Calculating the annual cost of labor

A wake-up call might be in order when we study the profit-and-loss ledger for the year. What might look like a 25 percent labor cost is really 33 percent. A huge difference.

The importance of this discrepancy is the reality that income is linear with support staff.

When calculating fees, we need to know the real cost of labor in dollars per hour — not the hourly rate we pay staff, but the total cost of support staff per hour.

If the issue seems confusing, it gets even more so when one looks at data from the banking industry, or from the reports in our own professional journals. What goes into the "real" cost of labor varies among them.

The published national norms are not precise. They don't consider the differences between wellness outpatient services, middle-market practices, mixed-animal practices or the multitude of emerging specialty practices. When we see "labor cost data" at 25 percent, that may or may not represent the total cost for all the employees.

Practice management must know the total cost of support labor.

To fully appreciate what that means, we must consider the basic hourly wages, plus health insurance, retirement, worker's compensation, bonuses, unemployment costs, employer's share of Social Security, Medicare, incentive pay and practice discount costs.

A major issue with poor labor numbers is that the overrun on labor cannibalizes the budget groups — specifically the profit groups. When profits are down, it becomes hard to fund debt service, invest in training and even to provide the best customer service.

Last month we discussed the cost of a single employee. Now let us track that number annually for the whole practice and see what we can do with that information.

Shrinking labor pool

The airline industry is under pressure because of rising fuel prices, the housing industry is under pressure because of banking issues, the domestic auto industry is struggling with historically guaranteed health and retirement benefits and veterinary medicine is under pressure because of rising labor costs — our most expensive budget item.

Those costs are expected to keep rising because the traditional skilled labor pool is shrinking. Along with that, there is competition between veterinary clinics, and from other related and unrelated businesses, for the best employees.

To set fees objectively, practices must determine labor costs objectively. There are but three issues to address to contain the cost of support labor:

• Get a handle on the real cost of labor; then set fees.

• Get a handle on the number of daily hours put in by the staff; then tune up the daily work schedule.

• Work out delegation processes to improve productivity.

Today we will discuss the first two.

Real cost of labor

We will use an illustrative practice as a base for this discussion. Look at the sample in Chart A to calculate total labor costs.

Chart A: Real annualized support-staff labor

We see that raw hourly wages come in at 25 percent, or $300,000, but a thorough analysis shows the real cost of labor is 33 percent, or $409,600.

The raw hourly is $12.50, but the real hourly cost to the practice is $17.06.

If one uses only the raw hourly to set fees, the total fees collected come in too low.

The real hourly cost to the practice must be used to determine fees. As the chart shows, when we use the raw hourly of $12.50 for a one-hour support-staff duty and labor at 25 percent, we collect a fee of $50. When using the real cost of $17.06 with labor at 25 percent, the fee one needs to collect is $68.54. A big difference.

Controlling labor costs is important, but in doing so it's better to raise revenues than to cut staff. Always make sure the practice is fully staffed.

Therefore, refigure the fees. To do this, simply subtract 5 percent from the real labor cost, which in this illustration is 33 percent, giving us 28 percent. Use the 28 percent to set fees. The fee to collect for a one-hour support staff duty would be $60.93.

Chart B: Tracking labor expense and productivity

Tuning up hourly shifts

Shift the staff to times of peak activity and cut staff when the clinic is quiet.

Allocate the total hours per year into a daily budget, using the following method:

If the practice is open 250 days a year with 24,000 hours, that works out to 96 hours per day of support labor. This would be:

• Ten shifts of 9.6 hours, or

• 15 shifts of 6.4 hours

To reduce the cost of labor by 10 percent, set up the day to have 87 hours. Create 10 shifts of 8.7 hours or 14 shifts of 6.8 hours. Reduce staff during the slower hours of the day. Split shifts might be needed.

Use Chart B to help you monitor support labor costs. Fill it out monthly.

Dr. Riegger, dipl. ABVP, is the chief medical officer at Northwest Animal Clinic Hospital and Specialty Practice. Contact him by telephone or fax (505) 898-0407, Riegger@aol.com or www.north westanimalclinic.com. Find him on AVMA's NOAH as the practice management moderator. Order his books "Management for Results" and "More Management for Results" by calling (505) 898-1491.