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When it comes to building a new veterinary hospital or renovating an existing facility, the first questions that come to mind typically revolve around money. How much can I afford to spend? How much can I borrow? Will I be able to make ends meet once the new hospital is open? According to veterinary financial consultant and tax planning specialist Gary I. Glassman, CPA, a partner at Burzenski & Company in East Haven, Connecticut, it’s normal—and appropriate—to ask these questions because the answers factor hugely into the future success of your project.
During a lecture at the inaugural Fetch dvm360® virtual conference, Glassman said the primary considerations before deciding to build should be the new hospital’s revenue stream and its cost structure. “Much of what is typically required for a practice to be successful is determining what kind of income will be generated and how that will change,” he said.
Revenue: How will income change?
New hospitals need an increased revenue base to support increased occupancy costs. Two key factors support revenue generation:
- Activity level: The number of invoices the hospital generates. This is controlled by the number of patients and clients served. More space in a larger facility and/or increased patient volume may lead to changes, such as adding a new associate, Glassman said.
- Average invoice amount: Controlled by the fees you charge. This is going to change based on changes to either your pricing structure or average invoice amount, he said.
Demographics and capacity
Before you can increase your activity level, you’ll need to find out how many new clients you can generate and what will happen to that new client base once you move into the new hospital. In other words, does the local market support the need for a new veterinary practice, and will your new hospital be able to handle a higher volume of patients?
To answer those questions, you must understand your capacity, Glassman said. He recommends conducting a demographic survey to evaluate area veterinary hospitals and the surrounding population. Ask these key questions:
- How many hospitals are in the area? Is there a veterinary hospital on every corner, or will there be an increase in demand because there aren’t any competing veterinarians nearby?
- Is the population decreasing or increasing? A decreasing population base will make it challenging to gain the amount of income you need for your project.
Not sure how to increase your clientele? Marketing is key. “Buildings themselves are great marketing ploys, in that the building acts as an exquisite point for people walking by,” Glassman said. Marketing the new building can attract passersby who want to find out what your new hospital is all about. You should also monitor whether new clients are sticking with the practice or leaving after a single visit.
Activity levels are also controlled by the services you offer. For example, if your previous hospital did not offer boarding and grooming but the new facility does, this can help increase your revenue stream. But you can’t expect that revenue to change overnight, Glassman warned—you’re going to have to build it with good marketing. Any time you add new services, you need to up your marketing game, which is an additional expense.
Veterinary hospital industry standards to consider
- A practice should have 25 to 30 clients monthly per full-time equivalent (FTE) veterinarian.
- The active client base per FTE doctor should be 1200 to 1400.
- The number of hospital invoices produced per FTE veterinarian should range from 5000 to 5500
- Occupancy costs should be 6% to 8% of gross revenue.
- Monthly rent should be equivalent to 10% of the fair market value of the property.
When it comes to increasing your revenue stream, you’ll need to review your current fee levels and decide early on if they need to rise. “For 2020, we’ve indicated to practices that they should be looking at a 5% increase in fee structure,” said Glassman, who advises against increasing fees on the day you move into the hospital because clients may perceive that they are helping to foot the bill for the new building.
Also make sure you charge for all of your services, in addition to adding new ones. New services and practice features that can lead to increased activity levels include boarding and grooming, behavior training, dental suites, and expanded the treatment area, and enhanced surgical suites.
A closer look at hospital cost structure
It’s important to keep in mind that your hospital costs will change before your revenue increases, Glassman said. The moment you enter your new building, fixed occupancy costs that are likely to be higher include mortgage payments, equipment loan payments, property taxes, utility costs, insurance costs, and maintenance service contracts. Typically, veterinary practices have some deterioration of overall financial health for the first year to 1.5 years in a new building. The key to success, he said, is in generating additional revenue relatively quickly so that you don’t need to worry so much about the higher costs.
How the IRS can help
Did you know that the IRS can help make your hospital dream a reality? There are tremendous tax incentives for you to complete your building project. The government can support and pay for your project using depreciation, said Glassman.
Generally, tax laws allow you to write off a building’s cost over its statutory life, which, according to IRS guidelines, is 39 years. But for new builds, the IRS allows owners to accelerate depreciation in a number of areas so you get a better tax deduction in the early years of building ownership. Depreciable components may not include permanent structural portions of the building or the land the facility sits on. Here are the components that do qualify:
- 5-year-life property: Cabinetry, specialty lighting and plumbing, wall coverings and trim, data equipment, property in your lab area
- 7-year-life property: Furniture and fixtures
- 15-year life property: Land improvements such as parking lot lighting, fencing, planting, adding sidewalks, parking lot striping, subsurface drainage
Using component depreciation requires documentation of how you are coming up with each component and the assets associated with them. Usually, engineers and accountants can assist with this process.