4 staples of a healthy veterinary practice

An understocked pantry doesn't make for balanced meals. And when your wallet's fat, you eat out more often, which means it's all too easy to neglect your sparse kitchen cupboards. So say that one day your wallet's not so fat anymore and you decide to stay in for dinner. But wait—no pasta? No rice? Nothing? How are you supposed to build a meal and sustain yourself? Just like cooking, your veterinary practice needs to be fully stocked with the basics.

Before this recession pounded our profession like a meat tenderizer, most veterinary practices saw exceptional cash flow. We rarely worried about paying the mortgage or making payroll. We became complacent in our business skills and stewardship. "Practice management" and "the business of medicine" seemed to apply only to overly ambitious veterinarians who cared more about profit than pets. Clients came in and paid their bills quietly, which meant our bills got paid too. And so for 40 years, our practices took care of themselves. Until now.

Hardships and challenges notwithstanding, the current economic state is an opportunity veterinarians shouldn't waste. In fact, it's a wake-up call to stock up on the basics. Here are the four staples of a healthy practice. Have you been neglecting them? Regardless of how busy you are—or aren't—take some time to examine whether you're stocked up on these key ingredients every month. If you don't, you could find yourself financially malnourished.

Stick-to-your-ribs income

In a slow economy, it's natural for your gross revenue and average transaction fee to dip. But if these are the only key indicators you track, you may panic unnecessarily. Examine the number of transactions, or client visits, you're seeing. A practice owner I know is distraught because her gross revenue is down 10 percent. Her initial reaction is to slash employee costs, lower her fees, offer deep discounts, and extend practice hours. Here's the problem: She's not monitoring any change in the number of transactions at the practice. If she were, she'd notice that her transaction volume has dipped only 3 percent.

A practice that sees a dip in its average transaction amount while maintaining a stable number of transactions probably doesn't need to take extensive action. Even though clients are spending less, they're still coming in. You have ample opportunity to promote your services and drive that transaction fee back up.

Examine how your team recommends income boosters such as senior wellness tests (both blood and urine), diets and supplements, and dentistry. With confident communication, you may see more clients complying with these recommendations. On the other hand, look at what you charge for common pet products and medications. If you're not competitive, you should be. Sharpening your communication skills, being competitive whenever possible with product sales, and offering superior client service can boost your average transaction fee without layoffs, discounts, or longer hours.

This leads to a question about the downturn: Do you think the recession will be short-lived or are we entering a many-year depression? If you're like me, you're betting that within a year or two the economy will rebound and growth will resume. But that doesn't mean you don't take action now. Rather, it means you respond prudently and rationally. As long as you don't see a significant, concurrent drop in all three income indicators—gross revenue, average transaction amount, and number of client visits—the fundamentals of your practice are probably sound. Take this opportunity to improve your standards of care and service, and when the rebound comes, your practice will be poised for incredible growth.

Lean expenses

The largest expense categories for most veterinary clinics are team costs (payroll and benefits) and inventory (drugs and supplies). These are the two areas that can spoil your profitability if not carefully managed. In the good old days of veterinary practice, when cash flow was plentiful, most clinics viewed inventory control and payroll management as good ideas rather than necessities. Sure, practice management types loved to talk about them, but the latest experimental feline functional brain imaging study was infinitely more interesting.

Here's the reality: Veterinarians who believe inventory and payroll aren't part of their scope of work are ignoring factors key to their success as doctors. If you don't have the supplies or staff you need, standards of care will suffer. If you have too many supplies or employees on hand, you can't afford new equipment, training, or exceptional team members.

According to Benchmarks 2008: A Study of Well-Managed Practices, medical supplies, lab costs, and drugs should total about 17 percent of annual gross revenue. That's $10,000 to $14,000 worth of drugs and supplies on hand per doctor at any given time. If you're exceeding this, you have an opportunity to improve your cash flow and bottom line in one fell swoop. Start by taking stock of what you've got on the shelves. Count every bottle, bag, and box.

Many veterinarians say they don't have time to do this. The reality is, you don't have time not to. Practices that perform a count find up to 10 percent excess inventory. That's several thousand dollars' worth—money that could be used to pay bills, invest in the team, or improve the facility. (For more, see the related links below.)

Payroll is another huge practice expense. And whenever businesses face a drop in revenue, their knee-jerk reaction is to cut payroll. But for small businesses, laying off highly skilled, experienced employees should be a last resort. Instead, carefully evaluate your staffing needs. If your gross revenue or average transaction fee is down, this may indicate that the team is performing fewer complicated, time-consuming procedures. Do you find that on slow days you have too many people standing around with nothing to do? If so, you have three options:

> Enhance training. When your business booms, you'll have a better-trained, more capable workforce. This is almost always the best use of your resources. The amount of money you'd save by sending employees home one or two hours early is nothing compared to the additional skills they can acquire.

> Work on tasks. Do the things that don't get done during busy periods: count inventory, improve or create client education materials, or review hospital protocols and workflow procedures. This will improve your efficiency, which will not only make your clinic more profitable, it'll also increase your standards of care and service.

> Ask for volunteers to go home. This is a last resort. Whenever we have really slow days, we offer the most senior staff this option when everything else is done. This allows junior staff members to gain additional experience and work one-on-one with our doctors. Some of your staff members might be thrilled to get more family time or a chance to hit the gym. Be careful with this option, though, because you may inadvertently encourage employees to seek employment elsewhere. And be aware of your state's employment regulations.

Tantalizing pricing

Like it or not, your clients are looking on the Internet for their pets' supplies. According to PetMed Express's 2008 stockholder report, people spent $188 million with online pet pharmacies in 2008, with an average order of $78. Clients want the best deals possible on pet supplies, so you need to know what your competition is up to. I've long been an advocate for aggressive pricing on highly shopped items such as flea and tick preventives, shampoos, and supplements. When veterinarians ask me what I charge for these common items, I always respond, "Whatever PetMed Express charges." Anything more is a potential lost sale.

Speaking of sales, these products have a significant impact on our bottom lines. Participants in Benchmarks 2008: A Study of Well-Managed Practices revealed that an average of 15 percent of their total income was derived from medical product sales. For practices in the study's 50th percentile, that's $255,000. If we lose that to online competition, we'll feel it.

Once a month, my office manager creates a list of the top 20 products and prescription medications we sell. Most practice management software programs can easily generate this report. Our manager then compares how much the major online retailers are selling these items for. This takes less than an hour, and we can respond to any changes as necessary.

If there's as little as a $1 difference between our clinic's price and a major online store's price, many of our clients will purchase the product at the lower cost. I'm not agreeing with that choice, but it's the way clients behave.

You can argue all you want about value-added services and doctor-client relationships. Clients want to feel like they're saving money. Besides, they figure they spend enough money at the veterinarian's office already. So we price our products competitively.

Be sure to involve your team in product pricing. After all, they're the ones who'll deal with client complaints and questions. If your team members know you're committed to keeping costs competitive, they'll feel better actively recommending that clients purchase their supplies from you.

Bountiful clients

The number of your active clients, new clients, and lost clients can tell you a lot when your pantry is bare. Let's start with active clients—those who have visited your practice in the last 12 months. I'll never forget the practice owner who bragged to me that he had more than 10,000 clients. As we analyzed how many clients had visited in the last year, the number dwindled to 1,100. Ouch! But even when you get it right, this indicator can appear deceptively simple—you simply run a computer report that shows how many clients visited in the last 12 months. As long as that number grows, you're OK, right?

You actually need to dig deeper—an active client who's visited just once in 12 months may be missing out on important pet healthcare. List the clients who visited only once and see if there are efforts you can use to encourage repeat visits, especially if they own multiple pets. Targeted e-mails or newsletters on topics such as senior care, dentistry, heartworm and flea prevention, and weight loss can provide key information about important issues to clients.

Once you've calculated client visits, determine the rate at which you're acquiring new clients. Run a query in your management software that counts the number of first-time visitors in any time period. But that tells only half the story. If you're losing clients as quickly as you gain them, your practice isn't growing. Which brings us to the next indicator: lost clients.

A client attrition report will show you how many clients you're losing—and why. Here's how to set it up. First, develop a protocol that requires team members to document all instances of clients requesting medical records for any reason. Use a simple form that lists the date, the client name, the reason for the request, and the name of the staff member who handled the request.

After documenting the information, the team member should alert the practice manager, who performs any needed follow-up with the client and classifies the client as inactive when appropriate. (See the related links belowtTo download a customizable copy of a client attrition report form.)

Now, not all clients request their pets' records when they go somewhere else. To identify these silent losses, you'll need to run a monthly report of all clients who haven't visited you in the previous 12 months.

Our manager reviews the list and the corresponding records. In some instances the client has moved; in others the pet has died. When there's no apparent reason, our office manager calls to remind clients of their pets' needed medical care. This is when we gather the most valuable information.

Clients may say they thought our prices were too high, there's a closer clinic nearby, or, most often, they just haven't taken their pet to a veterinarian anywhere. These responses are tracked on a form and the staff sees this report monthly. If we suddenly see an increase in any area, we respond quickly.

Bottom line: If you run a list of all clients inactivated each month and compare that with your attrition log, you'll have a pretty good estimate of how many clients you're losing. At Seaside Animal Care, our client attrition rate is about eight lost or inactivated clients per month per doctor.

Don't let these tough times expose your bare cupboards. This is an opportunity to bring some new life back into the basics of your practice. Begin analyzing these basic reports monthly, share the information with your team, and enjoy the growth you'll see. So get back in the kitchen, rearrange some things, and get creative. With these four basics, your practice will be healthy, balanced, and ready for anything.

Veterinary Economics Editorial Advisory Board member Dr. Ernie Ward owns Seaside Animal Care in Calabash, N.C., a National Practice of Excellence Award winner. He has appeared on Animal Planet, CNN, NBC Nightly News, and numerous other TV and radio talk shows nationwide.