AVMA 2018: Using the Business Cycle to Optimize Practice Profitability
Simply having financial goals is not enough to propel veterinary practices toward success. Instead, owners need to manage the financial health of their business according to the ebbs and flows of the economy.
By monitoring economic conditions, veterinary clinic owners can stay ahead of the business cycle, said Bridgette Bain, PhD, assistant director for analytics in the American Veterinary Medical Association’s economics division, in a lecture at the 2018 AVMA Convention in Denver, Colorado. She noted that this approach can help clinic owners prepare for economic downturns and take advantage of market opportunities.
Dr. Bain stressed that simply “having goals” is not enough to help clinic owners increase their profitability. They must also examine key performance indicators and understand the macroeconomic factors that affect businesses.
According to Dr. Bain, when preparing an annual budget, clinic owners should start by examining their financial statements. They should then adjust the budget based on anticipated changes in key factors such as market share growth, performance expectations, and economic conditions.
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She emphasized the role of performance expectations in increasing clinic profitability. When clinic owners set a goal, they must link it to certain strategies and specific employees within the business. And the goals and strategies should be reasonable. Good operations and workflow within the business are also critical to allow employees to reach these specified goals, she stressed.
A Macroeconomics View
Dr. Bain reviewed the basic concepts of the business cycle. She explained how this cycle represents fluctuations in the economy—as measured by gross domestic product (GDP)—that are shown as peaks and troughs on a graph.
The cycle comprises distinct phases of expansion, peak, contraction, and trough, she said, with the trend line highlighting the overall trend of increasing economic activity over time.
The US GDP is currently about $19 trillion, Dr. Bain explained. Personal consumer spending represents the main component of GDP, while investments are the most variable component, she noted.
In turn, “services” represent the largest component of personal consumer spending. Dr. Bain also emphasized that people who pay for veterinary services use their disposable income in doing so. “Disposable income is also affected by the general state of the economy.”
Dr. Bain reminded the audience that changes in the GDP are not consistent throughout the United States. Different states may experience different percent changes in their GDP at any given time. For example, in the final quarter of 2017, among all US states, Texas experienced the highest growth in GDP at 5.2%. In comparison, New York was at 0.0%, and North Dakota experienced a drop of 1.3%.
Overall, clinic owners need to use strategies to help them stay above the trend line of the business cycle, and not become a victim of it, Dr. Bain stressed.
“If we are above trend in the business cycle, we are most likely going down in the cycle,” she explained. “And, if we are below trend, we are most likely going up.” A contraction turns into a recession if there are two consecutive quarters with negative growth.
When things are going well in the economy, people spend their money, Dr. Bain said. When things are going badly, however, no one has money to spend, so people start to sell things cheaply.
So, when things are going well, this is the time for clinic owners to save, she said. And, when things are not going well for everyone else, this is when clinic owners should invest—because people are now selling things cheaply.
That’s how you outsmart the cycle, she concluded.
To help clinic owners stay ahead of the business cycle, Dr. Bain advised monitoring the Conference Board Index of Leading Economic Indicators. This is released on the third Thursday of each month and shows the US business cycle. It presents useful data about how the economy is likely to look over the next 18 months. This includes information about the timing of economic downturns, which can help clinic owners manage the financial health of their business with the ebbs and flows of the economy.
“The economy has been growing for 108 consecutive months since the last recession," Dr. Bain said, “and is still growing.” This growth is predicted to continue for at least another 18 months.
Dr. Bain also encouraged veterinarians to subscribe to AVMA’s Veterinary Economic Report, which is free for AVMA members. This report provides important, up-to-date veterinary economics information to improve veterinarians’ understanding of the markets in which they work.
Dr. Parry, a board-certified veterinary pathologist, graduated from the University of Liverpool in 1997. After 13 years in academia, she founded Midwest Veterinary Pathology, LLC, where she now works as a private consultant. Dr. Parry writes regularly for veterinary organizations and publications.