Does your team know you start every day $900 in the hole?

Let's face it: where work and your livelihood are concerned, ignorance is not bliss. Often practice owners feel frustrated that employees, including associate veterinarians, don't realize how expensive it is to run a veterinary hospital. Their lack of knowledge can lead to feelings of contempt toward the practice owner and a misconception that he or she is more concerned about the bottom line than the well-being of patients.

Some people think that the only way to truly understand the expenses associated with a small business is to actually own a small business. While there's some truth to this, you should still aim to educate your staff regarding the costs of running your practice. If your team knows what they're working for—and what's working against them—they'll be much more successful on the job. In fact, I've found that when employees are empowered with fiscal information, they feel more accountable for the financial success of the clinic.

Break it down

Using last year's profit-and-loss statement for your clinic, conduct the following exercise at your next team meeting: Ask your team to name as many overhead expenses as they can. As you know, the list is almost endless: taxes, rent, utilities, and so on. Be prepared to tell them how much you spent last year on each expense they name—and be prepared for their shocked reaction.

Where does the money go?

For example, let's use a clinic that's grossing $1 million per year with two full-time veterinarians, one of whom owns the practice. The largest expense for any practice is the payroll. This number should never be greater than 45 percent of practice revenue. So for our example, we have $450,000 to pay fair and reasonable wages to our team.

Keep in mind that with this number we must also pay the two veterinarians 18 percent of their production. And 4 percent of the gross ($40,000) should be available to pay a practice manager or the owner if he or she is performing all of the management duties. Remember, this is just an example. A great practice manager may be worth much more than $40,000 in a million-dollar practice.

The second-largest expense is the drugs and medical supplies that you need to deliver high-quality care. This number shouldn't exceed 18 percent of revenue, or $180,000 in this example. In a practice that doesn't tie up its cash flow by overloading its shelves with inventory, this number could creep down to around 15 percent.

Your team needs to understand that it's reasonable and fair that a minimum of 10 percent of the revenue generated goes to the shareholders of the practice, in this case, the single owner veterinarian. Why is this fair and not exorbitant? Because the business owner assumes financial risks that no one else in the practice does. And as an investor in the business, the owner needs to see a fair return on his investment; otherwise, he would take his money elsewhere.

Of course, if all veterinary practice owners took their investment money and ran, there wouldn't be any veterinary offices and, therefore, no veterinary-related jobs. So as employees, the team should be happy that the owner is getting fair and reasonable profits.

After subtracting out wages ($450,000), the cost of drugs and supplies ($180,000), and a fair return to the owner ($100,000), we're left with $270,000 to pay the clinic's overhead expenses. Assuming the clinic is open 300 days a year, this equals $900 per day in overhead expenses.

Reality check

Present the above information to your team with the following statement: "Every day that we open our doors, we start out $900 in the hole." You can also present this absurd scenario: Assume we could find a group of doctors, technicians, receptionists, and assistants who were willing to volunteer their time to work in our facility. In addition, assume our facility didn't contain any pharmaceuticals, vaccines, or equipment. We'd still have to ask our clients to pay us $900 a day for the smiles and advice we give them. And smiles and advice would be all we could offer.

Obviously we as a team want to be paid fairly for our time, skills, and knowledge. We also want to work in a hospital that we're proud of, a hospital with the latest equipment and a pharmacy with the necessary medicine for top-notch treatments. Therefore, we have no choice but to ask clients to pay for these expenses.

So we must make considerably more than $900 per day. In fact, to generate $1,000,000 in revenue over 300 working days, the practice needs clients to pay an average of $3,333 per day. Anything less than that and the clinic will not stay viable for long.

Remember what's important

As a practice owner or business manager, you must remember that your team is your most valuable resource. It's no secret that the key to long-term profits is finding and keeping satisfied clients. And to do that you need a happy and engaged staff.

One important way to keep your team happy is to share information about the financial state of the business and how it affects each one of them. If they understand the ins and outs of owning a business, your practice will be a better working environment for all concerned.

Dr. Michael D. Cross owns Cross Veterinary Clinic in Grand Blanc, Mich., and is the veterinary technology program coordinator at Baker College of Flint. He's also president of M. Cross Consultants.