John Chalk and Dr. Robert Magnus presented a well-rounded talk titled “Profitability Implications of Revenue & Expenses” at the 2022 AAEP Convention. To begin, Chalk reviewed the current economy, touching on stock market performance, federal debt, inflation and the consumer price index. He also discussed rising interest rates, housing prices and the yield curve inversion that is signaling a coming recession before moving on to current unemployment figures.
Profitability: Keeping Score in Equine Practice
After setting the stage with current conditions, Chalk turned to profitability in equine practice, stating that it is a way of keeping score. “Keeping score allows you to evaluate where you are and where you want to go,” he said. “If there is no score kept in a game, then no one knows whether they are winning or losing. The same is true in business. You must keep score in several areas so you can know whether your business is winning or losing.” In order for the score to be meaningful, you should measure it regularly. As you track performance, trends will begin to appear that allow you to judge whether or not you are making progress in that particular area. A practice’s financial statements are the scorecard, he said.
With inflation, costs go up, and “this is a perfect time to raise fees,” the speaker said. To illustrate the effect of not raising fees as expenses rise, the effect of raising fees by the rate of inflation, and the effect of raising fees to twice the rate of inflation, he presented a condensed profit and loss statement that showed how a practice could thrive even in these difficult times. He showed that while keeping pace with inflation would increase the absolute dollars of net ordinary profit, the percentage of revenue would remain the same. If you raised fees by twice inflation, the net ordinary income would be higher in both dollars and percentage.
Activity Based Costing
Magnus continued the discussion by talking about the many different services that practices offer. He challenged practice owners to ask themselves: What services are you good at? What services are profitable? What services are not profitable but you enjoy them? And what services does your local equine community need now and in the future? He said that by using activity-based costing, a practice owner could figure out what impact the practice’s top 10-15 services have on profitability in order to determine where best to focus the practice’s efforts.
Activity Based Costing (ABC), Magnus continued, requires digging deeply into costs. Your service fee minus the drugs and supplies used is not an accurate cost figure, he cautioned. By evaluating your most common services, he said, you can determine if your practice is losing money on a service. If it is, you can determine ways to make processes more efficient by utilizing people and technology differently so that you can turn that service into a profitable one.
Implementing Fee Changes to Increase Profitability in Equine Practice
In discussing necessary fee changes, the speakers said practices must consider methods, timing, financial impact for the practice, and client price sensitivity (market impact). Clients accept regular small increases more readily than unexpected larger jumps, they shared. Another important aspect to fees is to make sure your practice management software has automatic markups. That way, drugs and supplies that bring increased costs to your practice are automatically increased to the client.
The biggest expenses to practices are cost of professional services (COPS), employee costs, and facilities and equipment costs, explained the speakers. Of these, employee costs are the highest, followed by COPS. When revenue can be produced by non-veterinarians, profits will be higher. Within the facilities category, the lease or rent of the practice facility will generally be 5-6% of the revenue, as a benchmark, they shared. If the practice owners also own the real estate, this can be an important asset. “Younger practice owners that do not own the real estate should make that their goal,” said Chalk.
Final Thoughts
In summary, the speakers noted that during times when inflation is high, practices must keep pace with increased costs by adjusting their fee structure. They should also focus on improving operational efficiency and keeping a talented team. It is important to remember that increased revenue does not necessarily mean increased profitability in your equine practice, they emphasized. Focusing on the key expenses, growing revenue, and monitoring and proactively managing the business for profitability are all necessary for success.
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