How fast are you driving?

Imagine yourself on a long trip. For the most part, traffic has been rolling along at 70 miles an hour on a highway with a 65-mile speed limit. You are a quarter mile behind the car ahead of you as you enter an area with a reduced speed 50 miles per hour sign, and you see a state highway patrol car just ahead with its radar pointed directly at you.

Table 1.

You check the dashboard and realize that your speedometer cable must have broken, as your speed reads zero. You have to think fast.

Do you hit the brakes, continue on as you are going or hit the gas and expect to outrun your problems?

Couldn't happen to you? Perhaps not, but thousands are on the road with you driving cars with incorrect speedometers. A portable preprogrammed satellite navigator sits on the dashboard of our rental cars as we fly into terra incognita consulting for practices, many in towns we never new existed before.

One thing for sure, compared to precise GPS satellite measurement, most car speedometers are three to five miles too low or too high. Gas gauges are also notoriously inaccurate.

In the same way, most practice owners manage their practices without knowing their real speed or progress or even how much fuel (cash) they have on hand. Unless calibration is available, they don't know what may be functioning high or low or need an overhaul. Most close their eyes, keep practicing and hope for the best. The pathognomonic sign in these cases is that there is no standard payroll check for the owner and there is no contingency account. The owner takes whatever happens to be left over after paying the bills for the month.

These doctors are trying to steer a highly volatile business entity called the veterinary practice while wearing a blindfold.

When I started my own practice about 30 years ago, I was no different. When the recession caused by the fuel crisis of the late '70's hit, I had no idea if I was headed for trouble until something broke, and I was hard put to come up with the extra cash to put it right. I thought . . . just keep practicing good medicine and everything will come out right. Boy was I wrong.

Awakened by a gorilla?

I woke one morning to find an 800-pound gorilla stomping on my chest. That's what it felt like. Turned out to be a mycoplasmal pneumonia that put me out of service for close to four months. Relief veterinarians kept my practice open, but there was not enough left over, after paying them, to feed even one of my three kids. The bank came to the rescue like the Lone Ranger and by the time I got through paying for that quick loan, I knew why the Lone Ranger wore a mask.

My accountant always sent me a quarterly profit and loss statement. I studied those numbers, but didn't get much use out of them. After staring at them for a long time they looked like specks of fly excrement, and I couldn't tell whether the flies were coming or going.

I needed to put the flies into a holding pattern so they could land somewhere where they could make sense for me and my economic survival.

Then, miracle of miracles, I discovered graph paper and got rid of the fly paper. I went to work translating numbers into concepts and trends that I could use. I graphed dollars against time and soon I began to make dollars and sense from my efforts.

It's not gross

The first thing I realized is that gross revenue is the worst indicator of practice health. Twenty years later, I consulted for a five-doctor practice with $750,000 in gross revenues and $770,000 in practice expenses. Within one year, they were grossing $1.3 million with a 25 percent net. Another year saw $1.7 million with a 38 percent net.

Average transaction profit is the leading economic indicator for any practice today!

If I want to travel three miles, I would have to take 5,280 steps at my normal three-foot pace. That makes sense does it not? If I can expect 5,000 transactions this year, based on the history of the last few years, and I want to take home $150,000, then I need an average transaction profit of $30 each. Doesn't that make sense too?

Tools to help

Here's a little tool to help you calculate your average transaction profit from a profit and loss statement. I caution you that some may get violently ill after performing this calculation. You are forewarned that you may be working for peanuts.

Graph your average transaction profit each month. It should be no less than 105 percent of your office visit fee and well-run practices should have an average transaction profit of 120 percent of their office visit fee. If its less than your office visit fee, you are in a deep heap of trouble!