Bounce back from the bad economy with a breakeven analysis

So you say your business is down, but I say that sounds pretty normal. Get used to it. It's not the same normal of five years ago. This is the new normal. We can ignore it and hope it goes away, but that's like trying to hold back the tide. Is it survivable? Yes. In fact, if you do it right, the new normal can even be profitable. The return of the old normal is too far in the future to even dream about.

What caused the shift? Greed. Not our greed. Heck, we give our services away. It was banking greed and real estate greed, along with a very unhealthy dose of government spending. The new normal persists because of universal financial uncertainty. Faced with this uncertainty, our bread-and-butter consumers are acting exactly as they should—responsibly.

We can all come up with possible reasons why consumers are spending less. The simplest reason is that the people who control the largest amount of money in our economy—baby boomers—are spending less because it fits their stage of life. They're looking at the future with trepidation. They're asking, "Do I have enough money to retire?" and "Can I afford a new car, a vacation home?" They're wondering, "Should I save more?" Deflation has only compounded the problem.

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So, what's the responsible way for us to react? There is only one answer: Manage our practices at a level appropriate for fewer client transactions.

Prepare for fewer clients

What this recession has done for most practices is reduce transaction numbers and reinforce the belief held by certain segments of our society that pets are a luxury. Yes, our transactions are down, but we must ask ourselves, "Who, exactly, is no longer coming in?"

In the United States, 60 percent of households have pets (1.8 pets is the average), but 60 percent of these pets will never see a veterinarian. We make our livings from the 60 percent of the 60 percent, or 36 percent of the population.

In addition, 95 percent of our profit comes from our top 55 percent of clients. That's just half of last year's clients and 20 percent of all pet owners. These clients are also the most responsible and stable members of society.

The lowest 45 percent were usually visiting us for rabies vaccinations and nail trims and were marginal users of our other services. These lower 45 percent may be wonderful people and good drinking buddies, but they're the hardest hit by the recession: three to five times harder than the top 55 percent. In a way, this benefits us. Fewer but more quality-minded clients require less staff.

Trim the fat

Three decades of management consulting have taught me that most practices have a layer of financial fat weighing them down. I can tell you from expert personal experience that, once it's established, that fat is hard to remove. You have to be motivated or nothing ever happens. Debt happens to be a good motivator for many, and our drug distributors are doing their part in providing that kind of motivation. The number of hospital accounts on C.O.D. is at an all-time high.

Banks are also motivating many of us, especially owners holding mortgages on very expensive "hospital of the year" practices with million-dollar practice buildings. Practices that can't maintain a gross exceeding 13 times their rent are chock-full of motivation! Unfortunately, many of the most beautiful practice buildings in the country are suffering badly. The economy is going nowhere for several more years.

With a national 10 percent to 15 percent reduction in client transactions, many practice owners welcome staff attrition as a way to reduce overhead. However, we need a minimum of $5 of revenue for each $1 of payroll cost.

Faced with the need to reduce staff, veterinarians have offered their staff a choice: "I have to reduce staff overhead by 20 percent. I can either lay off X number of people or keep all of our staff but at a 20 percent reduction in pay. I'm going to let you make that decision." Many a staff, probably fearing that each would be the one cut, has opted for the pay cut with the certainty of employment. They work five days for four days' pay. The staff sees the veterinarian as fair, and, eventually, when a staff member leaves, the veterinarian can readjust everyone's pay.

Invest in a breakeven analysis

Decisions. You and your clients make them every day. Some are small: "Do I take my family to the movies at $10 each and another $30 at the candy stand, or do I just rent a DVD and order in pizza?" Others have a larger impact: "Do I invest in an ultrasound, or do I just have the mobile unit come in and charge me for each procedure?" The recent economic shift hit the Richter scale hard. Now more than ever, every decision counts.

Those who manage their business decisions will do well while those who continue without major changes will continue to see their practices decline—one client at a time—until sustainability is no longer possible.

Now is the time to use one of the great management tools almost universally ignored by practicing veterinarians: the breakeven point. We all have accountants who are skilled in using this tool. But like the computer system we paid through the nose for and now use as a cash register, many of us don't use our accountant's skills to our advantage.

The breakeven analysis shows you how many transactions your practice needs to see a profit.

My example in Tables 1 and 2 is a busy solo practice. It sees an average of 12 patients each day in a five-and-a-half-day workweek and has four OTC-only purchases daily. Annual revenue is $600,000. The owner, serving first as a veterinarian, receives 22 percent of each transaction, or $132,000. Then, as the practice owner and manager, she receives another $99,000. The total of $231,000 is, of course, before local, state and federal taxes, which will certainly reduce the income to about $180,000.

Table 1

The breakeven analysis shows that with current expenses typical of such a practice, the veterinarian must realize $2,408, or about 200 transactions, each month to reach the first penny of profit. The costs of running this hospital just to get to the breakeven point are $288,960. That means the veterinarian must work until the last week in May before being assured that the practice has covered its expenses for the year. After that point, the veterinarian as the owner takes home about 80 percent of each transaction. Until that last week of May, in terms of compensation, the veterinarian is an associate only.

Table 2

The breakeven analysis is valuable in many ways. The number and dollar value of your transactions determine the profit for the year. A decline of 500 transactions (10 per week) will lower profits by $20,000.

Any change in fees, costs of labor or supplies will change the the number of transactions needed to break even and the owner's pretax income. There are few better decision-making or forecasting tools. Ask your accountant to make sure you have this tool as a spreadsheet so you can add or subtract variables and see the direction your finances will go.

Keep your chin up. It's a tougher world out there, and previous success will be harder to achieve over the next decade. I guess that's why God created management consultants. He also created fleas, ticks, heartworms and nematodes, which have supported many practices for many years.

Dr. Snyder, a well-known consultant, publishes Veterinary Productivity, a newsletter for practice productivity. He can be reached at 112 Harmon Cove Towers Secaucus, NJ 07094; (800) 292-7995; Vethelp@comcast.net; fax: (866) 908-6986.