By: Kirsten Poppen, JD, CVA, Simmons Midwest –
You’re proud of your practice and with good reason. You have an attractive facility, a well-trained staff, newer equipment, and a solid client base. Overall, yours is a comprehensive, client-oriented practice. Yet perhaps you have concerns that your bottom line profits aren’t where you’d like them to be or you know you’re working harder than the bottom line shows. Current trends show many practice owners are in this same boat.
First, we must assess the financial health of the practice. To do this, we determine the bottom line management profitability. This is reached after adjustments and analysis of the practice financials (from the tax return or profit and loss statements)¹. While the analysis takes time and is viewed from several angles, at its simplest level, management profitability is the bottom line profits after all necessary expenses have been paid for by the practice.
Typically, we consider a small animal practice to be financially healthy if the bottom line profitability (after appropriate adjustments including fair rent and fair owner salary, among others) is 14-18% of gross. You may hear this referred to as true bottom line net, true profits, earnings, EBITDA, or similar.
In terms of actual dollars, this means that a financially healthy $1,000,000 grossing practice would have bottom line adjusted profits of $140,000 to $180,000 (14% to 18% profitability).
While each practice is unique—each with different variances, nuances, and routines—there are similarities and trends we see across practices. Unfortunately, one of the trends we are seeing is that the average practice profitability is 10-12%, with many practices in the 7-10% range.
This is a double whammy for average profitability and below practice owners:
1) You have less cash in your pocket from smaller profits each year. Instead of having $140,000-$180,000 in profits in your pocket (with the $1,000,000 grossing scenario), a current trend average practice, might have around $100,000 (10% profitability). Many practices have less; 7% profitability would be $70,000. And,
2) Your practice value is lower because value is largely based on the income stream. Generally speaking, a 7% profitability practice has a value of about half that of the same practice at 14% profitability.
You suspect you might have a profitability problem, but what can you do about it? Consider the following tips and pick one or two that speaks to you as a starting place.
Tip #1: Look for Discounted Fees.
Pull your practice’s income by treatment (or service or product) report for last year. Divide the annual income from that service by the quantity for that service. Compare that number to your practice’s price sheet. Is how you are “pricing” that service what you are actually “receiving”? This quick comparison can help identify areas of discounting (for missed charges see Tip #2). If you are discounting certain services, have an honest discussion with yourself. What’s the motivation behind the discounting? Are these intentional discounts? Are they your discounts? Or an associate or staff member’s?
Tip #2: Uncover Missed Charges.
I recently talked with a doctor about her increased top line gross and increased bottom line efficiency. I asked her to what she attributed this notable change. Had she raised prices? Increased the client base? Her answer was interesting—she hadn’t spent any more money advertising or attracting new clients. Nor was she seeing more clients per day. Rather she was working with what she had. She hadn’t increased prices in the manner I was expecting. Rather, she had increased fee collection through a system in place to catch missed charges. She wasn’t addressing discounting, rather unintentional, missed fees.
Have each doctor in your practice review a summary of their charges by client at the end of the day for any services performed or products provided but missed on the final invoice. The purpose of this isn’t to then send the client a supplemental bill, but to help the doctor see if there are routine or occasional missed charges. Is it a certain type of charge or does it vary? Maybe it was a busy Saturday morning or hectic afternoon. That’s going to happen. We’re more interested if there are routine, on-going missed charges and if measures can be put into place to remedy the issue. The solution might be as simple as DVM awareness.
Concerned about added time for this? This is intended to be a quick review, not a laborious new burden. How many clients would you estimate you see in a full day? Maybe 8 to 12? On the high side, 18? If a staff member runs the needed summary report for charges by client for a single day, the charging doctor ought to be able to review this and compare mental notes in about 1-2 minutes per client. Start small—try this audit twice a week for 10 minutes each time. See if this time investment pays off.
Tip #3: Reduce Drugs and Supplies Expenses.
Take your $1,000,000 grossing, small animal practice. We like to see the total drugs, supplies, lab expense (in-house and out), office expense, food, and similar items in the approximate 25% of gross range. This contributes to a nice, well-balanced, bottom line profitability. In this scenario, the collective Cost of Goods Sold expense dollar amount is $250,000 (an average expense of $20,800/month).
Compare this to a $1,000,000 grossing small animal practice with a higher COGS expense, say at 30%. This is $300,000/year, which is an average of $25,000/month.
Practice 2 is losing $50,000 in bottom line profits each year due to “extra” COGS expenses. Granted, there may be good reasons why your practice runs higher than the ideal 25% range, but not all practices have the right reasons. Some practices could benefit from reducing or streamlining their COGS expense.
Work with a modest and reasonable goal, broken down by month. Could you commit to reducing your COGS expense by $1,500 a month (in this scenario)? Instead of spending $25,000 a month average, could you reduce that to $23,500 average a month? Reducing your expenses by $1,500 a month increases the bottom line profits in this scenario by $18,000 a year, an increase in profitability of 1.8%. This may seem like an insignificant increase, but it’s not—first, it’s $18,000 extra in profits in your pocket each year. Second, that $18,000 bottom line increase adds approximately $50,000 – $80,000 to the practice value. Small expense reductions can make notable impacts.
Tip #4: Inventory Efficiency.
Are you familiar with minimum and maximum inventory levels for your inventory? I.e., you will always have 4 bottles of amoxicillin on the shelves but not more than 7 bottles. Then ordering is triggered accordingly. Try tracking your 10 – 15 biggest ticket drug/supply items. How much do you actually use of those particular items and over what time period. Then re-evaluate your computer or spreadsheet minimum and maximum levels accordingly to correspond with actual usages. You might find you routinely keep too much of something for too long a time period. Depending on your frequency of ordering, monitoring actual usages of the top items and adjusting minimums and maximums to fit can help balance inventory expenses. While this tip takes some work, notable inefficiencies with ordering are often identified. Many practices ordering habits are on auto-pilot. It’s easy to say that we always do this, so I’m going to continue with that without additional investigation or deeper inquiry. Check and see if auto-pilot is the right course.
As a part of this, we recommend you conduct an actual physical inventory count (or computer reconciliation with hard count) twice a year. Many practitioners do not know their current level of inventory, over or underestimate the true amounts, or rely on inaccurate computer counts. Yes, this takes some time, but being in the know makes a big difference towards appropriate ordering and expense control.
While good COGS expense and supply monitoring takes time, this is one of the top two biggest expense areas in the practice (along with wages). It is also often one of the least efficient expense areas. High COGS expense is often the culprit with struggling bottom line profitability. Taking some steps to reveal any COGS issues can go a long way in making profitability progress.
Questions? We can help.
Kirsten Poppen, JD, CVA is a veterinary practice valuator, broker, and consultant for Simmons & Associates Midwest, Inc. She can be reached at 877-322-6465.
- Did you know? Management profitability is typically not the same as tax return (or profit and loss statement) profitability. This can be for many reasons, including your sole proprietor and corporate structure, any one-time or non-operating expenses, equipment depreciation, debts, accounting for a fair rent expense, as well as a fair market salary for the owner’s DVM and management work.