Written By: Karen E. Felsted, CPA, MS, DVM, CVPM, CVA
Many factors are essential to the practice of quality medicine and surgery; including an appropriate range of high-quality equipment for both diagnostics and treatment. The decision to purchase some pieces of equipment may be an easy one—for example, it may be clear that the practice needs a new anesthetic machine. Because the practice already uses this equipment on a daily basis and the cost isn’t too great, the decision is clear cut to replace the current unit. The purchase of more expensive assets or those not previously used in the practice, however, requires more planning and forethought than does the purchase of equipment or supplies with a much shorter life, lower cost and for which there is an undisputed need.
As with any equipment purchase, it is first necessary to understand what the goal of the acquisition is in YOUR practice. Two of the most common reasons for purchase are:
-The new equipment will improve patient care
-The new equipment will increase profits
We can assume that a practice won’t even consider the purchase of equipment if the answer to the first question above isn’t yes. This would appear to be an easy question to answer but it’s not always. For example, it’s generally agreed that ultrasound is a great diagnostic tool; thus purchasing an ultrasound unit should improve patient care. But this may not always be true. What if clients don’t want to pay for the cost of this new test and decline the recommendation? What if the doctors in the practice don’t have the skills to properly perform the imaging or interpret the results of what they see? In either of these cases, just owning an ultrasound won’t improve patient care.
A harder question is certainly if the new equipment will increase profits. When replacing a piece of equipment the practice uses regularly (for example, an anesthesia machine), the expectation usually isn’t that this will increase profits. The expectation is that the practice will continue to generate the profits that equipment already provides. It’s a different story, however, when the practice buys something it’s never had before—a digital x-ray, an ultrasound, or a laser—something that allows the practice to expand the services it already provides.
Net present value (NPV) analysis is an excellent tool to help in understanding the potential profitability of the purchase—this analysis estimates the total cash outflows involved with the purchase of an asset compared to the total inflows. A positive outcome equals a profitable purchase. NPV analysis also incorporates the time value of money into the calculations. While incorporating the time value of money gives more accurate information, it is also more difficult to do and many small business owners will enlist the aid of their accountant or financial advisor in performing this analysis.
This calculation should be be performed over the full expected life of the equipment in order to estimate the total profitability. Any amounts expected to be realized from the sale of the equipment at the end of its life should be recognized as an inflow and any costs of disposal should be recognized as an outflow. This is a particularly useful calculation when comparing the potential profitability of two or more pieces of equipment. It’s important to remember, however, when comparing the profitability between two choices that the timeframes must be similar for the results to be the most meaningful; $100,000 in lifetime profits from a piece of equipment with a five year life isn’t the same as $100,000 in lifetime profits from a piece of equipment with a ten year life.
As with any analysis, good data is critical to good results. A number of variables will be used in these calculations such as the cost of the equipment, the additional annual costs associated with the asset (such as a service contract or supplies), the expected cost savings to be obtained from usage or the anticipated increase in revenues. If these items are not accurately estimated, the results of the acquisition analysis may be erroneous. Some examples include:
– The cost of equipment does not just include the sticker price. Other components of cost include tax, installation, training, and interest costs if the asset is financed.
– One point that is always touted as an advantage of digital radiography is the ease of taking the images and the reduced staff time required. This is true but reduced time spend on imaging doesn’t always result in reduced costs. Unless the practice actually cuts back on the number of staff hours, there will be no reduced staff costs from purchasing this equipment. The staff may be available to do other work which can be advantageous but that is not the same as realizing a true cost savings.
– It’s easy to overestimate the additional revenue that the practice will bring in from the new services; one way to help get an accurate figure is to go back through a month’s work of cases and determine where the new service could have been used in place of what was otherwise done. Could an ultrasound have been done in-house instead of referring the client out? Could laser treatment have been performed? Of course, just because something is possible, doesn’t mean clients will accept it so those factors have to be taken into account as well. In the case of laser therapy, will the potential inconvenience of having to bring the pet into the practice multiple times reduce acceptance?
One final comment about the financial aspect of buying a new piece of equipment—just because the new item may not do much more than break-even financially, it doesn’t mean a practice has to forego purchase. However, the owner and manager need to understand the financial ramifications and not expect something that is not possible. In cases like this, the purchase is no different than if the practice owner chose to use his or her profits to purchase a boat. The purchase doesn’t necessarily add profits and value to the practice but it brings pleasure to the owner. This is only a bad thing if there was an expectation that things would be different financially. Pre-purchase financial analysis can go a long way in helping owners and managers manage their expectations and make a good decision.
Written By: Karen Felsted, CPA, MS, DVM, CVPM
It’s a new world out there in veterinary medicine and the things that were enough to guarantee practice success twenty years ago aren’t the same now. While there are many things practices need to focus on, the following are some of the most important.
1: Practice Good Quality Medicine
This one goes without saying but, unfortunately, it’s often not enough to insure practice success. Unless you amputate the wrong leg, clients can’t judge the quality of the medicine you practice. They judge veterinary hospitals by things they can understand-generally communication and client service. You can be the best doctor in the state, but if clients don’t feel they got value for the dollars spent in a way they understand, they won’t come back.
2: Back to Basics
Wowing clients is great but it’s more important to make sure their basic needs are met. If the owner of an itchy dog comes to a practice, is 45 minutes late being seen, doesn’t understand what the doctor is saying is the cause of the itching, and doesn’t get the promised call back the next day, sending the dog home with a cute bandana won’t make up for it.
3: Know What Your Clients Want
There’s lots of information out there about “what clients want.” Much of it is very valid and applies to most clients of most practices. But it’s critical that you regularly gather information about what YOUR clients want and how happy they are with your practice. The best way to do this is to regularly ask clients about their experience with your practice via regular client surveys. However, you can also gather this vital information by: welcoming client complaints and making things right, reviewing record transfers and tracking client complaints to identify any patterns and whether or not changes in the practice are reducing the complaints.
4: Offer Payment Options
The price of veterinary care continues to be an issue for many pet owners. They want to provide the best care but are struggling with many demands on their money. We know that payment options make a difference—multiple studies have shown that clients who have pet insurance or a third party veterinary credit card or are enrolled in a wellness plan visit the veterinary practice more frequently and spend more money on veterinary services. Understanding the options yourself and educating clients makes a big difference in how pet owners take care of their pets and how well your practice does.
5: Don’t Shoot Yourself in the Foot
Look at your practice from the client’s perspective. When you discourage a client from visiting their pet during its two night stay at your practice, how does the client feel? The pet owner knows that when their human family members are in the hospital, it’s a different story—they can visit regularly. They want to do the same with their furry family members—they want to be able to see that their pet is being well-taken care of and they want to reassure their pet that he/she hasn’t been abandoned. What do you think my cousin thought when she picked up her cat following surgery and the technician said: “We gave him some food this morning but he wouldn’t eat. It might be because of the e-collar. Take that off when he gets home and see if that makes a difference?” What she thought was: “I just spent $3000 at this place and they’re starving my cat!”
6: Give Clients the Information They Want
A recent study looked at the top 5 health topics pet owners wanted to talk to their veterinarians about and the top 5 health topics veterinarians wanted to talk to pet owners about—only 1 topic was the same on both lists! This doesn’t mean that the practice team should ignore the issues they think are important when talking with clients but it does mean they need to make sure client questions and concerns are addressed as well. The simplest way to do this is to ASK: ·
– Is there anything else going on with Fluffy that we haven’t covered?
– Is there anything else going on with Fluffy that we haven’t covered?
– Did you have any questions about what we have discussed?
– Do you have any other concerns?
– Are there any other questions you have?
– Can I do anything else for you?
7: Make Clear Recommendations
If you say: “At some point you might want to get this dental done,” the client’s not going to do it—a dental just doesn’t sound like something truly important to the health of the pet. But if you say: “Fluffy needs a to have her teeth cleaned and polished” or “I recommend that Fluffy have her teeth cleaned and polished” or “It is critical that Fluffy have her teeth cleaned and polished”, then the pet owner will pay attention. The specific words are less important than the clarity of the statement you make. According to one study, pet owners are 7 times more likely to follow their veterinarians’ recommendation when it is clear and unambiguous.
8: Get Help When You Need It
Veterinarians are great at practicing medicine; they are usually not great at preparing tax returns, writing legal documents or investing for retirement. We advise our clients to see a specialist when it’s warranted; we should do the same. There are many attorneys, CPAs, consultants, financial planners, lenders, architects, brokers and business appraisers who work exclusively with veterinary practices and veterinarians and can help you achieve the success you are looking for.
Stop by booth 4118 for a FREE “Meet The Experts Series” featuring some of the nation’s leading veterinary business experts. Join us at our booth to sit down with one of five outstanding professionals in the fields of practice management, accounting, finance and business strategy. You’ll get answers to your questions, learn about new resources and more!
Written By: Karen Felsted, CPA, MS, DVM, CVPM
The first question that people ask is: “Why do I need to look at my profit and loss statement?” The answer lies in an old cliché that says “If you can’t measure it, you can’t manage it.” While it is easy to ignore clichés because you’ve heard them so many times, these phrases are generally clichés for a reason—they are widely applicable truths that should not be ignored. Obviously these specific words have to be taken with a grain of salt—it’s not necessary to count the paperclips on a daily basis in order to manage the purchase of office supplies but managing most areas of a veterinary hospital well means you need to measure the activities involved. Your veterinary hospital profit and loss statement (aka “income statement” or “P&L”) is a good starting point for revenue and expense analysis.
In most hospitals’ P&L statements, revenue is only displayed as a single number called something like “Fees-professional services.” While comparing this figure for a month or year to the prior month or year and calculating the percentage change gives you some idea about the magnitude of revenue growth or decline, the profit and loss statement doesn’t have a whole lot of other information about revenue. In order to analyze revenue more deeply, it’s necessary to look at some of the metrics related to the drivers of revenue—transactions, average transaction charge, revenue by doctor, new client numbers and revenue by category.
In comparison, the profit and loss statement is an excellent source of information for expense analysis. You’ll get better insights, however, if the information from the income statement is put into a spreadsheet that allows for comparison of changes over periods of time and allows the expenses to be reviewed as a percentage of gross revenue, not just in absolute dollars.
The key data points on which most of your time should be spent are the high-dollar items–labor costs (both doctors and staff), and drugs and medical supplies expense. However, don’t forget the smaller items–all expenses should be examined in detail at least once a year.
The first comparison to be made for any given expense is between the current period (month, quarter, or year) and the prior period; for example, support staff costs are compared from 2013 to 2014. Expenses that generally fluctuate with revenue changes are better examined by looking at them as a percentage of revenue rather than as a direct dollar comparison. Support staff costs may have declined dollar-wise from one year to the next but if revenue is declining as well, the support staff costs may actually have gone up in proportion to revenue. If you only look at dollar amounts, you won’t see this.
This internal benchmarking is often the easiest kind of analysis to perform because the data is readily available—it’s all internal. However, there is no guarantee that improvement means a practice is doing well; it may simply mean they are doing less badly than before. Some comparison to outside benchmarks is important to make that assessment.
AVMA, AAHA and Advanstar all collect and publish a fair amount of financial and operational metric information that can be used for this kind of comparison purposes. No practice is going to be exactly like the practices included in the study population but this analysis is very beneficial for most practices. For example, if your drugs and medical supplies expense is 17.1% of gross revenue and one of the published studies says this expense is 17% in a typical practice, you aren’t going to get too worried—it’s a minor difference. However, if your expense is 25%, then you should do some investigating. If the majority of practices can keep their drugs and medical supplies expense at 17%, why can’t you? Improving your inventory control could drop a lot of money to the bottom line.
Once you have a handle on which expenses seem high, you need to look at the drivers of those expenses. For example, if your staff compensation looks high, are staff working too many hours? Is there too much overtime? Are they overpaid? Some additional metrics to look at in sorting out the issues are staff hours per transaction and staff hours per day (particularly in comparison to doctor hours/day.) Does this fluctuate per week or month? What can be done to increase efficiency?
The last item to discuss is the “net income” figure on the P&L. This is what’s left over after expenses are subtracted from revenue. Perhaps the most important indicator of financial success in a veterinary practice is the true operating profitability. Unfortunately this is the most difficult number to get because it doesn’t show up on any report a practice regularly receives, even when those reports are properly prepared. The net income figure on the P&L is generally a meaningless number and doesn’t represent the operating profit.
Why is net income usually a meaningless number? Net income (i.e. the operating profit) should represent what’s left over after all of the normal and necessary expenses of the veterinary practice are paid at fair market value rates. Often times, not all of the expenses in a veterinary practice P&L statement are “normal and necessary” or they are not “paid at fair market value rates. Some common examples are:
There are usually 8-12 adjustments that need to be made to an income statement to determine what true operating profit is. You will generally need to get help from someone with veterinary practice financial expertise to know how profitable you are.
The P&L statement is a great source of information for making better management decisions. A monthly review will help you identify problems early on when it’s easier to correct them.
When looking to make any expansion changes at your veterinary practice there are a few things to consider to make sure you are making the best choice for your hospital. The first question to ask when you’re thinking about expanding is: What is the problem you are trying to solve?
• “Clients are stacking up in the reception area and have to wait too long”
• “We are turning away business because we are fully booked”
• “Our workflow isn’t very efficient because we don’t have enough exam rooms”
• “We’re tired of stepping over boxes of medical supplies every time we enter the restroom”
Before launching forward with any solution, you want to be sure it will solve the problem you have. For example, if clients are stacking up in the reception area, you first need to figure out why. If it’s because you have a doctor ready to see them but there aren’t enough exam rooms, then this may really be a space problem. But if it’s because all the doctors in the practice spend 30 minutes with a client in an appointment scheduled for 20 minutes, then adding exam rooms won’t help. Instead you have a scheduling issue or a doctor efficiency issue. If you’re turning away business because you are fully booked, adding another doctor or using technicians more efficiently may be the first step in solving this problem. Do you have to have more space for these extra appointments? Maybe or maybe not; before launching forward with the expansion, make sure you are using your current space to its best advantage.
Assuming you really have a problem that will be solved with extra space, the next question to ask is: What will be the impact on cash flow of expanding? If you’re expanding to accommodate more clients, you will likely see a dip in cash flow in the short-run but a later increase as more pet owners visit the practice. If you’re expanding simply because the space is too cramped but don’t expect much client growth, then the dip in cash flow may take longer to recover from. This isn’t always a bad thing; simply having room to turn around can be worth the extra bucks. If you will need additional clients to make the project pay off financially, you need to be confident you can attract them. The days of “build it and they will come” are behind us. Of course, you can borrow the money needed for the expansion but unfortunately, lenders want to be repaid at some point and you need to make sure you’ve got enough of a cushion to weather any dip in cash flow once you have to start repaying the loan.
Answering these two questions in depth will help you make the right decision in determining it it’s time to expand.
Dr. Karen Felsted is a senior advisor to Community Veterinary Partners.
Join us tonight at 7 p.m. at the Atlantic Coast Veterinary Conference for dinner and an interactive discussion of the business threats facing the veterinary industry.
Join us and our panelists, Dr. Karen Felsted, of PantheraT Veterinary Management Consulting, and Gary Glassman, of Burzenski & Co., as they discuss “The Business of Veterinary Medicine: New Threats, Challenges and Opportunities for Today’s Veterinary Practice.”
The dinner is being held at McCormick & Schmick’s, located at 777 Harrah’s Blvd, Atlantic City. Boehringer Ingelheim and Patterson Veterinary are co-sponsoring the dinner.
Here is the full invitation: Calico Group_Invite.
The Bayer Veterinary Care Usage Study made it very clear that veterinarians and their team members aren’t doing as good of a job in communicating with pet owners as we’d like to think we are.
For example, only 57 percent of pet owners completely agreed with the statement “My veterinarian communicates with me in language I understand” and only 44 percent completely agreed with the statement “My veterinarian clearly explains when I should bring my pet in.”
What this tells us is that we are asking clients to make decisions about things we recommend that are difficult to understand, scary because it involves a beloved family member and expensive and we can’t even explain clearly to them what we want them to do!
Without a doubt many veterinarians are genuinely trying hard to communicate with pet owners but it’s clear we need to improve how we do it. First of all, it is critical that doctors & staff tell the same story. It confuses clients to get different recommendations from different team members; pet owners expect us to be clear about what we think is best for their pet. It also confuses technicians and other team members when they hear doctors give different recommendations for the same problem or preventive care situation. And once team members are confused, we have lost the ability to use them well in the client education process. If they don’t know what to say, they either won’t say anything or they will try to interpret what they’ve heard and may end up giving the wrong information.
Doctors and other team members also need to remember that people learn in different ways — some adults learn best by listening, some by reading and others by doing. Communication with a client shouldn’t be limited to the exam room conversation; all of the common recommendations and information should also be included on the practice’s Web site, in handouts, in newsletters and email blasts and in any other web-based communication the practice engages in. The same message should be conveyed in many different forms.
In the next edition, we’ll talk about some specific language that makes a difference in talking to pet owners. What has worked for you?
Read all of Dr. Felsted’s blogs here.
When veterinarians surveyed in the Bayer Veterinary Care Usage Study were asked about communicating with pet owners about the examination process, 51% completely agreed with the statement that “I talk my clients through the exam, explaining what I am doing in detail.” Another 37% somewhat agreed with that statement.
Comments made by pet owners in the Bayer study focus groups, however, told a different story. Many did not know their veterinarian was doing a full nose to tail exam; instead they thought that when the doctor had his or her hands on the pet, they were merely stroking it or keeping it from jumping off the exam table.
One of the simplest things that can be done to educate clients about the physical exam process is to describe it as you go. For example, say things like “I’m listening to Fluffy’s heart — the rate is normal and I don’t hear any murmurs” and “I’m palpating Fluffy’s abdomen now — the kidneys are of normal size and I don’t feel any masses.”
If you are a veterinarian examining 15 pets a day, this may seem very boring after awhile but pet owners generally only get this information once a year max. To them it is new and fresh information and critical to their understanding not only of the care the pet needs but the value that the veterinarian and his or her team provides to the pet and the pet owner. This ongoing communication also strengthens the bond between the pet owner and the practice team.
This concept can actually be expanded to the rest of the team. When an assistant walks into the exam room to leave the necessary vaccines, they should introduce themselves and say “These are the vaccinations Fluffy needs — Dr. Felsted will be in to see you in just a minute.” When a technician takes the pet to the back to weigh it, they should explain what they are doing. “I’m going to take Fluffy to the back to weigh him; we’ll be back in a minute.” Even more important is to say something when Fluffy is brought back to the exam room; for example “Fluffy has gained 2.3 pounds; Dr. Felsted will talk with you about his weight and nutrition when she comes in.”
Do you think your clients appreciate the full physical exam done on their pet? What do you do to make sure they do?
Read all of Dr. Felsted’s blogs here.
Pet Owners Open to Education
Last time we talked about how many pet owners really don’t understand the need for veterinary care. Fortunately, they seem to be open to more education and to visiting the veterinary practice more often if they better understood the need for care.
Three of the top four things pet owners in the Bayer Veterinary Care Usage Study said that would make them take their pet to the veterinarian more often were about education. These top four items were the same for both dog and cat owners although the order and the percentages varied a little between the two groups.
The first change that would cause pet owners to take their pet to the veterinary practice more often was “if I knew I could prevent problems and expensive treatment later.” The second was “if I was convinced it would help my pet live longer” and the last was “if I really believed my pet needed exams more often.” These are all points we must include in our client education efforts. (The fourth of the top four items was about price—”I would take my pet to the veterinarian more often if each visit was less expensive.” We’ll talk more about price a little later.)
Of course, if we’re going to convince pet owners that preventive care is important, we (as a profession) have to believe in it. How do veterinarians feel about preventive care?
The majority of those surveyed in the Bayer study agree (either completely or somewhat) that wellness exams are the most important service the practice performs. This belief was one of the attributes that was associated with practices that were experiencing an increase in patient visits. Obviously, this makes sense; a lack of belief means that practice owners won’t put the time and attention into making preventive care a focus of the practice.
However, while most practice owners find wellness care to be a critical component of their practice, 65% of them also said that pet owners don’t share that belief. And 43% were concerned that pet owners feel they are only recommending exams to make money.
Clearly we need to focus on conveying the above benefits to pet owners. What has been most effective in your practice?
Read all of Dr. Felsted’s blogs here.