The theme of the business section at the 2017 AAEP Convention held in San Antonio, Texas, was “Back to Basics.” A number of excellent presentations about finances, inventory, marketing and risk mitigation were on the program, and we have summarized a sampling of those talks.
Business New Hour
Lisa Kivett, DVM, DACVIM, James Bryant, DVM, and Ernie Martinez, DVM, headed up this popular kick-off to the Business Education sessions at the AAEP Convention.
To begin, Martinez reported on current conditions in the racing and breeding industries. He reported that at the time of his presentation, North American Thoroughbred yearling sales in 2017 surpassed those of 2016, with an average price of $76,286 in 2017 compared to $65,204 in 2016. The median price of $24,000 was up $4,000 over last year’s $20,000. Another positive indicator: The 2017 gross sales figure was higher than in recent years. (Editor’s note: For up-to-date figures for Thoroughbred sales, visit bloodhorse. com/horse-racing/thoroughbred-sales/ state-of-the-market.)
At the Keeneland 2017 November Breeding Stock Sale, the highest price was $6 million, and at the Fasig-Tipton November Sale, two horses sold for astonishing prices ($9.5 million and $8 million).
Martinez reported that the number of horses sold in the Standardbred industry declined slightly, but the average price increased modestly. Turning to Quarter Horses, he reported that the Four Sixes fall sale saw the highest gross and sale average in the history of the sale.
In racing news, Martinez reported that average daily purses and average daily overall handle year to date had increased modestly over 2016. He also stated that economic statistics recently released on Kentucky’s international trade showed a 33.1% increase in the value of exported, live purebred horses. These statistics included all breeds, but the percentage of exported Thoroughbreds has historically accounted for at least three-quarters of the number of horses shipped out of Kentucky to other countries. The percentage of exported Thoroughbreds among all breeds in Kentucky was 83% in 2014 and 75% in 2015, according to the U.S. Department of Agriculture.
Nationwide, the total value of breeding stock of all breeds exported from the U.S. totaled nearly $175.5 million. The total of all other horses exported (which would include yearlings, 2-year-olds, and other racing stock) was more than $125 million from January through November of 2016, according to the U.S. Census Bureau. The value of the breeding stock rose 22% compared with the same period of time in 2015, while the value of “all other horses” dropped 23%, he said.
Finally, Martinez reported on the substantial financial impact of equine competitions. As an example, the Event at Rebecca Farm in Kalispell, Montana, attracted 10,000 attendees and nearly 600 horses. A recent study by the University of Montana Institute for Tourism and Recreation Research estimated the economic impact of the 2015 event at $4.4 million.
Turning to the economic outlook, Bryant reported that the total value of economic activity generated from veterinary services has been steadily increasing since 2004. The equine sector has contributed employment of 36,000, a $1.2 billion income, a $2.4 billion output and tax payments totaling $45 million. Bryant continued with good news, indicating that the forecast for the equine industry is positive due to the human-animal bond, the influx of premium products and the growth of horse therapy programs. In addition, the national unemployment rate dropped to 4.1% in November, which Bryant said signals strong job growth but presages upward pressure on wages.
All of this positive equine industry and economic news should bode well for 2018 veterinary business.
Kivett reported on the many cases of sexual harassment in the news this year and noted the #MeToo outpouring of accounts of personal assaults that flooded social media. She also highlighted the responses to the AVMA’s recent sexist gaffe in an article on bovinevetonline.com. (The statement was that “female veterinarians might find it more interesting to work with small companion animals, whereas male colleagues prefer to be outdoors among large animals.”) In the same vein, Kivett noted the Newsweek article that pointed out how women physicians are called “doctor” less often than their male peers. She then stated that in a recent study, female surgeons were found to have significantly lower death rates than male surgeons.
Martinez discussed the net value of a veterinary degree, which is higher for females due to the fact that the average male college graduate earns 55% more than a comparable female. In other words, the male with a bachelor’s degree earns 55% more than the female with a bachelor’s degree. As a DVM, the male does not get as much of a financial benefit, because his bachelor’s degree lifetime earnings are almost the same as those from the DVM. For females, the bachelor’s degree lifetime earnings are considerably less than the DVM earnings. So there is less gender wage gap in DVM earners. Because it costs a lot to get the DVM degree, males reap less benefit.
He then changed gears to report on the trend of “machine learning” and its implications, but shared that new research proves that doctors consistently outperform symptom checkers such as WebMD. (“Machine learning” is when computer algorithms are used to determine most effective treatments and most likely diagnoses, with the machine getting “smarter” as feedback is given. Websites where people input symptoms are similar to this.)
Bryant spoke about practice ownership and the need for new graduates to utilize the profits of ownership to rise above their student debt. He shared news about the launch of “The Practice Owner Incubator Internship” with four companion animal graduates of The Ohio State University’s veterinary school. This internship offers recent graduates the opportunity to grow their skills as clinicians while simultaneously engaging in one-on-one practice ownership coaching and mentorship.
There is a need for equine veterinarians. Bryant continued with information about the results from a 2017 national study in Britain that involved 5,200 people owning 15,433 horses. The respondents reported that more than a third of the horses had health problems, with the most common issues being lameness and skin disease.
Moving on to Bionic Science, Bryant reported on the growing use of experimental technology that can “smell” disease on your breath.
Next, he shared the UCSF development of an artificial kidney that could replace dialysis and transplant. The project was funded with a $6-million grant from NIH in 2015, and scientists will be trying to progress to human trials later this year.
In Big Pharma news, Martinez reported that Amazon.com Inc. gained approval to become a wholesale distributor from a number of state pharmaceutical boards, according to a review of public records. It’s unclear, though, whether the e-commerce giant is planning a move into the prescription drug delivery business. In addition, Apple is expanding into several health-related ventures.
Finally, Bryant reported on the acceleration of mergers and acquisitions, with Mars’ $7.7-billion acquisition of VCA in 2017 leading the way. However, Mars was required to divest 12 specialty and emergency clinics in 10 cities due to the substantial decrease of competition services by eliminating head-tohead competition.
Outside of the companion animal business, Bryant said that Mavana merged 21 mixed animal practices with 105 full-time-equivalent veterinarians and 350 employees. This company has 45 shareholders and is 95% veterinarian owned, he said. He added that it was formed to provide a better platform for mixed animal practices to control expenses, leverage talent and keep operating costs controlled, as well as increase shareholder value and make buyin easier and more affordable. (Editor’s note: In January 2018, Hagyard Equine Medical Institute in Kentucky joined the Mavana group.)
Melissa Maudlin, a certified veterinary practice manager, gave two presentations on inventory management. She noted that inventory is a large expense in veterinary medicine, second only to staffing costs. Because poor management of inventory can lead to poor cash flow and low profitability, she emphasized the importance of good policies and procedures.
Maudlin defined inventory as all goods owned and held for sale or use in the regular course of business. She stated that one person should be accountable for the oversight of inventory, even if multiple staff members are involved in ordering, receiving or stocking.
When considering the costs involved with inventory, she indicated that along with direct costs, there are holding costs and ordering costs. Holding costs include sales tax, building and storage costs, and losses from damage, theft and expiration. Typically, these costs are 8-15% of the unit cost, she said. Ordering costs are primarily due to labor and are 15-20% of the unit cost, she added. By having a streamlined ordering process with appropriate ordering quantities, these costs can be minimized, she said.
To determine appropriate stocking levels of inventory, said Maudlin, reorder points, reorder quantities, par levels and lead times must be considered. This means you will know when to reorder, how much to reorder, the optimal amount to have on hand and how fast you can get it.
To figure reorder points, you can utilize your management software to run a report to determine the amount of an item sold in a particular time frame, then figure your average daily sales by dividing by the number of days your practice was open for business. Multiply your average daily usage by your lead time to determine your reorder point, she said. Your reorder point will obviously vary by product, but you should try to never have more than 30 days of supply in stock at any time. However, product packaging might make that difficult.
The speaker recommended an inventory turnover of about nine turns per year. She cautioned that increasing this number can increase your ordering costs and make your risk of running out of stock higher. To determine your inventory turnover rate, she said, you must first determine your average inventory, then divide your total annual purchases of inventory by this figure.
Pricing items in your inventory can be by margin or markup, according to Maudlin. Margin is the difference between the total cost of carrying an item and the selling price, which requires that you consider all the holding and ordering costs, as well as the direct cost of the item. In markup pricing, the price is set based on a percentage of the direct cost, she said. In addition, it can be important to price commodity items competitively and make up the difference by pricing other items higher.
One of the biggest challenges with inventory management in group practices is getting the veterinarians to agree on which items of a particular type (e.g., hyaluronic acid) to stock, as most veterinarians have personal preferences. Obviously, having fewer items will be more efficient and decrease ordering costs. One way to achieve this with dispensed items, Maudlin recommended, is to utilize an online pharmacy. In addition, working regularly with a primary distributor will generally reduce your ordering costs.
Finally, Maudlin recommended having an inventory system with all pharmacy item reorder points and reorder quantities noted, and weekly manual inventory counts performed. She noted that in larger practices, the practice management software might produce a useful reorder report if the system inventory is accurate. She still recommended regular counts of high-turnover items, and promoted the concept of a central supply with daily stocking of other practice areas.
Although inventory management can be time consuming and requires attention to detail, this large practice asset demands to be managed with care, she concluded.
In keeping with the theme of “Back to Basics,” the Monday business session was devoted to understanding practice finances. Ann Dwyer, DVM, began with a presentation outlining the utilization of 100 pennies of income to help veterinarians know where their money is coming from. (Editor’s note: You can find this exercise on EquiManagement.com by searching for “100 Penny Exercise.”)
Although equine veterinary practices vary widely in scope and size, they all share a consistent set of expense categories, she said. Because an essential part of understanding practice finances is understanding what happens to the revenue earned, a clear view of expenses is essential.
Dwyer reviewed the importance of utilizing standard accounting software such as QuickBooks and a comprehensive chart of accounts. (Note: You can purchase a chart of accounts from Marsha Heinke, CPA, by scrolling down on this page on her website at www.vpmp. net/products-page.)
She said that practice expenses can be segregated into five categories: cost of professional services (COPS), expense and depreciation expense. When consistent and timely entries of expenses into your accounting software are made, powerful management tools become available. For example, the percentage of revenue used for each of these expenses can be analyzed and compared to previous time periods.
Dwyer explained that COPS includes the practice costs that are directly involved in producing services. These expenses include imaging costs, pharmaceuticals, laboratory testing costs, medical supplies and hospital supplies such as feed and bedding. In the category of “facility expense,” you include rent, taxes and repair or maintenance of any building utilized by the practice. Other facility expenses are telephones, utilities, fuel, business insurance and those costs associated with operating ambulatory vehicles.
The direct costs of running the practice office are considered office expenses, and those entail things that are separate from directly providing veterinary services. In that category are collection costs, advertising, credit card fees, postage, printing, payroll companies and professionals’ fees (attorney, accountant, business consultant).
Labor expenses include all the costs of having employees in the business. These include payroll taxes, salaries, workers’ compensation insurance, professional liability insurance and continuing education costs, she noted. Health insurance premiums and retirement plan expenses are also in this category.
Lastly, depreciation allows for stretching the cost of equipment and other fixed assets over time—primarily for tax purposes, she explained. IRS rules assign an annual portion of the original cost of an item as an expense that accounts for the expected life span of the item. In most cases, the IRS designates the expected lifespan of equipment purchases. It is important for a practice to budget for investment in fixed assets each year to replace broken or outdated equipment, offer new services and refresh technology. A well-prepared budget will keep depreciation expenses stable from year to year, she advised.
In discussing veterinary compensation, Dwyer stated that approximately 25 cents of every dollar of revenue should be available for compensation for veterinarians. All of the costs of compensation are included in that 25 cents, she emphasized. These include practice sponsored benefits, payroll taxes, workers’ compensation and continuing education.
To detail the elements of compensation, Dwyer said that wages (W-2 income) are the largest portion of veterinary compensation. This income paid to associates might be as a salary or as a base salary, with the opportunity to earn a production bonus. Benefits provided to associates can include health insurance, retirement account contributions, licenses, professional association dues, paid time off, continuing education allowance, personal use of a practice-owned vehicle and cellphone, and discounted services for personal pets.
Breaking down the different elements of compensation, Dwyer stated that for every $100,000 of practice income that a practice spends on W-2 wages for an associate veterinarian, an additional $15,000 is spent on benefits and perquisites. An additional $11,500 is spent on mandatory federal and state payroll taxes and payroll-related insurance programs such as unemployment, disability and workers’ compensation.
Out of every $1 that an employee earns, she added, an additional 6.2 cents for social security and 1.45 cents for Medicare are withheld for the individual’s share of these federal programs. Other state deductions for disability and unemployment vary according to the location of the practice. Individual income taxes are also withheld from the paycheck, with the amount is based on marital status, the number of dependents, and the anticipated applicable tax bracket. Typically, this accounts for an additional 15 to 20 cents of each dollar of pay. Many employees also elect to have their portion of health insurance premiums and retirement contributions deducted from each check.
In summary, Dwyer emphasized that when undertaking negotiations about compensation, it is important to remember that employees take home 25-30% less cash and employers spend 25-30% more cash for each dollar of W-2 wages. In addition, she concluded, a practice can only afford to spend about 25% of the income an individual generates on direct veterinary compensation costs.
Form Successful Partnerships
Partnerships are full of challenges, stated attorney Ky Mortensen, but they can also have great value. The synergies of talent, access to capital and economies of scale available when forming a partnership can help grow your practice, according to the speaker.
Different forms of partnership include the traditional partnership of multiple veterinarians, mergers of existing practices and corporate acquisition. In order to evaluate a potential partnership, it is important to do a careful analysis. Having an alignment of values, well-structured leadership and a strong legal foundation are imperative for success, according to Mortensen.
Maslow’s pyramidal hierarchy of needs can be extrapolated to the business world, said Mortensen. First, a business has a basic need to make money to pay expenses and earn profit. But a veterinary workplace also can be a fun place to work, with empowered employees who spend many years of their careers in place and who make a difference in the lives of animals.
In addition, practice owners can have an exit strategy while ensuring the sustainability of their businesses. He asked the question “Which is more important, money or a fabulous culture?” When choosing partners, having an alignment of these values and expectations is essential, he said.
Determining the lines of authority and leadership roles is crucial to having a partnership that thrives. All of these discussions should take place before the partnership is formalized. Growth of a practice can create new challenges, and owners might be poorly suited to meet them.
Mortensen discussed Founders Syndrome, a pathology that is often seen when original owners of a growing enterprise become unable to adapt to a new paradigm. Their energy and charisma, which originally was a positive force for growth and innovation, shifts to inflexibility and entitlement, leading them to feel they are indispensable and that no one can do things as well as they can.
Difficulty with delegation and a high need for control characterize these toxic leaders, he said. Personalities, egos and poor governance structure can seriously harm partnership ventures and eliminate trust.
Partnerships need a strong legal foundation, said Mortensen. The partnership documents should include non-compete provisions, a valuation methodology for future sales, restrictions on transferability of shares, choice of corporate entity, corporate meeting formalities, management of the practice, voting rights and percentages, managing disagreements and deadlocks, capital contributions, accounting methodology, distributions and compensation strategy, and transfer of ownership under different scenarios and authority.
In summary, good partnerships require careful preparation and excellent communication. By establishing expectations, sharing values and thoughtfully planning structural leadership, success can be within your grasp.