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Compendium November 2010 (Vol 32, No 11)

In Practice — From Seat-of-the-Pants Financial Management to a Blueprint for Success

by Leslie A. Mamalis, MBA, MSIT

    Historically, many veterinary practices monitored the health of their business by looking in two places: the checkbook and the appointment book. If the balance in the checking account was over a certain dollar figure (or perhaps greater than zero!) and the appointment book was full, business was good. In these practices, the first sign of trouble might not come until the money ran out before all the bills were paid. This kind of seat-of-the-pants financial management may work in spite of itself, but a better process involves regular review of key performance indicators.

    Key performance indicators, or KPIs, are quantifiable measurements, or metrics, that reflect the critical success factors of your business (BOX 1). KPIs provide an objective way to monitor or track trends and quantify progress toward a goal.

    In today’s technology-driven practice, there is no shortage of practice management data. At any point in time, you can access volumes of reports on income, expenses, production by service code or doctor, inventory on hand, payroll summaries, numbers of new and active clients, and how many rabies tests you ordered last year. The issue isn’t about getting data—it’s about turning that data into meaningful information you can use to manage your practice.

    Selecting What to Monitor

    When you select and monitor KPIs, you are focusing your attention on key figures that are important to achieving your goals. Many common KPIs measure revenue, expenses, and production, so a good place to start is comparing practice income to your five largest expenses. For most practices, these are:

    • Doctor and staff compensation and benefits
    • Drug and supply costs
    • Laboratory expenses
    • Facility rent
    • Ancillary costs, such as food and retail items

    These five expenses likely represent more than 80% of the costs to your practice. Depending on the number of patients and species you see and your practice modality, your five biggest expenses may be slightly different. The point is to watch where most of your dollars are spent. No matter how closely you monitor office supply costs, buying less paper isn’t going to have as much impact on profitability as stocking less inventory. Don’t agonize over other expenses until you have your top five under control.

    Not everything that is important to monitor appears on a profit and loss statement, so include a mix of financial and nonfinancial measurements in your KPIs. For example, compare average transaction charge (ATC) for each doctor and the practice overall. Is your new associate coming up to speed as quickly as you expected? If not, this is a clue that you should spend more time mentoring. Does the new doctor recommend the same treatment plans that you would? How are these plans presented to clients, and are they accepted? Are charges missed? Help new associates succeed so they can, in turn, help the practice succeed.

    For specialty and emergency hospitals, a practice-wide ATC may not be meaningful, so track ATC for each doctor and each department. Also track production at each location, again by doctor and department. Be consistent in what you measure and how you measure it. The difference between counting all invoices one month and only closed invoices the next will have you comparing apples to oranges.

    The most meaningful KPIs for your practice will align with your practice’s mission and goals. If one of your goals is to increase your clients’ use of your Web site, track the number of visits to your home page, the number of appointments made online, and/or total purchases from your online store. If these metrics are stagnant or decreasing, try a different approach to gain visibility and increase traffic to your site. If site use is increasing, is it due to your efforts or some other factor?

    Depending on your specific goals, you may wish to include KPIs such as cash balance, total client accounts receivable, or payments made to outside specialists. As your goals change and evolve, so should your KPIs.

    Measuring Intangibles

    It’s fairly easy to monitor tangible factors such as gross fees or number of new clients. But how can you quantify intangible factors that are vital to achieving your goals? To measure qualities like improved teamwork or employee morale, first turn those intangibles into tangibles. For example, low employee morale is tied to high employee turnover. If one of your goals is to improve morale, you may wish to track the number of employees who leave voluntarily or are dismissed. You could also count the frequency of staff conflicts or the number of staff complaints.

    The strength of strategic relationships is another intangible factor that is important to every business. Many specialty and emergency practices measure relationships by the number of active referral sources. Count the number of practices that refer cases to you and the number of referrals from each. Identify your top 10 referring practices and monitor changes over time as a way to judge your relationship with each referrer. A change may indicate that it’s time for a personal visit.

    Using Industry Benchmarks

    Compare your financial and productivity KPIs to averages published by the American Animal Hospital Association, American Veterinary Medical Association, or National Commission on Veterinary Economic Issues, but understand that no practice will match the “average.” Every practice is unique, and what is reasonable for the practice around the corner or on the other side of the country is not necessarily reasonable for you. When you compare your practice to these benchmarks, try to understand why your numbers are higher or lower. Pay attention to the way the numbers are defined to be sure you are making the right comparisons.

    Few benchmarks are available for referral/emergency practices, and applying averages from companion animal practices may not be meaningful. For example, drug and supplies expenses generally account for a lower percentage of gross fees in referral and emergency practices than in wellness practices, not because emergency practices buy less or what they buy is less expensive, but because their revenue is generally higher. An emergency practice may treat a patient with the same drugs a wellness practice would use, but because the emergency practice can charge more, the expense of the drug as a percentage of income is lower. In addition, rent expense as a percentage is usually lower for specialty and emergency practices, again because revenue is higher. Practices that operate 24 hours a day get greater use of their facilities, further reducing rent expense as a percentage of gross fees.

    If you believe that your practice is truly unique and can’t be compared to other practices, compare yourself to yourself. How does 2010 compare to 2009? How does March compare to February? Is your income the same? Higher? Why? The most important question to ask when looking at your KPIs is “does this make sense?” Are staff salaries higher because the workload is greater or because you just gave raises? Is a new schedule adding expenses?

    Charting Your Progress

    Anything you can count can be tracked as a number, but it’s tedious to read through row after row of data. Make reports more interesting and easier to read by including charts or graphs that show how results change over time (FIGURE 1). On the other hand, don’t put all your energy into slicing and dicing the numbers or creating pie charts and scatter graphs. Monitoring KPIs doesn’t ensure that your goals will be met. Measurements and metrics are the first steps—it’s what you do with those metrics and the changes you implement that will make your practice successful.

    Improving KPIs always involves some level of change in how people behave. Everyone in your practice can influence KPIs at some level, so share practice goals with your staff. Explain what is important and how each employee can have an impact on the results. Define what success looks like, and share progress along the way. Enlist everyone’s help to reach your goals.

    Conclusion

    Business-savvy owners and managers know that regular review of KPIs can help identify problems before they become critical and ensure that the practice is headed in the right direction. As you establish goals for 2011, take time to define what success looks like and how you will measure progress toward your goals. Then set up a monitoring system to track your progress. Use KPIs to go from seat-of-the-pants financial management to creating a blueprint for success.

    Leslie Mamalis is a member of Summit Veterinary Advisors, LLC (www.summitveterinaryadvisors.com).

    NEXT: Reading Room: Feline Dentistry Oral Assessment, Treatment, and Preventative Care

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