Don't get lost in increased costs

You know your new facility will mean higher loan costs and additional taxes. Fortunately, the new-and-improved space should also let you expand services and clientele so you can cover the increased costs. And you may need to raise fees. But before you do anything, you need to know how your expenses will change so you can decide how to meet the challenge.

Estimate changes in your costs

First, consider your fixed costs. These expenses exist regardless of how many patients you see, and they'll increase the day you move into your new facility. Fixed costs include:

• mortgage or rent payment

• equipment loan payments

• property taxes

• utilities

• insurance

• maintenance service contracts.

Pinning down changes in variable costs is a bit more difficult, though not impossible. Because variable costs change based on the number of patients you see or the number of staff members you support, you must do some forward thinking to create an estimate. Consider these places where variable costs might increase:

• drugs and supplies

• payroll costs, including taxes

• workers' compensation insurance

• fringe benefits.

So, for example, say you set a goal to offer more dental care in the new facility. This move could increase your fixed costs if you need to invest in additional equipment. And if you see more patients for dental care, you'd also see increased costs for drugs and medical supplies. You could even experience increased staffing costs if you need to add employees. To cover the costs, you'll need to increase your revenue base.

Don't over borrow

Explore strategies for boosting revenue

Here are some revenue-increasing ideas to consider:

1. New services. Additional dental suites; expanded treatment areas; and surgical suites offering endoscopy, laser, and ultrasound provide opportunities to expand your services. Also consider offering boarding, grooming, pet health, and behavioral training. Of course, you want to think through your investment in the facility compared to the income these areas will generate. To estimate the potential revenue, think about the number of additional invoices this service will generate and multiply that by the estimated average invoice amount.

Keep in mind, it may take some time to build a new revenue stream. So the practice's cash flow may suffer in the short term—typically up to two or three years.

2. New clients. New facilities tend to attract new clients. Construction makes your facility more visible and piques clients' curiosity. So think about how many new clients you may attract and plan for the growth. As a starting point, an average full-time practitioner sees 25 to 30 new clients a month and maintains a client base of 1,200 to 1,400 active clients.

Your potential to attract new clients depends on the demographics of your area. A demographic study shows you the number of existing veterinary practices, practicing veterinarians, households, and pet-owning households. You also want to know whether the number of pet-owning households is increasing, staying the same, or decreasing.

Let's say your 8-mile geographic radius indicates 8,000 dog- and cat-owning households and each full-time practitioner has an average client base of 1,200 to 1,400 active clients. In this case, your area can support approximately seven full-time equivalent (FTE) practitioners. If 10 work nearby already, you won't likely see much growth in client numbers. If you find only four FTE practitioners in the area, there's plenty of room for growth.

Of course, as I mentioned earlier, you'll also want to consider how the growth in your client base will affect your expenses. For example, if you need to generate 15,000 invoices a year to meet your revenue goal for your new facility and you're a two-doctor practice generating 10,500 invoices now, you're already close to capacity. (A FTE practitioner generates 5,000 to 5,500 invoices per year.)

It's possible that you can leverage your team more to help the doctors see more clients. When you've tapped their talents to the fullest, you'll likely hire another doctor and/or support staff member(s) to meet the increased workload.

3. Raise fees. Do you think you're charging as much as you should now?

It's possible that you're right. But if you improve the level of service or care in a way that makes clients feel they're getting more value, you can charge more. To find out whether you're charging the right fees, consider doing a competitive analysis of shopped and exposed fees at area practices. You can also tap such sources as The Veterinary Fee Reference, published by AAHA.

Figure 1. Crunching the numbers

Whether you can increase fees enough to cover the increased costs entirely is another matter. In fact, you may need to combine all three revenue-increasing ideas—new services, new clients, higher fees—to cover the increased costs. (See Figure 1 for an example of one practice's multi-pronged approach.)

Figure 2. First-year numbers

Make realistic projections

Even with all these adjustments, it's possible you won't meet the sales level required to carry your new debt in the first year. You may need to make some additional adjustments to meet your goals. (See Figure 2 for a look at one practice's first-year numbers.) A five-year financial forecast will help you set the right course. I know that might sound daunting. But remember, you don't have to tackle this job alone. Your financial advisor can help. And you must understand how your costs and revenue needs will change. When you set clear, realistic financial goals, you can celebrate the completion of your new facility without worrying about whether you can afford it.

Veterinary Economics Editorial Advisory Board member Gary I. Glassman, CPA, is a partner with Burzenski and Co. PC in East Haven, Conn. He'll speak on financing options at Veterinary Economics Hospital Design Conference August 23 to 25 in Kansas City, Mo. Send questions to ve@advanstar.com

Gary I. Glassman, CPA