10 tips to boost profitability

Hopefully, but now you've looked at your year-end financial statements and assessed your practice's profitability. How well did you do? Were you as profitable as you planned? Was it a great year for you?

I hope it was. But if this year fell short of your expectations, what are you going to do about it? If you're not sure, check out these 10 ways to change, add, or update your approach.

1 Review markups on pharmacy items

Here's a worst-case scenario for you: I was reviewing a practice's financials during a consultation, and I noticed that product pricing seemed to be low. So I investigated further. And I discovered that the computer wasn't marking up any inventory items.

Using the fee-setting formula

Team members were entering the purchase price, but the "switch" in the software that would enable the automatic markup was set at "no." This meant that inventory items hadn't been properly marked up since the practice team purchased the computer six years ago!

To avoid this type of problem, check your computer settings and make sure the computer institutes the markups you intended. To test it, enter a new, fictitious product into the computer at 100 percent markup and see what comes out on the other end. You should also check that minimum per pill charges and minimum prescription fees are programmed into your system. This area of your practice is too important for you to make assumptions. Make certain your pharmacy is working as a profit center.

2 Update dispensing fees

While you're looking into your computer system and reviewing inventory and pharmacy items, also review your dispensing fee. The dispensing fee offsets the cost of counting out, packaging, and labeling a product. If you mark up items without adding a dispensing fee, you're greatly reducing your profitability.

Every pharmacy—human and veterinary—charges a dispensing fee. Typically you'd add the fee into the total cost of the prescription, rather than presenting it as a separate line item on the client invoice. You may even wish to establish two dispensing fees—one to cover items that you count out, package, and label, and another smaller fee for cases when you just need to label the item.

Dispensing fees vary significantly, but I'd guess the average lies between $9 and $14. A labeling fee might range between $4 and $6. Just to be clear, you would not charge both a dispensing fee and a labeling fee; charge one or the other. I suggest you review these fees every six months and make adjustments as necessary. As overhead costs increase, so must your dispensing and labeling fees.

3 Offer third-party payment options

As veterinary medicine becomes more sophisticated and we can offer our clients and their pets better products and services, the cost of care naturally increases. So it becomes more important to offer clients various payment options. Most practices accept credit cards—which is great—and many practices also accept debit cards.

Another option is to sign up with a third-party payment service that is available to our profession. As you probably know, with these services clients fill out a credit form and submit it online or by fax. If the company approves the application, the client can immediately access the new line of credit and pay for your services.

The client then pays off his or her debt over time. This approach can give clients the financial flexibility they need in order to pay for their pet's care, and if the client doesn't qualify for credit, it's the company who says so, rather than you.

4 Review fee schedules

When was the last time you updated your fee schedule? If it was more than six months ago it's time to do it again. Think about it. Your expenses are going up: Employees are getting raises, and the costs of inventory, rent, and utilities keep rising.

To keep up with these costs I recommend that you use a fee-setting formula that weighs your practice's costs for overhead, products used in the procedure, and doctor time. (For more, see "Using the Fee-Setting Formula" on page 1 of this online article.)

Once you've determined your fees based on this formula, you can adjust them based on the cost of living. I suggest you increase your fees twice the cost of living. So if the cost of living increased 4 percent last year, you might increase your fees 4 percent every six months or 8 percent once a year. If you don't update your fee schedule regularly, you're being unfair to yourself and the rest of your team.

5 Offer pet insurance

Pet owners in Europe are much more likely to have pet insurance than pet owners in the United States. I'm not sure why. Perhaps people are afraid that pet insurance will follow the path of human insurance. Understanding available pet insurance plans will help to set aside this fear; most companies offer indemnity insurance, which is more like car insurance than health insurance. These policies consider pets property.

A study conducted in the United Kingdom in 1988 found that clients who insured their pets spent 103 percent more on sick patient care and 48 percent more on wellness care. This study also indicated that clients who had their pets insured visited an average of 2.6 times per year versus clients with uninsured pets who visited twice, on average. Imagine what that study might show today!

As a profession, I think we need to take a closer look at pet insurance and understand the companies and the plans they offer better. Educate yourself about what's available and decide whether there's a policy or company that you want to recommend within your practice. There's no question pet insurance will help make optimal pet care more accessible for clients, and hopefully this tool could remove the dollar sign from the equation.

6 Review outside laboratory fees

When was the last time you took that fee schedule from your outside laboratory and compared it to the fees you're charging your clients? I always check this during a consultation, and often I find practices are charging clients less than the laboratory charges the practice. The outside laboratories are doing what I asked you to do—they're increasing their fees once or twice a year.

Every time the outside laboratory increases its fees you need to increase yours. Most practices double the fee charged by the outside laboratory, some mark up the outside laboratory 2.5 times cost, and others double the outside laboratory fee and add $5 for handling the paperwork and packaging. Whatever your pricing policy, you need to review those outside lab fees once or twice a year. Make sure you know when the labs update their fees, and update your own. Outside lab work can be a significant profit center for your practice if you keep your fees up to date.

7 Budget for your biggest costs

OK, I have to be honest: I'm not a big believer in budgets. Not that they aren't valuable, but most people go to all the effort of creating a budget and then do nothing to follow it. The only benefit is that they figure out at the end of the year where they're over budget.

So, unless you're really going to use a full practice budget, I think it makes more sense to focus on the two expenses that affect profitability most: support staff costs and inventory costs.

Support staff costs should run between 19 percent and 21 percent of gross. I recommend that my clients use a computerized staff-scheduling program to enter the intended work schedules for their doctors and team. A good program indicates the ratio of support staff to doctors and tracks overtime—plus, it tells you the support staff costs for a particular time period.

So if you're creating the work schedule for the first two weeks of February, you can look at what your income was last February, increase it by your normal percentage increase, calculate 20 percent or 21 percent of that and know your budget for staffing costs. Then enter the schedule and check the projected costs. It really isn't that complicated.

Inventory costs should run 14 percent to 16 percent of your gross. To budget this expense, take the income for the same month of the previous year, add the normal percentage increase occurring in your practice, and then calculate 14 percent or 16 percent or whatever percent you wish to budget. Your inventory control manager can spend that much.

These two expense categories affect your practice more than any others. And you can control them pretty easily with potentially dramatic results.

8 Implement a credit and collection policy

If you're a small-animal practice, your accounts receivable should be between 0.5 percent and 3 percent of gross. If you're a large-animal hospital they can be significantly higher. The most important area to examine in accounts receivable isn't necessarily the total accounts receivable but those that are over 120 days.

These accounts receivable are normally the ones that are going to go uncollected. Here's the problem: I don't mind extending credit to clients, but I sure do mind not getting paid. This income represents true profits. You paid all the costs it took to generate this income and the practice received zero income.

So, it's critical to monitor accounts receivable, especially accounts older than 90 days. Establish a credit and collection policy for your team to follow and make sure they stick to it. If an account gets to 120 days and you haven't collected, send it to an outside collection agency or lawyer. Don't spend a lot of time on these accounts. If you haven't received the money by now, you probably won't.

9 Incorporate internal controls

I estimate that the average veterinary practice gives away 20 percent of its gross every year—knowingly or unknowingly. It may be that nail trim you chose not to charge for, or the laboratory test your team ordered and performed but didn't put on the invoice.

We studied about 150 of our consulting practices and found the average practice gave away almost $50,000 in services per year per full-time equivalent doctor. This is huge!

Effective internal controls help to prevent this bleeding. I hope most practices use travel sheets during out-patient office visits to create a check system in the charging process, and use in-hospital tracking forms to ensure fee capture on hospitalized patients. It's important to remember that giving clients a service for free sends the message that the service wasn't worth much in the first place.

Price is only an issue in the absence of value. So if you think you're not giving clients a good enough deal, offer more value. But do not decrease the price or give away the service.

10 Leverage yourself—and your doctors

One of the best ways to improve profitability is to leverage your doctors better. How much time do your doctors spend doing jobs someone else could be doing? Do your doctors count out their own prescriptions, perform their own radiographs and laboratory work, or place IV catheters?

I'd guess that the average veterinarian spends about 50 percent of his or her time actually being a veterinarian. The rest of the time he or she is doing the work of receptionists, technicians, managers, and bookkeepers. Of course, the more time a doctor spends being a doctor, the more income he or she can generate for the practice.

The normal ratio of full-time equivalent support staff to full-time equivalent doctors in a veterinary hospital is 3:1. In such an environment, we can expect a doctor to produce $300,000 to $400,000. If you move to a 5:1 ratio, I've seen doctor production increase to $800,000 or more.

Now, the answer to these dramatic results isn't just hiring more team members, it's hiring and training them. You can't expect great results without developing a top-notch team.

So, would you like to be more profitable in 2007 than you were in 2006? Small changes can have a dramatic effect upon your practice's bottom line—and now's the time to make them. Review this list of 10 ideas and pick one or two to implement. You can only gain from the exercise.

Veterinary Economics Hospital Management Editor Mark Opperman, CVPM, is owner of VMC Inc., a veterinary consulting firm based in Evergreen, Colo.

Mark Opperman, CVPM,