BEP your way through the lingering recession

We know the real story, even though the pundits are telling us that the recession is over. Most of the experts assumed this recession would be like the one in the early 1980s, but things are not going according to schedule. The dynamics of this business cycle are different this time around, and we all know it. We've adjusted our staff, expenses, compensation packages, tuned up our inventory, modified the business plan—so now what? It's BEP to the rescue. With the entire world trying to figure out what to do, break-even points (BEPs) are one of the key elements to adjusting and adapting to the new economy, including those of us in Main Street clinical veterinary medicine.

Look at the expenses

To get serious about our businesses, we need a method to address capitalization costs—nonrecurring expenses for things like dental machines, ultrasound and training for those purchases. We need to understand the real cost of capital investments to price their use. You can figure capital costs with the BEP formula: break-even point = Item to assess/1.00 – Variable percentage.

In previous columns, I've explained how to break up your profit and loss statement into expense categories: variable, fixed, veterinary salaries and profits, including return-on-investment (ROI) items.

• Variable expenses are support staff labor and drugs and supplies.

• Fixed expenses are rent/facilities and other general expenses.

• Veterinary salaries include pay, benefits, taxes and associated fees.

• Profits pay for capital investments.

Consider the service

Let's assume that variable expenses are 35 percent. Use the data from a BEP to set your fees. Consider the purchase of an $1,800 blood pressure monitor. If we plug that number in the BEP equation it would be: $1,800/1.00 – 0.35 = $1,800/0.65 = $2,769. That means $2,769 is the real cost.

Let's assume the practice does 300 anesthesias per year, and at $10 per anesthesia the annual revenue would be $3,000. This is a good purchase for two reasons, improving patient care and covering purchase price in a year.

Next, let's consider glaucoma. We can purchase a Schiotz tonometer for $200. Plug this into the BEP formula, and we come up with $200/0.65 = $308. Now, these numbers represent total new sales for glaucoma identification and treatment. Say a veterinary practice has 4,000 patients and 1 percent of those patients have glaucoma. This translates to 40 potential patients. If we charge $30 per assessment, this would generate $1,200 in new revenue.

Consider ultrasound. Within a practice, 1 percent of gross veterinary-specific revenue can come from ultrasound. So a practice with gross veterinary revenue of $800,000 can expect new revenue of $8,000 per year. Also consider that a veterinarian must complete a two-year learning process to acquire the skills needed to generate this new revenue. With the purchase of ultrasound equipment comes improved bladder cancer detection, surgery, treatment and a lower morbidity.

If one purchases a new ultrasound for $25,000, the BEP is: $25,000/0.65 = $38,461. Within five years, the ultrasound should provide $40,000 in new revenue.

My rule of thumb is that a piece of equipment must—at a minimum—generate its cost within 5 years.

If one desires ultrasound but is put off by the price, many quality used machines are available at a reduced cost—and therefore a lower BEP.

Ways to use the BEP

These BEP concepts can be applied to all equipment purchases. Consider the examples below and in "A BEP cheat sheet" at below. Use it when you're putting together a business plan or an adjusted business plan to present to those holding your debt. Say the rent/facilities payment is $3,000 per month and you need to negotiate a reduction in the payment to $2,000 per month. The BEP calculation would be: $12,000/0.65 = $18,461. A veterinary practice owner can go to the banker with this data.

A BEP cheat sheet

A practice owner can use the BEP to calculate the real cost of hiring a new associate. If you anticipate an inclusive salary of $75,000, it goes into the formula: $75,000/0.65 = $115,385 of new revenues will be needed to cover this expense.

Going the other direction, if you want to grow a practice, one strategy is to add support staff. Say a practice wants to grow by $100,000 this year and you anticipate a 20 percent cost of labor associated with this increase. Plug a $10 per hour inclusive remuneration into the BEP formula to come up with $22,000. Then, $22,000/0.65 = $33,846. So the practice needs to generate $33,846 of new business to cover this salary for an anticipated gain of $100,000. That's pretty good.

My point? The BEP is helpful to understand your business decisions. All fees are linked to the variable costs of producing a service. BEP helps solve the real cost riddle.

Dr. Michael Riegger, Dipl. ABVP, can be reached at http://nwanimalclinic.com/, riegger@aol.com, 505-898-1491, on VIN or at Iowa State University as a guest lecturer.

For a complete list of articles by Dr. Riegger, visit dvm360.com/riegger