David B. Gerber, DVM, BA
What is Profit?
Profit is the amount of money remaining after paying all expenses for the practice. Those expenses include all of the normal operating expenses which includes a reasonable veterinary salary for the owner, management compensation for the owner, and fair rent on the facility if owned by the practice owner. What remains is profit.
Why Should We Care?
Profit is the return on your investment for taking the risk and headaches of ownership. Profit is the basis of practice value. Without profit, there is no (or very little) value in a practice.
How Can I Estimate Profit Relatively Easily?
In the recently published The No-Lo Practice: Avoiding a Practice Worth Less booklet, there is a good introduction to understanding how to view profit. It says, “To determine this, you must step outside your practice and examine it as a potential investor. Pretend you are a silent partner. What amount of money would flow to you while sitting at home if the practice continued to use your money but without your active presence? All the functions you perform in the practice would have to be done by someone else who is fairly compensated for this work. All the expenses would have to be paid before you, as an investor, could get any reward. Your return from the practice is what flows to you sitting on your sofa at home while the practice carries on without you.
This amount can be compared to passively owning shares in General Electric or buying a Treasury bill. Your return on investment comes from (1) distribution of your share of the current profits and (2) from long-term appreciation in the value of your practice, an amount you receive only when you sell.1
Unfortunately, tax preparation is designed to show as LITTLE profit as possible in order to minimize tax burden. Financial statements typically do not adequately show the four areas of owner compensation described above and, in fact, for sole proprietorships, lump all of the owner compensation into a single figure, which is often misinterpreted as “profit.
Thus it is necessary to have tools to adjust tax returns or financial statements that can more easily show the true profit of a practice. The Valuation Issues Committee of the Association of Veterinary Practice Management Consultants and Advisors (AVPMCA) has developed such a tool. It was designed to be veterinarian-friendly and easy to use. It can provide an ESTIMATE of true profitability by inputting a few figures from your tax return. The tool, called The NoLo Practice Threat Advisory Worksheet can be downloaded for free in either Excel format or in a manual format directly from www.avpmca.org. Detailed instructions are included. The worksheet provides input cells for adjusting such items as depreciation, owner salary, interest, discretionary expenses, etc., so that a much truer profitability picture can be created. We recommend that this worksheet be completed at least annually.
Profit is the basis of value, but does not necessarily equal value. It is a prerequisite of value.
Practices with high value have high profit
not all practices with high profit have high value.
1 Association of Veterinary Practice Management Consultants and Advisors. 2008. The No-Lo Practice: Avoiding a Practice Worth Less
This article was originally posted on www.simmonsinc.com. Any reproduction on any other site is prohibited and a violation of copyright laws.