Practice budget is 'living, breathing' entity

our practice budget is a living, breathing, vibrant part of the practice. It is the underpinning of successful implementation of the practice mission statement and business plan.

Michael H. Riegger, DVM, Dipl. ABVP

The profit and loss (P&L) statement is not the budget. It is an historical document. The budget is the plan.

A disclaimer: the P&L compiled at the end of the year is the result of the success, or not so successful, budget of last year. It is this difference between the budget and the P&L that causes confusion to reign.

How budget process works

• The profit and loss statement is an historical catalogue of income and expenses.

• The budget is a plan of what we want to happen in our practices.

• The budget is the start of the future development of the practice.

• The budget is a financial commitment to back-up the practice mission.

• The budget is a living, breathing tool used monthly to guide daily operations.

There are two major issues to be addressed-income and expense.

What makes up the budget?

The budget plan must address income. If the practice grossed $500,000 last year and the practice wants to grow 20 percent, that's $100,000.

The next step is to determine how the practice will grow this $100,000 of revenue. Where will the growth come from: new services, new clients or just artificial growth (raising fees).

When looking at the collection of services offered and those that might be offered, we can plan to add new services; perhaps chemotherapy, or increase the use of existing services such as dental, to generate the new revenue.

In considering the growth of a practice, how many new staff members does the practice need for the daily operation to generate this new revenue?

It is best to have a five-year plan and a one-year plan for the income budget.

Expense analysis at the end of the year is a compilation of what funds have been spent to keep the practice running in a solvent fashion.

Expenses

Most of us have way too much detailed information from the P&L, but to understand the budget processes and understand a practice, the expense analysis is best made simple.

In considering a simple outline, all expenses should be written up in a cash flow format; in other words, not the IRS forms or accountant format.

In a veterinary practice, expense analysis has four categories: fixed, variable, veterinary salaries and profits.

Those expenses that are there every day without regard to how many patients come in the front door are fixed expenses. These include, facility and general expenses.

Facility expenses might be a payment on a mortgage or rent. Real estate income and profit is a separate area of profit from veterinary services.

General expenses include, but are not limited to: accounting, maintenance, repairs, accounting, legal, advertising, utilities, telephone, computer expenses, donations, laundry.

Expenses that vary with the income are variable expenses. In general, there is an algebra equation associated with these expenses associated with income.

The well-run practice has this linear algebra relationship with support labor and drugs and supplies.

(The equations looks like this: Variable Expenses divided by the Desired Budget Percent = Fee to collect.)

Drugs and supplies expense is pretty easy to understand. We have inventory we sell and receive income from. No sales; no income. Inventory must rrroll. (Or turnover monthly to be a true and real variable.)

Support labor expense takes a little more work. In a service profession we provide services. Fees, taxes, employer's share of government taxes, health insurance and all benefits are included in this category.

Our staff cleans cages, nurses patients, prepares the operating room, administers therapies - services for which there is a fee.

We make the fee schedule to reflect the time associated - the cost of labor - with the production of a service to determine the fee.

The result is a linear relationship.

Veterinary salaries expenses are the third category.

Again all taxes, fees and benefits for the veterinarian are placed in this category.

In general, veterinary salaries are a fixed item, but increasingly in practices with 100 percent production pay, this group would become a variable.

One hundred percent commission pay offers good and bad points to consider (including the issue that some veterinarians on production might starve, and some, heaven forbid, would run up the bill).

Profit groups are the fourth category.

Profits are what is left after fixed, variable and veterinary salaries expenses are paid. Many businesses plow 100 percent of the profits back into their future development.

Profits are the resource for development of the practice for the future. Profits fund education, training and the purchase of new equipment.

And profits are how a practice value is determined.

Study the six different practices in Table 1, then read on.

• Nice Practice. These are numbers for a typical veterinary practice with all categories in a nice array.

Each of the categories are in line with national norms, and profits are nicer than the national norm. This practice has the resources to fund education, new equipment, upgrades. It would also be sellable.

Note: Each type of practice-be it equine, discount, specialty, AAHA, generic, storefront, food animal, exotic-will have different norms.

• Practice A. The general expenses are too high. The managers must look for over-spending in these areas (and, yes, the practice Hummer, was listed as automotive.) Practice A is a small animal practice not making house calls - and the Hummer expensed by the practice is driven by the spouse of a partner, who has no role in the practice functions.

Technically this type of expense belongs charged against the veterinary salaries.

• Practice B. The drugs and supplies are way out of line. Probably inventory control is poor, out-of-date drugs fill the shelves or the trash, the turnover of drugs and supplies is very sluggish. Check for proper mark-up and "giving away" items such as bandages and catheters. Also check for theft.

• Practice C. Oops, no profits? There are still those of us who might still do our accounting this way - anything left over is salary. So if a veterinarian says the take home is $100,000, the take home salary really needs to be reduced to 22 percent with 20 percent coming from profits. This is an important step in understanding a practice's financial health.

• Practice D. Another "no profits." Only this time it is because all the categories are bloated. The bloating in this group is because fees for this practice are too low. And in calculating the needed fee increases, one is going to get nervous. After a careful analysis of the income categories and income budget, a 24-month plan of raising fees will ease the discomfort and get this practice on the way toward "Nice Practice."

• Practice E. Support staff is too expensive. The correction is usually to improve the productivity of the staff with better infrastructure guidelines, worksheet, delegation of duties and more training. Sometimes some poor performers will be identified, but they generally will depart when the stronger leadership in the practice prevails.

Education for the staff these days seem to be a proactive 5 percent of the practice profits.

Special notes on profit

Additional equipment for a progressive practice might be up to 5 percent of the practice profits.

When advertising exceeds 3 percent, something dynamic needs to be happening-such as the promotion of new growth or a new service.

The variable expenses, in raw dollars, will increase, while the fixed expenses percent will drop in the face of increased revenues.

Special notes on growth

Plan on expanding the staff in advance of the anticipated growth to have the new clients enjoying the same level of service that is currently offered, or take steps to not outgrow the practice's current foundation of service.

Study the P&L for the last 12 months.

Set a budget like "Nice Practice," and develop plans, steps and motivation to get from where you are to where you wish to be.