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Practice Management

So, How Is Your Practice Doing?

by Mark Opperman, CVPM
    Stethoscope and money

    Dr. Jones has owned the All Pet Animal Hospital for 15 years. Normally, the practice enjoys a 12% to 15% increase in gross per year. However, this year, things do not seem to be going as well. Dr. Jones is not quite sure what is going on, but the balance in the checkbook is lower than it has ever been, and he even had to hold his personal paycheck this week in order to make payroll. Dr. Jones has noticed that business is slower, but he is not quite sure what he needs to do to turn things around, so he decides to review his finances.

    The Numbers

    Up to now, Dr. Jones hasn’t paid much attention to his financial statements or any of the reports coming from his veterinary software program. Things were going well, so why should he? However, since this is the first time in 15 years that his income has not increased, he is understandably disturbed. When he starts to break down his income and expenses, he discovers the following:

    • His gross income is down, his expenses are up, and of course, his net income is way down.
    • His support staff costs are 23% of his gross income.
    • His inventory costs are 19% of his gross income.
    • Two of his employees are getting more than 5 hours a week in overtime, which totals about $4000 a year.
    • His fees have not changed in the past 2 years.
    • His number of invoices is down, as is his number of new clients.

    Let’s see if we can help analyze his findings, find the problems, and take some steps to correct them.

    Where Is the Money Going?

    Support Staff Costs

    There are two basic expense areas that can be controlled within the practice: payroll and inventory. It is generally accepted that support staff costs (gross payroll for support staff, including payroll taxes, not doctors’ or owner’s compensation or other benefits) should run between 18% and 22% of gross income. Dr. Jones’ support staff costs are 23% of his gross income, which is a little high.

    There are many reasons why support staff costs may be too high. One of the most common is that the team is not properly scheduled, with too many people at some times of the day and too few at other times. A team schedule should be determined by the practice’s office hours and surgery schedule, not by team members’ preferences. For example, when Dr. Jones is scheduled for office hours, he needs a receptionist, an exam room assistant, and a technician. If another doctor is scheduled for surgery, the practice needs another technician, a veterinary assistant, and maybe another receptionist. The doctors’ needs should drive the team schedule.a

    Overtime is the second most common reason for high support staff costs. In fact, many practices could hire another person for what they are paying in overtime. Overtime should be kept to less than 1% of total payroll. To achieve this, try establishing 38-hour workweeks for fulltime employees with the understanding that, as needed, employees may be asked to work 40 hours a week. If this results in inadequate staff time, consider whether hiring a new full- or part-time employee would be more cost-effective than paying overtime.

    Other possible reasons for disproportionate support staff costs are lack of employee training and ineffective employee utilization. Have your employees been trained so that they can perform income-producing activities? The more competent employees are, the more responsibilities they can take on and the more they can assist the doctors in the practice. Hiring licensed veterinary technicians and trained assistants and developing an environment of quality and excellence where education and continuing education are valued can pay off significantly for the practice.

    Income factors may also affect the percentage of support costs. Common reasons for inadequate income include:

    • Not charging enough for services or not charging effectively
    • Inappropriate discounting policy
    • Internal control problems, in which services with established fees are being rendered but not charged for
    • Fee schedule has not been updated

    Lastly, it is possible that embezzlement is occurring. According to one study,1 one of every 10 veterinary practices is the target of embezzlement every year. (In this study, to be considered embezzlement, the amount stolen had to be more than $10,000.) Proper internal controls can help prevent embezzlement. Read this case report for more information about these controls.

    Inventory Costs

    Inventory is an expense, not an investment; after all, what inventory item have you ever purchased that appreciated in value? Inventory should normally be 14% to 16% of gross income. So when Dr. Jones found his inventory was 19% of his gross, he knew he had a problem. What would cause this number to be high? Let’s see.

    Shelf Life

    The number-one reason for high inventory costs in a veterinary practice is shelf life, which is the time from when a product comes into the practice to when it is used or sold. What is the optimum shelf life for any product? The technical answer is a minute or a second! You want in your practice only what you are going to use that day. Of course, this is not practical, so the best answer is 1 to 2 months. There are exceptions; for instance, food should turn over within a week or two, and some products that are necessary for the sake of quality medicine or surgery will not be used or sold within 2 months. But, for the most part, items should be used or sold within 1 or 2 months of coming into the practice. Therefore, you should set your reorder point at a 30‑day supply and your reorder quantity for the amount you use in 30 days.

    For example, let’s say your practice uses an average of four boxes of 3-cc 22G × 1 syringes per month. In your practice management system, your reorder point should be set at four boxes, so when you have four boxes (a month’s supply) left, these syringes come up on your reorder report. At this time, you should order another four boxes, so if they are delivered tomorrow, you have a 2-month supply.

    At this point, you may be wondering: why have a month’s supply on hand? The answer has to do with the costs of ordering. These costs, which are incurred every time you place an order, include all the activities of ordering: placing the order, unpacking the shipment, entering inventory data into the computer, paying the invoice, etc. So although items in inventory do not appreciate in value, the cost of having a certain amount of money tied up in inventory must be balanced against the costs of ordering. The point at which these costs most offset each other, which can be calculated using  a formula called the economic order quantity formula, determines the ideal shelf life of an item. In general, the economic order quantity formula indicates that items should have a shelf life of 1 to 2 months.

    Product Duplication

    The second biggest reason for high inventory costs is product duplication. How many different types of flea control products, ear cleaners, food, or other products do you maintain in your practice? If you are selling all these products within the 1- to 2- month shelf life, great, but if certain products sit on the shelf for longer than 2 months, you have a problem. One simple but effective way to find out how long a product sits on your shelf is called the red dot idea. Have one of your assistants place a red dot on all your inventory items. After 30 days, how many items still have a red dot on them? How about 60 or 90 days later? Technically, all the items with red dots should be gone (used or sold) after 60 days. You’ll be amazed how many aren’t.

    Other Factors

    As with support staff costs, income factors may also be at work. If you have not raised your fees while all your other costs have gone up, your inventory expenses may seem out of line. Are you charging for all your services?

    Theft can affect inventory costs as well. Comparing income to expenses for specific types of products can help uncover ongoing theft. For example, compare your cost of food with the income received for food in a month. If your normal markup is 34%, add that to your costs and see how the result compares with your income. If your costs are higher than your income, you have a problem.

    ***

    Dr. Jones did some research. He used the red dot idea and was amazed at how many items had red dots on them long after 2 months had passed. He reduced his products’ shelf life and started to use bar code scanning and his veterinary software program to control his inventory. He also found a lot of duplicate inventory items—products that other doctors had ordered that were still sitting on the shelf—so he instituted a new policy that he would have to approve the purchase of any new inventory items. His inventory is starting to fall in line.

    Why Isn’t the Money Coming In?

    In a “healthy” practice, a full-time veterinarian should generate about 3,200 professional transactions per year. These are transactions in which the doctor is formally involved in the delivery of service. When total transactions are considered, 5,000 invoices per full-time veterinarian is a healthy number. Dr. Jones saw a decrease in both of these areas.

    Also, an average of 20 to 25 new clients per full-time veterinarian per year is normal growth for a healthy practice. Dr. Jones had slipped to an average of 15 new clients per full-time doctor. How can these trends be turned around?

    Reminder Services

    One of the first things to look at is the practice’s reminder system: how effective is it? Normally, reminders are 80% to 85% effective, meaning that 80% to 85% of clients respond to them. If a review shows that your reminders’ effectiveness is not up to par, look at your system.

    I normally suggest a three-tier reminder system. The first reminder should be sent a week or two before the pet is due for a regularly scheduled visit. This reminder should consist of an e-mail and a postcard. If the client does not respond, a follow-up e-mail and a tri-fold reminder letter should be sent 30 days later. If the client still does not respond, a final e-mail and a past-due reminder postcard should go out 30 days later. Three reminders is all I generally suggest; after that, you might be harassing your client. If a year goes by without a visit, you might send a purging card or letter to the client to find out the status of the client and the pet.

    Another important aspect of any reminder system is to make sure your patients have reminders in your veterinary software program. Run a report on patients that you have seen in the past year but for which you have no future reminders. You may find that although you have seen many pets for medical problems (e.g., skin problem, eye problem), their preventive information is not in the system. If you are missing this information, you are also missing reminders and a major revenue source for your practice.

    Fees

    Dr. Jones had not increased his fee schedule for 2 years while the expenses of materials, salaries, rent, and utilities all went up. Shame on Dr. Jones! Your annual fee schedule increase should be at least double the cost of living increase for the year. If not, you will experience a decrease in net income and end up playing the catch-up game, just like Dr. Jones.

    Advertising

    Dr. Jones’ new clients were down, but he was not doing anything to actively promote his practice and bring in more new clients. He did not have an up-to-date Web site; in fact, all he had was a single Web page done by the telephone company. So, he hired a third party to develop a new Web site, and he also decided to visit other veterinary-related businesses in the area, such as boarding and grooming facilities, and invite them to come and tour his practice. When he visited a large local pet store, he discovered that it was looking for a new veterinary hospital to work with. They developed a great relationship, and Dr. Jones is seeing a significant increase in the number of new clients coming into his practice.

    The Bottom Line

    Dr. Jones had not stayed on top of his practice and its financial affairs. It was not until the checkbook started to run dry that he became concerned. Many practices are experiencing a decrease or flattening of their practice income, or worse. You can say it is the recession and sit back and try to ride it out, or you can start to analyze the problem and respond to the challenges. There is no reason you can’t continue to grow your practice and be profitable, but you might have to work a little harder to accomplish this goal.

    So, how is your practice doing?

    Reference

    1. Manning P. Theft and embezzlement: how safe is your practice? In Pract 1999;21:336-339.

    aVMC has developed a unique spreadsheet program that can automatically schedule your practice based on parameters you choose. Click here to contact VMC.

    didyouknow

    Did you know... 4.4% of veterinarians younger than 30 work with food animals or a mix of food and companion animals, while 44% of those who do are 50 and older.

    These Care Guides are written to help your clients understand common conditions. They are formatted to print and give to your clients for their information.

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