Key Data Points in Your Vet Hospital’s P&L Statement

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.

P and L Statement Example

Revenue

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.

Expenses

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?

Net Income

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:

  • Practice owner compensation that is not calculated based on the medical/surgical/management work the owner does but instead is just a random amount determined by how much money is in the bank
  • Perks (trips to Tahiti, dry cleaning bills, liquor store bills, airplanes, personal lawn service, etc.)—i.e. expenses that are not necessary for the operation of the practice but are paid by the practice in order to gain a tax advantage
  • Salaries for family members that are not paid at fair market value rates
  • Facility rent that is not representative of fair market value

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.


Do You Know What Your Veterinary Practice Real Estate is Really Worth? Part 1

Do You Know What Your Veterinary Practice Real Estate is Really Worth?

Part 1- Creating Liquidity and Building Improvements

Written By: Daniel Eisenstadt and Ian Widensky of Calico Real Estate

Thirty years ago nearly every owner of a veterinary practice owned (or wanted to own) the real estate where his or her practice was situated.  While this continues to be the norm for many owners, like so many other aspects of veterinary medicine, “the times they are a changing.”  Today, more practice owners are recognizing that their practice and building are different assets and that viewing each separately can create greater financial value and more flexibility.

In many other healthcare fields (dentistry, physical therapy, etc.) practice owners rarely own their own real estate, choosing instead to focus on building the business of their practices.  Most owners enter into long-term leases for well-equipped facilities in good locations.  In fact, most corporate groups that acquire veterinary practices utilize the same principles and negotiate long-term leases as part of a purchase agreement.

Similarly, certain consultants and advisers have come to view the separation of practice and property as a good way of creating options for owners.  Says Dr. Karen E. Felsted, CPA, MS, CVPM, president of PantheraT Veterinary Management Consulting, “Traditionally, practice owners have sold their real estate when they’ve sold their practice.  This is a good option for some practice owners but not necessarily for all.  An opportunity to cash in on the value built up in the real estate without having to sell the practice gives veterinarians more financial choices and the ability to customize their succession plan to their individual needs.”

Although no situation is alike, there are several scenarios where value can be created by viewing and treating the practice real estate as independent from the practice:

Creating Liquidity

After years of building a successful practice, many owners are content to practice for another decade (or more) and enjoy the stability of owning a healthy business.   But many admit to feeling a financial crunch as their children grow older and head off to college.   Many want to buy a second home or travel more, but feel unable to do so.

Some veterinarians may be concerned that selling the practice real estate separate from the practice may make a future sale of their veterinary practice less attractive.  In fact, as long as a lease is assignable by the practice owner to a future buyer of the practice, the sale of the real estate will not restrict the sale of the practice.  And, though some associates may be interested in buying real estate few associates and no corporate buyers will pass up the chance to buy a good practice because the facility is leased.

For most veterinarians their practice represents their largest financial asset.  But without selling the practice, many see no easy way to create liquidity.  Some veterinarians in this situation work harder to meet their increased personal financial needs while others put off personal needs and/or the responsible preparations for retirement.  For these veterinarians, a sale of their real estate to a landlord that will lease the property back to the practice can be a creative solution to address this financial need.

Building Improvements

After years in the same building, many practice owners recognize the value (or the impending need)  of renovating and/or expanding their physical plant.  But many of those same owners choose to defer these large-scale projects for financial reasons or because they don’t want to take on additional debt late in their careers.  Regrettably, the decision not to renovate can compromise their ability to recruit quality associates or future buyers, detract from the customer and patient experience, and  lead to a deterioration in the practice’s value.  Few consider the option of selling their building to a landlord who will invest and manage a renovation project and integrate these costs over the course of a long-term lease.

Coming Soon: Part 2 of “Do You Know What Your Practice Real Estate Is Really Worth?”- Diversification and Maximizing Value. 


Want to Learn Social Media, Finance & HR Management This Weekend?

We have five seats left for our Practice Builder workshop this weekend. The event is from 11:30 a.m. to 3:30 p.m. on Sunday, November 11th at Seasons 52 in King of Prussia, Pa.

Co-sponsored by Pennsylvania Veterinary Medical Association and the Delaware Valley Academy of Veterinary Medicine, the workshop will present experts in social media, finance and human resource management.

Attendees will work in small groups throughout the afternoon to ensure an interactive experience.

The topics are:

Where’s the money? Real-life ways to improve practice cash flow,” by Gary Glassman, CPA, of Burzenski & Company.

Social Media Marketing: The new word of mouth and what it means to client communication,” by Andy Burstein, CEO of VetJump.

Hospitality in a hospital setting: Does the client ALWAYS come first?” by Suzie Weaver, director of human development at CVP, and Bash Hallow, CVPM & LVT, of Hallow Consulting.

Who can attend? DVM/VMDs in good standing of either PVMA or DVAVM. Because of space limitations, we request practices limit registrants to hospital owners and one guest.

To register, email us at register@cvpco.com. Email Dr. Travis Meredith with any questions: travis.meredith@cvpco.com.