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Tuneup Time

Your practice might need an overhaul if you neglect to monitor a few key performance indicators.

Tuneup Time
Like tracking COGS as a percentage of revenue, you must understand the cost of employing everyone who is not a veterinarian.

If you’re the owner, a veterinary practice is likely your largest asset. But is your clinic a finely tuned machine that produces a handsome return? If you don’t know the answer or are afraid of the question, it’s time to check the key performance indicators.

Just as a car might break down if the dashboard “Check engine” light is ignored, disregarding your practice’s KPIs can lead to financial pain or chronic underperformance.

Here are the first KPIs we track monthly and quarterly for our veterinary practice clients and work to improve:

Revenue

The number of patient visits and the prices charged drive the money coming into your practice. If your revenue is not increasing at least 3% a year, you are not keeping up with inflation. (The warning light is flashing.) Improving a practice’s financial success is nearly impossible when the revenue doesn’t rise.

The common causes of stagnating or declining revenue are:

  • Fewer clients. Check the numbers in your practice management software. If patient visits fell, you need to know why. Has the outstanding client experience disappeared and, if so, are pet owners going somewhere else? Are bad online reviews dissuading potential new clients from requesting appointments? Is your clinic understaffed and unable to see as many patients as last year?
  • Lower average transaction charge. Are the doctors not making recommendations as well as they did before? Do you need more team members to make or reinforce those recommendations? Have you not raised prices in the past year?

COGS

Cost of goods sold, or COGS, includes what gets used in the delivery of veterinary care — for instance, prescription drugs, preventives, laboratory and hospital supplies, and retail items. Ideally, your financial statements are set up with a COGS section so that you can quickly see the dollars going out the door with these expenses.

Start by looking at COGS as a percentage of revenue. Looking only at the dollars might mislead you. For instance, a client once told us, “We need to stop sending lab work to the referral lab. Our lab bill has doubled. There is just too much money going out the door.” The client’s observation ignored the fact that while the monthly lab bill rose from $2,000 a month to $4,000, the revenue jumped by $6,000 a month. By looking at the relationship between COGS and income, we identified the referral lab as one of the practice’s most profitable segments. If a clinic spends more while doing and charging for more lab work, that’s great medically and financially.

We build for our hospital clients specific COGS goals. Depending on your clinic’s mix of products and services, your COGS goal as a percentage of revenue will change. Take, for example, similar-size practices that gross $1 million annually. The clinic that does zero boarding and grooming but sells a tremendous amount of food and parasite preventives will have a higher COGS goal than one that has a significant boarding and grooming operation but sells few preventives and no food.

Among the common causes of COGS running too high as a percentage of revenue are:

  • Prices are not regularly updated. You lose ground when your prices don’t keep pace with the rising cost of products and services.
  • Missing charges. Failing to invoice just one fecal or heartworm test or medication sale each day you’re open can negatively affect revenue in a big way long term.
  • Too much discounting. Track it. We’re not saying you can’t discount, but we have seen practices that gave away far more than they realized. The impact is the same as with missed charges — reduced revenue but no cost reduction.
  • Poor inventory management. Practices that have a high COGS typically do a lousy job of managing inventory. If you can’t print an accurate inventory report from your practice management system, that’s an obvious opportunity for improvement.

Non-DVM Payroll

Like tracking COGS as a percentage of revenue, you must understand the cost of employing everyone who is not a veterinarian. When comparing your practice’s numbers with published benchmarks, make sure it’s apples to apples.

In this case, we’re talking about gross payroll. Employer payroll taxes, retirement plan benefits and health insurance costs are not included in the goals discussed below. We’re not suggesting that employee benefits aren’t important or don’t warrant tracking. Instead, our goal is to provide a simpler method of analyzing labor costs by focusing on the most impactful part: How much you pay your employees.

When we use the example above of a $1 million practice with no boarding or grooming but significant product sales, the non-DVM payroll goal will be lower because selling products is less labor-intensive than boarding and grooming.

When labor costs run higher than ideal, consider these possible reasons:

  • Not using team members to their full potential. A well-utilized staff helps you make recommendations, book appointments and provide the “Wow!” experience that drives client referrals.
  • Poor scheduling. For example, too many people are present to open or close the practice or during lunch breaks because “That’s how it has always been done.” Instead, be sure to staff each day based on the number of doctors working, whether surgeries are scheduled and the number of exam rooms needed.
  • Poor performers. Firing employees can be one of the most difficult tasks for a practice owner, especially if the team member with a poor attitude has good technical ability. On the other hand, keeping such a person can negatively affect the entire team.
  • Paying too much. We list this one last because it is uncommon. We’d instead focus on properly utilizing staff, scheduling appropriately and removing rotten apples before we consider excessive pay. Veterinary practices are experiencing significant upward pressure on compensation because of state-imposed minimum-wage increases or simply the supply and demand. Like it or not, experienced team members are in short supply, and a short supply drives up prices. It’s a conversation we’re having with all our clients this year.

In the end, the red light on your dashboard should flash when the combination of COGS and non-DVM payroll exceeds 45% of revenue. It’s then time to pull over and look at revenue growth and expenses to get your practice firing on all cylinders again.

Financial Wellness co-columnist Jason Castner is the managing shareholder at Lacher McDonald & Co., CPAs & Consultants. He leads the company’s veterinary consulting segment and assists clients on tax and financial planning and other issues. Co-columnist Robert A. Sparrow is a partner with Triune Financial Partners LLC. A graduate of Rockhurst College, he has been in the financial services industry for more than three decades. Learn more at triunefp.com. Veterinary industry veteran Fritz Wood contributed to this report.


LIVING THE DREAM

A financially successful veterinary practice should permit you, the owner, to:

  • Pay off your student loans faster.
  • Provide financial stability for you and your family.
  • Enjoy time away from work without financial worries.
  • Plan for a long and wonderful retirement.
  • Maintain your high-quality medical equipment and hospital to support the best patient care.
  • Compensate your work family as they deserve.
  • Sustain an extraordinary workplace.

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