Examine costs, stick to budget to ensure fiscal heatlh

A key step in managing the expenses of any veterinary practice is learning what things actually cost.

For instance, do you know what it actually costs to attract a patient or to sell a service? For that matter, what does it cost to open the doors to your animal hospital, clinic or practice each day?

Often wrongly considered boring, time-consuming and less than helpful to the principals in small veterinary practices, the costing and budgeting processes have a significant impact on the bottom line.

At its most basic, the costing process seeks to determine what it costs to operate each day, treat patients or bring in new business.

Budgeting involves forecasting the amount of money needed to make the practice prosper. Costing turns the guesses in that process into educated ones.

What does it cost?

What does it cost your veterinary practice to perform its services? Although your financial statements do show total expenses, rarely do they break them down into specific services or categories of services. That is where cost accounting enters the picture.

Cost accounting is the process of detailing all of a veterinary practice's costs associated with attracting new business, performing services, etc., both direct and indirect.

Direct costs include such things as total wages paid to workers, supervisors' salaries, supplies purchased, etc. Anything beyond that is an indirect cost.

It is the rare veterinarian who does not know whether his or her practice is profitable. Accounting statements, or even the practice's tax returns, provide that information.

But how many DVMs know which aspects of the services they routinely perform are profitable or even which types of services make money? Few owners, in fact, know whether their best customers are generating enough profit to warrant the degree of services provided.

It also is surprising how few veterinarians understand what a particular patient, service or type of treatment actually costs. Too many believe that, if they charge a certain sum for a service and pay a worker slightly less, then that service is profitable. In reality, nothing could be further from the truth.

As is the case with many business expenses, the cost of money often is misunderstood. Many veterinarians seem to believe, for instance, that using savings and investments for most necessary purchases is sound economical strategy.

What they may fail to realize, however, is that there is even a "cost" to spending that money. Removing funds from savings incurs a so-called "lost-opportunity" cost. If those funds had remained invested or stayed in a savings account, they would have earned interest or increased in value. Using them in the practice means that the practice should consider that "lost opportunity" as a legitimate cost of doing business.

Any practice that offers a "prompt payment" discount also incurs a cost. The practice usually must pay its workers and its bills before receiving payment for services. Often, this means borrowing money. It is up to the principals in any practice to decide whether it is more economical to borrow the money needed to keep the operation going or to offer clients an incentive for paying early.

Budget basics

Like a road map of a rapidly growing city, a budget establishes a path to get to a selected destination, usually a set profit amount.

The budget attempts to show what expenditures will be necessary to achieve goals set by the veterinarian.

After income and disbursements have been estimated, a minimum cash balance usually is established. How much does the practice's bank require to be kept in an account?

How much reserve must be maintained to comply with loan terms? How much is needed to meet monthly bills and payroll? All of these figure into the minimum cash balance needed.

Put another way, if $10,000 per month is necessary for payroll, rent, utilities, advertising and the like, the veterinarian should plan to maintain a cash balance of $10,000.

If sales slip, and the practice does not have sufficient income to promptly make payments, creditworthiness may be affected, or the practice may be forced to borrow to make up the shortfall.

Obviously, a budget will greatly aid in effective cash management, helping a veterinarian anticipate the need for short-term borrowing and, perhaps, obtain more favorable borrowing terms. Conversely, when the budget indicates periods of excess cash, those funds may be invested in readily marketable securities that will yield additional income.

Accounting for costs, reducing costs

There is more to cost accounting then determining the costs of various services. Every veterinarian also must find and reduce expenses that are out of line.

Many begin by comparing this month's expenses with last month's or with the same month last year. Eventually, year-to-date expenses are compared with last year's, after which an attempt is made to determine reasons for any discrepancies and why some costs may have risen.

If, for example, the cost of supplies shot up to 15 percent this year from 2 percent last year, you must know why.

Equally important, that analysis also offers insight into the practice's overall fiscal health.

The latter is important, affecting not only to the bottom line or profits, but also the cost and availability of financing.

Manage, manage, manage

How can you better manage the expenses of your practice? Consider these strategies:

• Accelerate cash inflow. The quicker cash is collected, the quicker it can be spent, or added to available capital.

Improve receivables. Most practices benefit from billing early and often. Issue invoices promptly and follow up immediately if payments are slow to arrive.

• Offer discounts to those who pay promptly.

• Require credit checks on all non-cash customers.

• Consider raising prices. Know the competition.

• Manage payables. Study your options. Generally, bills should be paid as late as possible. If a payment is due in 30 days, do not pay it in 15 days.

• Conversely, consider vendors' offers of discounts for earlier payment. Payables can be either expensive loans to your suppliers or a reduction in overall costs.

• Use electronic funds transfer to make payments on the last day they are due.

• Minimize expenses – not only operational ones but make the most efficient use of every dollar spent.

• Comparison shop. Try to get the best deals on everything your veterinary practice needs, from office supplies to computers.

• Don't always focus on the lowest price when choosing suppliers. Sometimes, flexible payment terms can improve cash flow more than a bargain-basement price.

• Don't consider expanding until you have the means to pay for it.

• Prepare for cash-flow fluctuations and imbalances.

By anticipating when income is likely to drop, a portion of your working capital, or reserve, can be set aside for such periods.

• Seek assistance from an accountant or other professional to help manage cash flow, especially in projecting needs. Many accounting software packages include modules that can help manage cash flow.

Managing expenses for profit

Managing the expenses of any veterinary practice can be as simple or as detailed as the principals desire, but at the very least it's good to know the true "cost" of money, and what every aspect of every service is costing you. If costs start to rise, you should at least know why.

Columbus ventured out without a map looking for a shortcut to India and landed in the Caribbean. He died broke.

The veterinarian who sets out to find profits without a map or budget will end up somewhere.

He or she might even profit for a while, but only through good luck.

If that should be the case with you, imagine how much farther sound costing and budgeting practices could take you.

Mr. Battersby is a financial consultant in Ardmore, Pa.