Today's Veterinary Business

OCT 2018

Today’s Veterinary Business provides information and resources designed to help veterinarians and office management improve the financial performance of their practices, allowing them to increase the level of patient care and client service.

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62 Today's Veterinary Business VetPartners Corner Balance Sheet We hear a lot about P&Ls in veteri- nary medicine — I will address them later — but our balance sheets tend to not get as much attention. Bal- ance sheets reveal assets, liabilities and equities. Assets, including cate- gories like bank balances, inventory and equipment, are found at the top of the page and are listed in order of liquidity. Liabilities follow and include accounts payable, whether short term for bills from a vendor or long term like a mortgage or equip- ment lease. Equity is the last section and is a product of all assets minus all liabilities. Balance sheets are useful because they allow us to calculate: • Current ratio and "days cash on hand" to evaluate your ability to meet financial obligations. Days cash on hand measures your ability to make payments when due by telling you the average number of days' worth of expenses you can cover at any given point. You need to strike a balance between having enough cash to pay your bills each month and meet unexpected expenses, but not having so much cash that you are not utilizing your assets effectively. For exam- ple, you might want to invest extra cash in hiring another CVT, who will generate ad- ditional income, rather than letting the cash sit in your checking account. • Debt ratio and debt-to- equity ratio to evaluate how effectively you use credit to finance your operations. • Return on assets (ROA) to measure how productive- ly you use your assets to generate revenue. It tells you how many cents of profit you generate with each dollar of assets. A higher ROA means your practice is more produc- tive. To calculate ROA, divide net income by the value of your total assets. Profit and Loss Statements (P&Ls) One of my favorite workshops, whether the audience is composed of veterinary students or seasoned practice owners, is a P&L exercise. It starts by reviewing why profitability matters and then transitions into dis- secting real hospital P&Ls to identify and calculate KPIs and what they tell us about the health of a clinic. For those unfamiliar with P&Ls, as I was early in my career, in their simplest form they are an income statement categorizing a business's revenue and expenses for a given period. As practice owners, we should be able to use P&Ls to: • Identify opportunities to gener- ate profit by ethically increasing revenues and decreasing costs. • Complement our budget by highlighting areas where ex- penses need to be tightened or where additional spending might benefit the hospital. • Plan for profits, including sup- plies, capital investments and owner return on investment. VetPartners Corner In case you missed my August/September article, "Uneasy Street," I examined the difference between flying by the seat of our pants as practice owners versus leveraging financial statements and key performance indicators (KPIs) to make educated, intentional management decisions. For those readers ready for a structured, calculated management process and the benefits it brings, let's pick up where we left off and dive into some of the tools at our disposal. By Stith Keiser While each P&L line gives us some- thing that could be of value, I tend to focus on these five primary P&L KPIs because they often represent the greatest opportunity for sub- stantial improvement: • Gross revenue: The mon- ey our hospital brought in during a given period before any expenses are subtracted. • Net income: Our practices' gross income minus expenses. • Payroll: All the costs of em- ploying staff, such as wages, taxes, benefits, uniforms and continuing education. • Cost of professional ser- vices (also known as cost of goods sold, or COGS): All expenses associated with providing the services your practice offers. Expenses within the COGS category include professional services, pharmacy, laboratory, imag- ing and radiology, dentist- ry, ancillary products, and grooming and boarding. • Rent or mortgage: Does not include facility costs. Upon identifying valuable KPIs on a P&L, we can begin to benchmark our numbers with national averag- es. The percentages below repre- sent the share of gross revenue. • Gross revenue: The average full-time equivalent (FTE) veterinarian produces roughly $550,000 to $600,000 a year. In a three-FTE practice, I'd expect my doctor-driven gross reve- nue to be around $1.8 million. • Net income: 8 to 10 percent of gross revenue. Top-per- forming hospitals can see net income as high as 24 percent. • Total payroll: Non-DVM staff, 23.7 percent; DVM staff, 21 percent; taxes and bene- fits, 6.3 percent. • Cost of goods sold (COGS): 22.8 percent. • Real estate/rent: 4 to 6 percent if leasing or 8 to 10 percent if owning. Key Performance Indicators I often have practice owners look at national data and tell me why they A balancing act Use KPIs and financial smarts to drive your practice toward higher levels of profitability.

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