This article originally appeared in the Fall 2024 issue of EquiManagement. Sign up here for a FREE subscription to EquiManagement’s quarterly digital or print magazine and any special issues.
Veterinary practices can quickly stray from the path to profitability if they have excessive expenses or problems producing or collecting revenue. Just consider the profit equation: Revenue – Expenses = Profit. Not enough revenue or too many expenses—or both—can erode profit.
Although making money on an animal’s misfortune can seem wrong to veterinarians focused on doing good for animals, profit is necessary. The veterinarian uses it to repay loans and interest, incentivize business ownership, fund employee bonuses or pay raises, fund equipment purchases, or build business value beyond the fair market value (FMV) of the practice assets.
During transitions of ownership, the profit known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is used to calculate practice value. Thus, maximizing EBITDA is important to gain the highest possible price in a practice sale.
Even when a sale is not anticipated, practice owners’ distributions from EBITDA add to the compensation they earn for their efforts as veterinarians. Practice owners’ lifetime earnings are usually significantly higher than those of associates because of this distribution of the profits earned.
Profit is highly dependent on the owners’ decisions about pricing, inventory management, discounting, and expense management. Many veterinary business owners look proudly at the amount of gross revenue their practices produce, but they neglect to look regularly at their profitability. Similar practices in the same region can have different valuations because they have different profitability. Here are your options for increasing profitability.
1. Make More Money
To make more money in a veterinary business, you can:
- Increase the number of hours and/or days worked.
- Charge more through increasing fees or spending more time on the most profitable services.
- Spend less by decreasing expenses incurred while doing the work.
While these three actions typically increase profit, they each have important nuances.
In the current environment of equine practice, increasing the number of hours or days worked is unlikely to be popular. Therefore, it is very important to maximize revenue by capturing “whole” revenue for the work done. This means charging for every service, accounting for every dispensed item, and offering every service the client could value.
Revenue wholeness means you’re achieving maximum potential revenue for the services performed. It also means this amount is not diminished by missed charges for services, dispensed items, call charges, or outpatient fees; reduced by discounts; or minimized through missed opportunities to provide additional services the client values.
When you reduce revenue through failure to achieve wholeness, profit bleeds away. A clinic with a revenue of $2 million and the typical expenses of an average equine practice can realize a 12% EBITDA. That means $240,000 could be available to distribute to owners. If this practice misses just 10% of its potential revenue, the EBITDA falls to 5% or $90,000. If it loses 20% of revenue, no EBITDA exists, and the practice is operating at a loss.
2. Catch Invoice Omissions
Sedation administered (especially second doses) and dispensed supplies and/or medications are large sources of missed charges in most practices. Careful invoice review can catch many of these omissions. Before finalizing an invoice, review it for errors. If you have an assistant or technician, a second set of eyes can be very helpful. If you are alone, methodically review the sequence of events of the farm call examination or day of hospitalization.
Newer practice management software systems are useful in this regard by having linked items, often in dropdown menus, which help capture all performed services.
Dispensed items that fail to be invoiced, which cost the practice in dollars rather than doctor time, can be sources of marked losses. It might take the future sales of several items to earn back the cost of just one unpaid-for item. This is especially true for medications that cannot be marked up robustly.
3. Only Offer Planned Discounting
Another very common source of revenue loss is discounting. Practice owners are often the worst offenders, but all veterinarians sometimes want to discount their fees. When a client complains about your bill, you might feel some obligation to lower it. If you have a case with a bad outcome, despite your best efforts, you might feel you should lower the amount owed. Many veterinarians who like a certain patient—and know the client cannot afford the treatment—will give a discount on the bill. Practice owners are sometimes prompted to agree to a discount on a bill when a client who has owed money for a long time offers to pay some portion of it if the remainder is forgiven. Of particular harm are the situations where trainers offer to use a particular practice exclusively in return for steep discounts on their personal horses, which might be numerous.
It doesn’t take long for these discounts to strongly erode profit.
While you should minimize discounting, planned intentional discounts to drive behavior can be positive. For example, giving a lower farm call fee when clients participate in a vaccine clinic day in a particular geographic region can increase efficiency, which can help meet demand for services during a busy time of year. Some practices offer discounts on dental work during slower months to flatten out the seasonality of revenue.
Unplanned discounts in reaction to a client’s complaint about fees are rarely indicated, and the word might get out that your fees are negotiable. Although clients might ask for a discount for any number of reasons, there is no harm in asking, so try not to take offense. Prepare a simple response so you will be unflustered. For instance, say, “I wish I could, but our fees are based on our practice’s expenses. We want our practice to be here to care for your horses for a long time,” or “To keep our prices as low as they can be for everyone, we have a policy not to give discounts.”
Because of veterinarians’ drive to do good for animals, offering an annual compassionate discount account for each doctor to “spend” on one case or over many cases can be a morale booster you can build into the budget. This allows yet another response to a discount request: “I have a small budget each year for helping in tragic cases. This year I used it to help a young 4-H member when her pony had a bad laceration.”
Taking control of the desire to discount can often follow recognition of the trade-offs involved—decreased value of the practice or decreased profit to distribute to owners or to give as pay raises.
If you find yourself wanting to give discounts regularly, consider the following method to train yourself to stop. Just like using a credit card makes it easier to overspend than paying with cash, it is easy to remove line items in an invoice or simply add a discount line without thinking deeply about the consequences.
To stop your propensity for giving discounts, go to the bank and withdraw $1,000 in $50 or $100 bills from your personal account. Put this money in your wallet. The next time you feel like giving a discount, pull out your wallet and hand over some cash instead of subtracting an amount from the invoice. In reality, this is exactly what discounting is—taking money from your pocket and giving it to your client.
4. Perform Invoice Auditing
Invoice auditing is a useful way to ascertain what percentage of loss your practice might be experiencing.
First, choose a group of invoices of a particular type, such as emergencies, ambulatory calls, or hospital cases. Then, review 15-30 medical records and their associated invoices to determine the services/products received but not invoiced, the services/products discounted, the total missed and discounted charges, and the total as a percentage of the amount of the invoice. Calculate the average percentage of missing revenue to predict how much your practice is losing through failure to capture revenue or by discounting.
By sharing the findings with practice team members, you can raise awareness and increase revenue wholeness.
For associates who are paid as a percentage of their revenue production, preventing these losses will increase their compensation while increasing the practice’s profit. Owners that push back against an end to discounting or fail to create invoices in a timely fashion might change their perspective when the facts are evident.
5. Review Medical Records
Medical records review can be a good team exercise that might increase revenue through a shared understanding of how other team doctors approach certain cases.
One example would be a veterinarian who offers foot radiographs to each worried horse owner whose animal clinically appears to have a foot abscess (but drainage was not obtained) to rule out a coffin bone fracture or osteomyelitis. Other doctors might decide to take a similar approach in the future.
Another practitioner might offer a quantitative fecal for every colicky horse to rule out parasitism.
These revenue boosters have a clear clinical basis and might be selected by some engaged horse owners, increasing both the level of medical care for the patient and client satisfaction.
6. Increase Revenue and Decrease Expenses
Another way to positively influence profitability is through small changes to revenue by increasing fees, the number of hours worked, and/or the amount of time spent delivering more profitable services. These types of changes can have a noticeable impact on profitability.
A 1% increase in revenue can change bottom-line results by much more than 1%. Nothing increases EBITDA like the effect of increasing fees. In fact, a 5% increase in fees can create a 50% increase in EBITDA.
Consider a practice producing $2 million in revenue that increases fees by 5%. All other things remain equal, and the revenue will increase to $2.1 million. If the EBITDA before the fee increase was $198,900, after the increase it will be $298,900, representing a 50.1% increase. If you increase fees and the amount of time spent delivering more profitable services, your practice’s EBITDA could increase even more sharply.
Decreases in expenses can also have big results for your practice. For instance, if your practice’s administrative expenses total $100,000, and you manage to reduce them by $5,000 (5%), that $5,000 will be added to your EBITDA. Imagine evaluating all categories of spending and being more cautious in your spending. The impact on profit could be considerable. However, after finding the low-hanging fruit of expenses you can trim easily, the expense side is a difficult place to find savings.
To have the biggest impact on profit, do both—maximize revenue and reduce expenses. This is the key to the best profitability. While increased profitability often doesn’t require big changes, it is important to remember even small negative changes in your revenue or expenses can powerfully affect your business. Decreased revenue or increased expenses can hit profitability hard. (For additional reading on this topic, see The 1% Difference by Murray Lyons and Kelly Lyons.)
Take-Home Message
In summary, not achieving revenue wholeness can have drastic effects on your practice’s profitability. Ways to capture all the revenue for your services include awareness, invoice review, invoice auditing, medical records review, and minimizing discounts. Failure to capture all the revenue from the work you do has marked effects on the profit your practice earns, which can affect practice value, ability to fund equipment purchases, ability to give raises, and even the viability of the business.
You can also boost profitability by regular, small increases in fees accompanied by careful monitoring of expenses. Combine those with controlled practice growth of the scope that maintains both team and client satisfaction, and your practice will prosper.
Related Reading
- Business Briefs: Increasing Efficiency in Your Equine Practice
- The 100 Penny Exercise: Understanding Practice Expenses
- Handling Payment in the Field
Stay in the know! Sign up for EquiManagement’s FREE weekly newsletters to get the latest equine research, disease alerts, and vet practice updates delivered straight to your inbox.
