mark-up applied to it (Figure 4).

Figure 4. An example of gross profit based on mark-up.

The above has a 100% mark-up on cost price but a 50% gross profit margin. Tracking fee and drug sales is therefore very important to understand the gross profit margin.

Buying Terms

The better the buying terms available to the practice the higher the margin on the drug sold can be generated. Negotiating hard and or joining buying groups should be considered.

Pricing Strategy

A sensible and simple pricing structure is very important for the practice. If the practice owners are uncertain about what to charge for procedures then market surveys are often available or advice can be sought from professionals. Many pricing structures are historic and have no clear basis. Sorting this out will enable a structured approach to be followed in the future.

Charging

Setting a pricing structure is one matter, implementing it is another. It amazes the author how often items are ignored, forgotten, blatantly undercharged or negotiated without reference to the owner (Figure 5).

Practices that resolve charging issues make significantly higher profits than others. This is just charging what the price structure is set at!

Figure 5. An example of the financial impact of poor charging.

Staff Cost Efficiency

Staff are the biggest asset of the practice but also the biggest cost. Reviewing staff costs is therefore critical (Figure 6).

3.55 vets would generate £731,000 of sales (based on turnover per vet of £206,000). Average staff costs as a percentage of sales are therefore around 43% for a small animal practice. A typical range would be 37–46%. Practices at the lower end will be more profitable. This is the overall practice performance, but it can be taken a stage further to individual performance.

Practices can measure individual vets' efficiency, considering their financial package versus their turnover. We would expect their turnover to be five times their financial package. As an example if the vets turnover is £210,000 and their financial package £45,000 then their turnover is 4.67 times their package. Individual factors will influence this, e.g., type and mix of work, but it is a good guideline.

Figure 6. Staff costs of an average one owner UK veterinary practice.

Summary

Managing the above areas is key to delivering success (Figure 7). Overhead management should not be ignored but the opportunities to generate a significant financial impact are often less than in the three areas outlined. All of this requires good quality data but most of the data are readily available to practices in their veterinary software or financial software. Of course, good quality input is critical.

Figure 7 shows scenario 1 having the lowest gross profit margin and highest costs, through to scenario 3 where the gross profit is higher and staff costs lower.

A small percentage change in gross profit and staff costs can have a significant impact on overall profitability. Focusing on these areas, together with sales performance will generate success and prosperity.

Figure 7. A simple example demonstrating the impact of good management of the above areas.