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Practice investments: How do you decide?

Article

"One, zero, eight, nine, eight." I presume the sales representative was stating the price in this manner to lessen the impact.

"One, zero, eight, nine, eight." I presume the sales representative was stating the price in this manner to lessen the impact.

"Are you telling me this machine costs almost $11,000?" I asked, incredulity reflected in my voice. "Charlie was born yesterday", offered my partner, as a means of explaining to the sales rep my state of shock. I had no idea a blood chemistry machine was so expensive.

After a few more questions and answers, our visitor left, and my partners and I needed to decide if we wanted to invest in this piece of equipment. There were several factors that would influence our decision. But in the end, it would come down to one: how badly did we want it? The word "want" reflects an emotion, and buying decisions are impacted by emotions much more than by facts.

While recognizing the truth of this statement, managers still need to do an objective evaluation before making capital investments. Our emotions may change once we have done so. I suggest trying to assess how the purchase will impact the following areas:

  • Cash flow

  • Practice growth

  • Quality of life

Let's consider the question of buying milking machine testing equipment. A practice is contemplating this investment to allow them to work more intensely with clients on milk quality and mastitis control. The cost of the equipment is roughly $5,000, and becoming trained to use it will cost another $1,500.

Is it worth it?

Projecting cash flow requires setting a fee for the use of the equipment, and predicting how often it will be used.

If the equipment fee is $100 per evaluation, and an evaluation is done once a month, then the new equipment will generate $1,200 annually.

In addition, if each evaluation requires three hours of professional time, that will also generate significant cash flow. We must be careful here, because the cash flow from professional fees requires additional labor. We must have some figure in mind to use for the cost of the doctor's time; $45 per hour might be a reasonable figure. If the professional rate is $95 per hour, then a cash flow of $50 per hour is realized when a doctor is doing milking system evaluations. Using all of the above, we project additional cash flow of $250 per month or $3,000 annually.

Once we have projected the cash flow, we can evaluate the investment on that basis by using an annuity table or a computer program that applies our desired return on investment, projected life of the investment and salvage value of the investment. Assuming the equipment in the above example will last five years, the $3,000 annual cash flow will generate a very high return on investment. Of course if our projections are wrong, and we do only two evaluations a year, then the return on investment will be negative.

It is possible that doing milking system evaluations will generate other revenue. As these doctors do more work with milk quality, they may increase the number of milk cultures they perform. They may end up conducting milker training schools. They may attract new clients who perceive them as progressive and oriented to production medicine. Thus, it is reasonable to assume that practice growth will result from their decision to begin doing milking system evaluations.

Added revenue

Quality of life involves many intangible factors, and is different for every doctor and practice. Some doctors will get satisfaction from offering the milking system evaluations, because they will perceive that in doing so they provide a valuable service to their clients. This satisfaction will be in addition to any financial gain.

However, other doctors may resent having to be on farms at milking time, which is often early in the morning or well into the evening. For these individuals any financial benefit is diminished.

How about applying these criteria to the question of buying a truck and mobile unit instead of a car to use as our practice vehicle? Will the former generate any more income than the latter? Probably not, and both the purchase price and operating costs will be higher. Will the truck and mobile clinic lead to practice growth? While some clients may be impressed, the performance of the doctor is far more important than the vehicle. That leaves quality of life, and it is a fact that many practitioners strongly prefer to work out of a mobile clinic instead of a car. No further justification is needed, as long as the practice can afford the mobile clinics.

I started this column by saying that buying decisions are ultimately determined by emotions. Some people have emotional needs of financial security, and will only make investments that appear certain to give a financial return. Other people like "toys", and will have all kinds of fancy equipment that is seldom used. Some like to be "state of the art," and will have whatever it takes to maintain that status.

Dictated by emotion

To follow up on my opening example, we bought the blood chemistry machine, even though we could not justify it economically. Being able to get results quickly was important to us, and our emotional need to provide good service outweighed our profit motivation.

By going through the analysis just outlined, we can best assess how our practice and life will be impacted by whatever purchase we are contemplating.

If all three areas look attractive, then making the decisions should be easy. If they yield a mixture of positive and negative, we can at least know what we are giving up in one area to accommodate our needs in another.

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