Plugging the Leaking Profit Margin

Fear the profit leaks in your equine veterinary practice, and build your practice’s net profitability.
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veterinarians need to focus on profit margins

While the veterinary industry as a whole is booming, why aren't equine veterinarians seeing more profitable businesses?

This article contains both good news and bad news. The good news is that the market for veterinarians has never been better! The animal health care market is booming. The American Pet Product Association (APPA) reported that Americans lavish approximately $69.4 annually on pet products and services.1

Pet owners typically spend more on their pets than on their own clothing or phone bills. Spending directly related to animal clinic visits went from $13.7 billion in 2012 to $15 billion in 2013 and an estimated $17 billion in 2017. 2, 3, 4 Projections estimate industry growth will continue at a rate of approximately 4.8% per year, as averaged from 2010 to date.5

With this rosy picture, why aren’t veterinary practices—and their owners—raking in more cash?

First, let’s recognize that the veterinary industry is unique in several respects. Consider the initial impact of new practitioners and their level of student debt. Statistics show that new veterinary graduates enter the market with a staggering average of $142,395 in student loan debt.6 This factor, measured against an average starting salary of all types of veterinarians of $72,229,7 significantly hamstrings the accumulation of wealth necessary for new veterinarians to start their own practices, or even after several years, to buy into existing practices.

Next, add the high cost of opening or purchasing an existing stationery clinic. Factoring in the cost of acquiring real estate (or paying rent), equipment, vehicles, product inventory, animal housing facilities, surgical facilities, diagnostic equipment, mobile clinics, and your employees and their benefits, you can understand why many practice owners don’t sleep well at night.

Finally, veterinarians—like many small business owners—love practicing veterinary medicine, but they aren’t quite so keen on staying on top of “business management” practices. Accordingly, many owners are missing the boat in terms of identifying areas of leaking profit, identifying steps to build new profit centers and engaging in long-term planning. That includes emergency and business succession steps needed to retain the value of an existing business when an incorporator is getting ready to retire or is forced by health issues to leave practice.

The good news is that a little attention to these steps now can reap immediate and significant returns to the owner ready to take more money home at day’s end.

Bigger Isn’t Better

So how does a practitioner analyze where his or her profitability markers lie, and, equally important, where those markers are leaking profit and how to quickly plug those leaks?

Many small business owners, including veterinarians, initially interpret gross revenues as the measure of their success—bigger must be better, right? Yet this analysis ignores the most meaningful factor: net profitability!

Regardless of what you’re billing out, how much of that are you collecting? How much of what you collect is then being spent on personnel, mortgages, inventory, vehicles and other costs of the business?

Thus, bigger isn’t better if it means you’re working longer hours less efficiently for less net profit. It doesn’t matter how much revenue a practice generates if more goes out than comes in.

Picture a Healthy Practice

Let’s start by first defining what a “healthy” practice looks like. Various treatises define a thriving veterinary practice according to five core areas that identify that a practice is:

1. consistently growing its top line (gross) revenue;

2. building and retaining a top-notch staff (i.e., leadership and people management);

3. managing and optimizing its supplier relationships and inventory costs;

4. providing exemplary care (both to its animal patients and its human clients); and

5. demonstrating timely and adept financial management.

Let’s Start Plugging Holes

So how does the practitioner even begin to plug profitability holes? The following offers a step-by-step template that will allow the veterinary practice owner to identify, analyze and plug those leaking profitability centers.

Carve out time and space for mindful analysis. If you’d wanted to be an accountant, you wouldn’t have gone to veterinary school. So devoting valuable time to financial review probably isn’t your idea of a weekend well spent. You must decide from the outset to create time and space in a “reward-type atmosphere” that gives you the incentive to conduct regular performance and financial reviews of the practice. Find a place and location that allows you the opportunity to conduct this financial review without making it feel like punishment. Give yourself at least two days—it’s worth it!

Devote 50% of your time to review and 50% of your time to relaxing activities and free time, which is your reward. Your free time permits you to reflect on the information you’re reviewing, and it creates the space necessary for determining strategy options based on the data you’ve reviewed.

This is essential in “mindful decision making,” a process that is supported by a growing number of Fortune 100 CEOs and regularly endorsed by Forbes magazine.8 Make this review time and place a pleasurable experience, and you’re more likely to engage in this process on a regular basis. Like creating and updating your wills and trusts, this review should be done on a regular basis, or you might find your strategic decisions quickly outdated by the changing realities of the industry and of your practice.

Come armed with relevant data. At least three to six months before your “business retreat,” design and begin collecting monthly data reports that track practice performance in essential profit centers. If necessary, work with an accountant to set up the necessary accounting system.

A little proactive consulting fee up front can allow you to avoid wasting your time and taking you away from what you do best. This also permits an expert in the field to work with you in setting up proper control and data accumulation centers.

Identify your KPIs. What data should your report(s) capture? This varies from practice to practice, but financial analysis shares some essential data centers. Practice profitability and progress is typically tracked through what we call KPIs, or Key Performance Indicators.9 KPIs should be tailored to your business, limited in number, bear a high impact on the practice’s success or failure, contain timely data and remain relevant to your specific objective.10 Thus, standard KPIs for a veterinary practice might contain monthly data on the following:

• number of transactions (patient visits or over-the-counter sales, if applicable)

• actual costs of professional services (including inventory, lab, radiology, food, bedding, mortuary and other related costs)

• labor (typically the highest cost of most practices)

• average monthly accounts receivable

• average monthly collections

• average new patients per month

• average returning patients per month

• available cash flow (net available money after expenses paid) per month.11

Use that data to create a budget, and watch for monthly budget busts! By tracking such categories on a month-to-month basis, the practice owner can create a meaningful budget and can track monthly performance to budget, simultaneously creating a tool that alerts you to leaking profit margins.

A well-designed budget-to-actual report, reviewed on a monthly basis, quickly informs business owners when a “budget bust” occurs. A budget bust is typically defined as any deviation of more than +/- 10% of your estimated budget. When a bust occurs, it tells you one of three things:

• Your original estimates were incorrect and must be adjusted.

• Your estimates are correct, but your management practices are causing the line item to be exceeded.

• Your estimates are correct, but your management practices are causing the line item to be underutilized.

None of this is “good” or “bad” in a vacuum. That analysis depends on the circumstances, but the key point is this: You are timely in discovering budget-to-actual discrepancies, giving you the ability to mindfully react to those deviations. In other words, you can determine whether this is really a profit leak, and if so, you can quickly plug that hole before your boat sinks!

Understand and utilize industry analytics. You should review your labor, inventory and service expenses. Luckily, you don’t have to reinvent the wheel. Industry reports show that thriving veterinary practices have readily identifiable formulas that can be plugged into your own analytics.

The most profitable practices traditionally reflect costs that run at the “40/20 rule.”12 This means that based on total gross revenues, 40% percent or less should be attributable to labor costs and 20% or less to actual costs of services provided, leaving 40% gross profit per month.

For example, if a practice generates $100,000 of income per month, then under this formula, no more than $40,000 per month would be spent on payroll expenses and benefits, and no more than $20,000 per month would be spent on tests, inventory, lab, radiology, food, bedding, mortuary and other related expenses.

Factor in other expenses and aim for a 14-18% net profitability goal. The 40/20 rule pertains to “gross” profit calculations, but the analysis doesn’t stop there. You also need to add in other expenses such as mortgage or rent, utilities, owner compensation, practice development, professional education, etc. The overall goal after adding all of these additional expenses is to hit a bottom line profitability of between 14-18% of gross revenues.13

Using our above model practice, let’s say these additional costs total $30,000 per month. This means that of $100,000 gross revenue generated per month, total costs amount to $90,000, leaving $10,000 per month net profit, or a bottom-line profitability of 10%.

This tells you that you need to either raise revenues or reduce costs to hit that 14-18% range.

But don’t get discouraged if you’re not there yet—industry statistics show the average practice runs between 10-12%, with many practices routinely in the 7-10% range.14

While that’s occasionally going to happen, you don’t want to remain in that range if your goal is improved profitability.

Implement strategic review and modification practices. So what do you do if you’re at the 7-10% profitability range? You get creative! You know how to diagnose your patients, so put those diagnostic skills to work in a business context. Here are areas to consider.

Review your inventory practices.15 Do you need to carry the amount of inventory you currently hold? What if you reduced it by a small amount to see what happens?

Are you utilizing appropriate markups (stocking fees, dispensing fees)?

Are you utilizing computer software to track and “alert” on upcoming product expiration dates?16

Are you taking advantage of manufacturer bulk purchase or “special” discounts?

Remember, small adjustments in inventory management practices can make significant impacts over a year.17

Review your fee schedules. Are you charging enough based on your industry, region and level of expertise?

Are you adjusting fees on an annual or biannual basis to keep track of inflation?

Are you educating your clients so they realize your fees represent the quality of care that you provide? (See my notes in the use of social media below. Remember to blow your own horn!)

Implement oversight controls to capture and bill for services and goods sold. Consider that each year, on average, it’s estimated that every veterinarian in a practice loses $50,000 in unbilled services and goods—$50,000 per veterinarian!18 Plugging that leak alone could bootstrap you into your 14-18% profitability goal.

Consider implementing day-end inventorying systems requiring all of your practice’s veterinarians to:

• review their daily call logs and the data within;

• review starting and ending inventory counts and, if discrepancies occur, review and correct as needed;

• ensure that daily call logs are routed to staff, either the same day or no later than the following morning, for immediate computer entry. Be sure that the date of service reflects the actual date of service and not the date of data entry (that is an ethical and state board violation if not done correctly);

• bill on a timely basis, but no later than every 30 days;

• research new trends in veterinary practice management software;

• put your Millennials to work researching and solving this tracking issue—they’ll love you for it!

Perform more in-house testing services. Consider this: The average cost for laboratory tests is 17 cents per $1.00 transaction, leaving a profit of 83 cents per dollar!19

Should you purchase or lease testing equipment to keep these costs—and profit margins—in-house?

Just Google “veterinary testing equipment lease” and you’ll receive a number of results showing companies that specialize in this service. Comparison shop at the AAEP Convention to ensure you are getting the best deal.

Leverage your professionals’ time. Look at your weekly management practices. Do you have sufficient support staff? This permits the professionals to efficiently examine and treat animals and not spend valuable time doing paperwork and administrative functions that are better (and in the end more profitably) performed by non-veterinary office staff.

Are you continually reminding professionals to allow the administrative staff to perform those functions?

If you’re not ready to hire full-time administrative staff, consider using an employee leasing service to hire part-time help until volume and cash flow justify adding a full-time position.

Also consider third-party accounting and billing service providers. For a small practitioner, these companies—which excel in doing the type of confidential accounting and billing services most practitioners hate—is a valuable and justified cost.

Consider designing and implementing wellness programs for large clients. For your large breeding and training stable clients, consider meeting with them to design packaged farm calls each year that are nothing but “wellness” calls.

While this will vary from stable to stable, these should:

• be tailored for each specific stable and type of business conducted there;

• include all routine vaccinations, dewormings and preventive care of all horses within that stable (i.e,. bulk examinations and treatment at one call);

• not include discounted fees, but generate stable or horse owner savings by:

° reducing farm call costs (allocated among entire stable vs. one horse)

° utilizing bulk purchase discounts (i.e., deworming, preventive care medications)

° utilizing bulk equipment use discounts (i.e., multiple sonograms or radiographs at one visit)

• be documented in writing with a proposed fee schedule signed and dated by the clinic and the stable;

• include clinic computer docketing and notice to the client when routine examinations are scheduled and coming up.

Wellness exam days at a stable could also be a good time to implement the kind of client outreach programs discussed below.

Recruit and maintain a loyal client base. You can do this when you:

• Identify where your most successful marketing efforts lie.

• Be specific about your technical skill, knowledge and expertise. Blow your own horn about awards, articles, board appointments, board certifications, faculty assignments or speaking engagements.

• Highlight your clients’ achievements (show wins, breeding success, industry positions or accomplishments).

• Put your Millennials to work—design a monthly social e-newsletter with lots of client pictures (with written permission, of course).

• Identify and highlight those features that distinguish your practice from others.

• Implement regular “soft medicine” practice, including:

° Advertising and sponsorships;

° Tracked results (putting a code on flyers and tracking that code when business comes in);

° Records of new business referrals and where they are originating. Send thank-you notes or emails for referred business. Cut the avenues that generate little to no new business, but increase your support of the proven marketing winners.

° Client intake sheets. Use the information to create and implement regular “warm fuzzy” communications, such as pet birthday cards and newsletter updates on industry developments (i.e., contagious disease outbreaks for your travelling show clients).

° Notice to clients about pharmaceutical manufacturer rebates and special programs. Provide them with either a seminar or a link for direct access.

° Personalized service reminders

° Quarterly education or fun clinics, or receptions for clients.

Research, obtain and use a good practice management software. This is a great research project for your Millennial employee(s). Work smarter, not harder, by using the most relevant and up-to-date computerized programs. The cost is typically offset by the man-hour savings provided by the program’s use.

Remember that patience and training are required any time you introduce a new software or management program to your office. Software changes aren’t for the faint of heart, but typically they give you a profitable return on the discomfort required to implement new programs.

Budget for your largest overhead costs; review their impact on bottom line profit. This isn’t rocket science. If you know you need to purchase a new building or a mobile veterinary clinic, allow yourself enough advance time to make that purchase in a high-revenue year. Use your accountant as a consultant for big financial decisions and tax impact.

Want a partner? Bring in a small animal practitioner. This business decision is particularly true for equine practices. Nearly all horse owners also own one or more dogs or cats.

Industry reports show that the most profitable equine practices have a small animal practice. This doesn’t mean that the equine vet also handles the small animals—you should bring in a small animal practitioner as your partner.

Be creative; also consider providing a small animal mobile veterinary clinic at major horse shows or events attended by the equine vet. You can use the mobile clinic for routine care such as dentals, deworming and vaccinations.

Consider third-party payment options to facilitate up-front payments. Third-party payment options typically apply to high-dollar transactions such as surgery or long-term therapy or care. However, if the client can’t pay all at once, consider offering your clients:

• pet insurance that will cover the bill;

• veterinary financing options such as CareCredit or a similar type of proprietary veterinary health care card.20

Talk to your banker or industry financial experts for ideas in this arena and how it could affect your practice.

Implement a credit and collection policy and incorporate it into your client intake forms. Again, this is not rocket science. Implement new client intake forms that contain not only information about the client and patient, but also:

• identify the clinic’s payment policies and right to refuse services or lien the animal for non-payment (seek legal counsel to correctly word your rights, as this changes from state to state).

• identify a returned check fee and a late-pay penalty interest right. Remember, penalty interest must be set by contract. That means you can’t just stick a statement on an invoice and permit parties to contract to late-pay interest of 18% per annum, or 1.5% per month compounded each month that the payment is late, but it must be contractually negotiated.

• identify any third-party payment providers with which the clinic works, including their contact information.

Consider adding “other services” as potential profit generators. Does it make sense to consider adding a pet cremation service to your practice? Can you partner with 501(c)(3) non-profit organizations or other groups locally to provide grooming services or the manufacture and sale of treats, clothing, custom tack, etc?

Make sure you ask yourself whether these will be viable profit center additions or whether they will be time- and money-draining rabbit holes that divert you from more profitable endeavors.

Plan early for your business continuity plan. At least once a year, engage in “emergency triage” planning for the clinic and create a written contingency plan. How will the practice continue in the event a key employee is unexpectedly disabled or dies?

Consider utilizing an attorney to create the necessary legal documents to keep the business running, which at a very minimum should include:

• Limited durable powers of attorney authorizing others to act in the owner’s place in times of unexpected disability or death. This should also include addressing each practitioner’s licensing for those practices with young veterinarians and only one licensed owner.

• Key man life insurance that can immediately kick in with funds to carry a practice until the legalities of an unexpected death can be addressed.

• Some form of buy/sell agreement that lists the owner(s) intentions and desires in the event of an unexpected disability or death, and identifies prospective purchasers of the business.

Consider ways to permit young veterinarians to create “vested ownership” in the practice by earning small incremental ownership interests based on hitting specifically identified performance goals. This creates a potential built-in buyer when you’re ready to retire. This also creates a vested interest for the success of the practice by its veterinary practitioners.

But be smart. If permitted in your state, use non-compete/non-solicitation agreements custom drafted by your legal counsel.

Develop, Maintain and Effectively Use Your Professionals

Develop early and ongoing relationships with attorneys, accountants and commercial bankers. Stay in touch with them about new developments in the business. Many times this can be done on a no-cost basis by scheduling a friendly lunch. Be sure to clarify that it’s “off the clock” up front.

Don’t be afraid to bring these professionals in early—remember that a stitch in time saves nine, and early professional intervention, counsel and advice can typically avert disasters before they happen.

Ask yourself if you’d rather pay $250 to $500 for a written opinion on a situation or hundreds of thousands of dollars for charging ahead, only to be hit with the legal and financial consequences of a bad decision.

Also remember: If a professional screws up in giving you that opinion, you might have a right to have that professional defray your exposure through his or her own malpractice coverage.

Take-Home Message

In summary, while the above comprises a wide variety of brainstorming options to help you be more profitable, the key to remember is that the mind is the builder. Thought represents the first major step toward action.

By taking the time to read and consider this article, you’ve already focused attention on implementing many of these profit-saving mechanisms. You’re halfway there! Just invest a bit more time and sweat equity, and you’ll find your business is efficient, maneuverable and more profitable.

Denise E. Farris practices equine, insurance and veterinary law in the Kansas City area. “AV” rated in Martindale-Hubbell, she has been named in “American Law Firm of the Year–Kansas” by Corporate Vision Magazine; “Best of the Bar” by the Kansas City Business Journal; “SuperLawyers,” “Top 100 Lawyers Kansas” and “Top 50 Female Lawyers Kansas” by Kansas City Magazine; “Preeminent Women Lawyers” by Martindale-Hubbell; and EQUUS Magazine’s “Leaders in Equine Law.” In addition to writing numerous articles, Farris has been a featured speaker at local, state and national symposiums, including the National Equine Law Practitioner’s Conference, the AAEP Hambletonian Conference, the National Farrier’s Convention, the National Multiple Trail Users Conflict Symposium and the North American Trail Ride Conference. She’s an avid equestrian who competes in endurance and competitive-trail riding.

DISCLAIMER: This article provides general coverage of its subject area. It’s provided free, with the understanding that the author, publisher and/or the publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The author and publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained.

References

1. American Pet Products Association Pet Industry Market Size & Ownership Statistics Report (2017). http://www.americanpetproducts.org/press_industrytrends.asp

2. Id.

3.“Furry Profitable: Shi Tzus Having Hip Replacements and Cats Underwater Treadmills: American’s Booming Pet Business”, THE ECONOMIST (2/2/2017). http://www.economist.com/news/business/21716077-shi-tzus-having-hip-replacements-and-cats-underwater-treadmills-americas-booming-pet

4. http://atwork.avma.org/2017/02/06/2016-report-market-for-veterinary-services-available/

5. supra fn 1.

6. “The State of Student Debt”, Veterinary Business Advisors, Inc. (2/17/2017). http://veterinarybusinessadvisors.com/the-state-of-student-debt/

7. Id.

8. Marturano, Janice, “Finding the Space to Lead: A Practical Guide to Mindful Leadership”, 1 ED. (Bloomsbury Press 2014). . Janice served as Vice President and Deputy General Counsel for Fortune 100 Corporation General Mills and is a recognized leader in changing the leadership paradigms employed by corporate America.

9. Blach, Edwards L., DVM, MS, MBA, “The Anatomy of a Profitable Veterinary Practice”, Veterinary Advantage (December 2016); http://blog.vet-advantage.com/companion/the-anatomy-of-a-profitable-veterinary-practice.

10. Id.

11. Id.

12. Id.

13. Kirsten Poppen, JD / CVA, Veterinary Practice Profitability Trends and Tips in Selling a Practice, (3/14/2017) http://simmonsinc.com/veterinary-practice-profitability-trends-tips/

14. Id.

15 http://veterinarybusiness.dvm360.com/10-tips-boost-profitability

16. For an excellent treatise on veterinary COGS (Cost of Goods Sold) and Inventory Management article, see: http://simmonsinc.com/wp-content/uploads/2011/05/veterinary-inventory-management-guide-2011.pdf

17. Id.

18. VPI®-Veterinary Economics Financial Health Study (©2014 Veterinary Pet Insurance Company and Brakke Consulting).

http://www.partnersforhealthypets.org/Uploads/ccrivg2s.mqe/VPI-Veterinary-Financial-Health-Study-WVC-2014.pdf

19. Id.

20. https://www.carecredit.com/vetmed/