Practice math 101

Last month, we explored the rules of veterinary practice payroll and how to determine the correct office visit fee, average hospital transaction fee (ATF) and average doctor-only average transaction.

I hope you learned that lesson well and are ready to explore the rest of the story. Failure to do so will mean that you will pay a severe penalty in retirement income.

$ 1 million mistake

A $10 deficit in correct ATF costs you at least $10 x 15 transactions per day x 5.5 days a week x 50 weeks a year x 80 percent net after breakeven point = $33,000 in take home pay per practice doctor per year. In a three-doctor practice over 10 years, that adds up (without interest) to $1 million lost.

Do not expect the clients that you have economically subsidized over the length of your career to step forward and make up the difference between a very comfortable retirement and just scraping along.

Today, we learn the radiology and anesthesia ratios, the drug and supply ratio, drug mark-up ratios, dentistry and laboratory ratios, the client visit ratios, the doctor ATF rules and the rules of fair ATF.

Radiology

Radiology (two views, any size, taken at the same time without contract media) and general surgical anesthesia (including induction, maintenance, monitoring and not including any diagnostics or IV fluids) ratios are soooooo easy!

The fee that is so easily accepted by your client is 3 to 3.3 times your demographically correct office visit/consultation fee as determined in last month's column.

Drugs , supplies

The minimum drugs and supply rules are:

Drug costs (not including diets) can never exceed 18 percent of revenues, unless adding a never-before used drug that is novel and not substituting for an existing drug.

The drug and supplies purchase budget (not including diets) for any given month may not exceed 15 percent of last month's gross. (All you are doing is replacing the drugs and hospital supplies that you sold last month.)

Over-the-counter, non-prescription items are sold for 2.6 times your actual cost.

Over-the-counter prescription items (Advantage, Revolution etc.) are sold for a fee fairly competitive with other practices in your area.

Prescription drugs (pills, solutions, tubes) are sold for double your cost plus an overhead fee of not less than $17.15 (2004.) Yes! Really! No Kidding! Don't call me about this, please! When clients comment, just use the magic words. (See footnote 1.)

Injections

Injections are sold at 20 percent of the demographically correct average hospital transaction, plus $1 per 10 pounds of body weight, irrespective of what is in the syringe. (Unusually expensive drug exceptions may apply.) Only injections are used for cats as no practice in the world has more than 20 percent of their clients who can successfully and routinely pill a cat and guarantee that the pill will not be found behind the couch next week!

Administered fluids are charged at $9.35 per day plus 4 cents for each ml administered. Additional fees apply for I.V. catheters.

Dental

Dentistry, including dental anesthesia, should be no less than 4.5 percent of each month's revenues.

The greatest reason for achieving less than that, is failing to have a technician apply dental disclosing solution to the gums and teeth prior to the veterinarian coming into the exam room.

The second greatest reason for failure is using the word "recommend" instead of saying, "Your pet needs ..." Thirty five percent of patients seen need dental therapeutics yesterday.

Diagnostics

Diagnostics, including laboratory and radiology, should be no less than 20 percent of each month's revenues and laboratory income (15-20 percent of gross revenues) should be no less than three times the radiology income (4 to 5 percent of gross revenues).

Urinalysis

Two percent of your practice revenues should come from urinalysis fees.

Practitioners fail dismally in using this relatively inexpensive tool and 40 percent of practitioners have never even heard of ERD tests and don't know that the letters really stand for earlier retirement deposits. Using ERD tests leads to much earlier detection of a dozen or more diseases.

Client visit rules

Now we have the client visit rules.

The average practice has 1,500 active (visited within 12 months) clients. Twelve hundred concerned, responsible pet owners and 300 that would never bother you if they died of self- absorption tomorrow! The 1,200 see the doctor with their pet(s) 2.2 times each year and have 4.2 transactions each year.

Thus, if your clients inhabit a $76,444 average family income neighborhood, you can be assured of a demographically correct $122.31 average hospital transaction x 1,500 x 4.2 = $770,553 in annual revenues as long as you brush your teeth at least twice a day.

The lesson?

Applying all the ratios discussed so far should net you 40 percent or $308,221 a year of net income provided that you are unmarried or do not work more than 50 hours each week.

Divorces, I am told, are verrrry expensive.

Calculated fair ATF

Now we come to the rule of calculated fair ATF.

The fair ATF can be calculated for any practice.

The components are:

The practice owner should be paid for purely medical duties, not less than 25 percent of personal production, exclusive of diets and refills. If you produced $577,900 (75 percent) of the above $770,533, you are entitled to $577,900 x 25 percent or $144,475. That's only fair!

The return on equity (ROE) must be not less than 12 percent of the practice equity. If you built your practice property a dozen years ago and it is now appraised for $300,000 and you only owe the bank $200,000, you have $100,000 in practice equity. $100,000 x 12% = $12,000. That's only fair!

The return on management (ROM) must be not less than 5 percent of gross or $38,526. (footnote 2)

The practice, like any other business, must make a profit. All of the above are fair expenses. Ten percent of gross is a fair profit = $77,053.

Overhead

Then there is the small matter of overhead.

With the above formula, last year's gross minus veterinary salary was overhead. So here we put in $770,533 - $144,475 = $626,058.

Now let's take these components and plug them into the formula:

FAIR ATF = Fair Owner Salary as Vet + ROE + ROM + Fair Profit + 110 % of basic overhead.

Number of transactions

Substituting in our calculations ;

Fair ATF = $144,475 + $12,000 + $38,526 +$77,053 + $626.058 = $898,112 = $142.56

1,500 clients x 4.2 transactions per year = 6,300.

Now, you might say that's $142.56 and the demographically correct ATF is $122.31. There's a $20 shortfall there. That's when I hit you with the final rule. Fees for non-shopped services should be increased 1 percent per month or 3 percent per quarter for inflation. At that rate, $122.31 becomes $142.56 in about 12 months and just in time for a new 2005 revised calculation.

(Footnote 1) The magic words are , " Went up !"

(Footnote 2) If you hired a manager, their salary comes out of this money and then is added into overhead. That's only fair, too!