How unnecessary expenses hurt the bottom line and what to do about it
Identify the main culprits eating away at profits and start pulling them in line
How profitable is the hospital where you work? Surprisingly enough, it is not uncommon for practice owners and their management not to know the profit of the business they run.
Oftentimes, leadership is more concerned with day-to-day issues and providing pet care than focusing on the bottom line. And the problem can be compounded by clinics’ use of accountants who are not familiar with the veterinary industry.
Certified public accountants often provide only an annual profit and loss (P&L) statement and not a monthly one, which doesn’t allow for course corrections during the year. And rarely do they provide statements that consider a variety of add backs that impact the profit of the business. On top of this, P&L statements tend to collect dust rather than be thoroughly reviewed by owners, many of whom are complacent and forgo looking at the business’ financials because they feel that they’re paying the bills and making a good living. The reality is that many have little business training and are not accustomed to deciphering financial statements. They may think they are doing the best they can and that it won’t make a difference.
This is unfortunate because there is a significant difference in profit among veterinary practices, often ranging from 5% to 25%. Such a sizeable difference not only impacts the value of the business but also its overall well-being.
Practice profit, or EBITDA (earnings before interest, taxes, depreciation, and amortization), is important to everyone: owners, team members, clients, pets, and the community in which they reside. The more profitable hospital is better positioned to offer higher compensation and benefits to the team, have a nicer facility, and practice higher quality medicine. And yes, its value is also enhanced. Take-home messages: Profit is important, profit can be planned for, and profit matters now.
Profit matters now for many reasons. A big motivator for owners to enhance profitability is that practice value is based on EBITDA. We’re all familiar with the saying, “A penny earned is a penny saved.” However, in the veterinary business, every dollar saved increases the company’s value by a factor of 5 to 10, so a mere $10,000 in savings could increase value by $100,000 or more, and a $100,000 savings by $1 million or more. That is a great motivator to start cutting expenses ASAP.
What accounts for the sizable gap in profit between veterinary hospitals? Simply put, it comes down to expenses. Hospitals that control their expenses are typically far more profitable than those that don’t. To improve and increase profit, management needs to take a close look at expenses. A convenient way to look at costs and profit is to categorize them: staff payroll, DVM payroll, COGS (cost of goods sold, such as drugs and medical supplies), G&A (general and administrative, or day-to-day, expenses, including rent), and practice profit. Ideally, each category equals approximately 20% of expenses. A long-term standard for the profession is to have a profit of 20% or higher. Of course, that’s easier said than done, but those that strive for it are often successful.
Traditionally, practice management consultants have advised animal practices that if they focus on growing the business, then expenses will fall into line. Although this can happen, it is often not the case; therefore, to be most profitable, emphasis on growing a practice and controlling or monitoring expenses is advised. Managing costs begins with measuring practice expenses regularly. As the adage goes, “What gets measured gets managed.” You will quickly notice that if you keep your payroll and COGS in line, much of your work is done because these should account for nearly 60% of practice expenses. This leaves just G&A for review. This category, however, is made up of many of the fixed expenses: facility costs (approximately 10%) and things like utilities, office supplies, professional fees, and marketing, over which you may not have much control.
So your job is to play detective and search for unnecessary expenses. You’re looking for any thing or service for which you’re overpaying, are spending too much on, or don’t need. For instance, you may be able to get better pricing on a specific heartworm preventive, or you may be able to drop a whole product line because it is not essential and can be ordered from your online pharmacy. And you may also look at your budget and determine that you will keep only $15,000 of heartworm preventive in stock rather than the $30,000 currently on the shelves.
It is the combination of a few large and many small items that can lead to a significant saving. Start by prioritizing the big-ticket items, such as vaccines and heartworm, flea, and tick preventives. As time permits, move on to less pricey items or services, such as radiation badges, oxygen tanks, and medical waste removal. Making a list of tier A, B, and C expenses can help you approach this job.
The COGS category, which includes inventory and supplies, is a problem for many clinics, and this percentage can vary widely from one practice to another. Depending on what you include in COGS, it should range between 20% and 24%, but it is not unusual to see it in the 28% to 30% range. Some clinics struggle with payroll expense, but this is pretty straightforward. If it is much greater than 40%, it will be difficult for the hospital to achieve a 20% profit.
Here are some of the culprits that limit profits and suggestions on how to pull them into line.
1. Pharmacy expenses
Run the pharmacy a profit center, not a conveninece center. Focus on carrying essential items that you routinely use: 2 or 3 ear medications, nonsteroidal anti-inflammatory drugs, and preventives—not 5 or 6. Have the medical team decide jointly on what to carry, and order the rest for clients via your online pharmacy. Carry as few sizes of a product as you can, and small sizes rather than large containers. Most products can be received within just a few days of ordering, so focus on just-in-time ordering, not on stockpiling products. Avoid promotions that require you to buy large quanitites of a product all at once.
2. Prescription diets
Carry a limited and essential supply and train clients to purchase them from your online store or supplier. Getting these on auto-ship is ideal and makes you competitive with retailers.
Lab expenses typically comprise 4% to 5% of clinic revenue. But there is a large disparity between what hospital A and hospital B pay for the same service. Do your homework before making selections. Reference laboratory pricing is often more cost-effective and competitive than that of an in-house lab. Shop around for best pricing and consider joining a buying group, which can often achieve prices comparable to those of large group practices. Take advantage of special panel pricing. Most labs will have excellent pricing on select panels, often including wellness screening, preanesthesia, sick, and senior screenings.
There are a lot of nice pieces of equipment out there, and many are essential to practice high-quality medicine and attract top talent. Compare and contrast not only the equipment, but also maintenance cost, cloud storage fees, and contracts. Imaging should be a profit center but can quickly be a profit drain if maintenance and storage costs are taken into account. With a little research, you can find a package that fits your needs and budget. Do not overspend or overcommit.
It is OK to have your vendors and sales representatives of choice, but demand best pricing and compare with other providers. Do an annual review to keep everyone “honest.” What was once reasonable pricing may no longer be. The goal is to worry about the college fund of your children and the team's children, not that of the vendor’s friendly representative or CEO.
From a budgetary standpoint, about 1% of revenue is OK to allot to marketing, but marketing has changed. There are no more big phone book ads. Today, it is much harder to navigate your cyber presence and determine the impact of marketing dollars. However, since the COVID-19 pandemic, many clinics are maxed out or even turning clients away; if that is the case, you may be fortunate enough not to have a marketing expense.
7. Tier C expenses
Although these individually may be small players, they are often overlooked. As a practice owner, I have overpaid significantly for radiation badges, bank fees, trash removal, medical waste removal, oxygen tanks, floor cleaning, snow removal, and so much more. Yes, it is hard to babysit these small spends, but they add up over time to thousands of dollars that fly out the door because you did not take the time to price shop or take advantage of your local Veterinary Medical Association-preferred vendor list.
8. Services not charged for
Yes, this happens! So put on that sleuth cap and brainstorm a little: For example, are you itemizing and charging specifically for the suture used for surgical and dental procedures? Do you just automatically trim toenails for free or do you have it as an optional client fee? Most clients will happily pay for this service. And do you charge any type of fee for euthanasia? Maybe you don’t charge anything for euthanasia for “good” clients. We want to be fair to our clients but we must realize that these freebies become an expense that cuts into the bottom line. It is really the team that is subsidizing these costs.
9. Contracts that lock you into what seems like good pricing
Having the freedom to change vendors as desired is invaluable, and frequently a better deal or product line comes along and your hands are tied. And many times, contracts renew if you don’t give notice a month or 2 in advance and now that 5% to 10% increase per year is not good pricing. Avoid anything longer than a year. At the end of the day, vendors want your business and you will find appropriate fees without being locked in.
You have done your investigating and found expenses that can be reduced; however, you may be still struggling to get beyond a 10% to 12% profit. If so, take a close look at your pricing. If both your payroll expense and COGS are hard to keep in check, then your pricing may be out of line. You may decide to simply increase prices accordingly or consider using a service like Profit Solver or working with a practice consultant who specializes in profitability.
Simply put, your practice deserves to be reasonably profitable. The idea is not to be frugal but to be informed about where your dollars are going. You need to decide what battles to fight. You may feel that having snack food at the clinic for the team is a morale booster and well worth $100/month. But you might decide it is more effective and cost-efficient for the team to do a quick end-of-the-day clean-up versus the luxury of having an outside janitorial service come in every night.
No one wants to nickel-and-dime every little expense. The key is that many veterinary practices can improve their bottom line by closely monitoring where dollars are being spent. This is critical when you realize that the dollars saved can go to improving the quality of life of the practice owners and team. Additionally, and not to be overshadowed, it is what also leads to better overall pet care.
Jeff Rothstein, DVM, MBA, is the founder and copresident of Mission Veterinary Partners, headquartered in Novi, Michigan, which operates more than 250 veterinary hospitals in more than 30 states. He is a frequent presenter at veterinary conferences and veterinary schools and can be contacted at firstname.lastname@example.org.