Does your team know you start every day $900 in the hole?

Does your team know you start every day $900 in the hole?

Apr 01, 2007

Let's face it: where work and your livelihood are concerned, ignorance is not bliss. Often practice owners feel frustrated that employees, including associate veterinarians, don't realize how expensive it is to run a veterinary hospital. Their lack of knowledge can lead to feelings of contempt toward the practice owner and a misconception that he or she is more concerned about the bottom line than the well-being of patients.

Some people think that the only way to truly understand the expenses associated with a small business is to actually own a small business. While there's some truth to this, you should still aim to educate your staff regarding the costs of running your practice. If your team knows what they're working for—and what's working against them—they'll be much more successful on the job. In fact, I've found that when employees are empowered with fiscal information, they feel more accountable for the financial success of the clinic.

Break it down

Where does the money go?
Using last year's profit-and-loss statement for your clinic, conduct the following exercise at your next team meeting: Ask your team to name as many overhead expenses as they can. As you know, the list is almost endless: taxes, rent, utilities, and so on. Be prepared to tell them how much you spent last year on each expense they name—and be prepared for their shocked reaction.

For example, let's use a clinic that's grossing $1 million per year with two full-time veterinarians, one of whom owns the practice. The largest expense for any practice is the payroll. This number should never be greater than 45 percent of practice revenue. So for our example, we have $450,000 to pay fair and reasonable wages to our team.

Keep in mind that with this number we must also pay the two veterinarians 18 percent of their production. And 4 percent of the gross ($40,000) should be available to pay a practice manager or the owner if he or she is performing all of the management duties. Remember, this is just an example. A great practice manager may be worth much more than $40,000 in a million-dollar practice.

The second-largest expense is the drugs and medical supplies that you need to deliver high-quality care. This number shouldn't exceed 18 percent of revenue, or $180,000 in this example. In a practice that doesn't tie up its cash flow by overloading its shelves with inventory, this number could creep down to around 15 percent.

Your team needs to understand that it's reasonable and fair that a minimum of 10 percent of the revenue generated goes to the shareholders of the practice, in this case, the single owner veterinarian. Why is this fair and not exorbitant? Because the business owner assumes financial risks that no one else in the practice does. And as an investor in the business, the owner needs to see a fair return on his investment; otherwise, he would take his money elsewhere.

Of course, if all veterinary practice owners took their investment money and ran, there wouldn't be any veterinary offices and, therefore, no veterinary-related jobs. So as employees, the team should be happy that the owner is getting fair and reasonable profits.