Stop costs from gobbling up your revenue
Back in the roaring '90s, when growing a veterinary practice by 10 to 20 percent per year was commonplace, I thought it would be great to own multiple practices. Ten seemed like a good number. If I only made a 12 to 15 percent profit at each, I'd still be doing very nicely, thank you. A few stock market crashes later, that idea wasn't looking so great. Instead of profits multiplied by 10, I was looking at impending losses. The battle was on—I was determined to figure out a way to remain profitable.
Many financial management speakers assume that veterinary practices base their operations on a yearly budget plan. But in my experience, most hospital owners eyeball their expenses and hope for the best. For years I wasn't too different—I didn't stick to a formal budget either. But when cash flow started to slow, I realized I had to control costs. And to do that, I needed to change my ways.
Making a budget for a veterinary hospital isn't difficult. Most budget expenses are related to payroll and inventory. If practice owners control and monitor these, our budgeting is just about done. Payroll, including taxes and benefits, takes about 50 percent of a practice's revenue, with 25 percent for staff and 25 percent for doctors and management. Inventory costs, including laboratory equipment and food, take about 20 percent of revenue. Rent and associated building expenses eat up another 8 to 10 percent, and general administrative costs come close to 8 to 10 percent.What does that leave for profit? If you're lucky, 10 to 20 percent. Much of your rent, utilities, and general administrative costs are fixed, which means you can't do much about them. Therefore, to be profitable, you must control payroll and inventory costs.
Many hospitals spend 52 to 55 percent on payroll rather than the targeted 50 percent, and inventory runs 22 to 25 percent of total revenue versus the ideal of 20 percent or less. Do the math and you'll quickly see that these clinics are minimally profitable at best. If this describes you, don't give up—there's still hope for profits ahead. Here's what I do to keep major expenses from gobbling up too much revenue.
MANAGE DAILY PAYROLL EXPENSES
I give my practice managers a budget of 18 to 20 percent of revenue to spend on payroll hours during busy times of year and 20 to 22 percent to spend in slow times; our overall goal is 20 percent. The managers look at our revenue history and average hourly wage to forecast how many hours they can spend on their weekly schedules. A spreadsheet scheduling system shows them whether they're staying within the payroll budget. After each payroll period, managers plug in the actual revenue and payroll numbers to see what percentage of our income went to payroll expense. If payroll exceeds 20 percent, a column in the spreadsheet shows the actual amount paid by the hospital for unneeded labor. While we don't begrudge the staff their wages, we don't enjoy spending that money unnecessarily.
When my practices first started doing this, I found that one location was overstaffing by 100 hours per week! It seems absurd, but it's true. In addition to glaring problems like this, I learned a few other lessons from tracking payroll. First, while you can often tell that you're overstaffed, it's hard to tell to what extent because folks typically find some way to "keep busy." Second, it wasn't that difficult to cut the wasted staff time and function just fine—everyone just worked a bit less. Over time, a staff member or two left the practice, which freed up more hours for others.
Taking payroll management one step further, our managers and head doctors often check their upcoming schedules at the end of the day. If a team member is scheduled to work the next day but isn't needed, the manager lets him or her know that night. We also send folks home or out for a long lunch on slow days. No one likes this approach, but team members realize it's a better option than failing to make payroll.