Practice math 101 remains indispensable training

Your homework assignment: Learn and apply the following practice mathematical rules and ratios by this time next month.

Gerald Snyder, VMD

There will be no test until the day you decide to sell your practice or retire. If you haven't implemented these rules and ratios, you will certainly fail the test. Failure means that you will pay a severe penalty in retirement income. Do you really expect the clients that you have chosen to economically subsidize over your career to step forward and make up the difference between a very comfortable retirement and just scraping along. Sure!

You must learn to apply the Staffing Ratios, the Rules of 48, 45 and 6:55, The rules of 0.85 Net and 8:9:2, the Rule of ATF/Neighborhood Income, the ATF Rules, radiology and anesthesia ratios, the drug and supply ratio, associate ratios, drug mark-up ratios, dentistry and laboratory ratios, the client visit ratios, the Doctor ATF Rule and the Rules of Fair ATF.

Medicine relies on mathematics. Statistical analysis must be used to prove efficacy on any pharmaceutical before any government stamp of approval can be issued. Drugs are invariably dispensed on a mg/kg ratio. Mathematics pervades every aspect of our profession and certainly not least in practice management.

It's about math

"The time has come," said the Walrus, "to speak of these things before you reach the state of penury and no return. The future will very likely be cruel to you and your colleagues."

Let's start with the staffing ratios.

The rule of 48 states that when staff is rated for performance on a scale of 1-10, six staff rating "8" will always produce more than eight staff rated "6". Warm bodies running amok may be the unifying similarity that so many practices share, but it doesn't make for a great bottom line.

The rule of 45 states that the maximum fiscally responsible budget for a mature practice for both veterinary and paraprofessional staff is 45 percent of gross revenues, 15 percent for non-veterinarians and 30 percent for veterinarians is possible but leads to a disastrous understaffing. In most cases, 20 percent for paraprofessionals and 25 percent for veterinarians is a better choice, but, in fact, you may have no choice at all because of the 85 percent rule.

The 85 percent of net rule states that one cannot responsibly pay all practice veterinarians more than the 85 percent of the actual net before veterinary salaries and make a profit. Therefore, if the practice net is 40 percent, the maximum that veterinarians can responsibly be paid is 25 percent of gross. That, coming back to the Rule of 45, leaves 20 percent for paraprofessionals.

If the practice net before professional salaries is only 33 percent, then, it follows that paraprofessionals must be paid no more than 18 percent of revenues if veterinarians are paid 25 percent (all benefits inclusive.) Each percentage point less than 40 percent net comes directly off the rule of 45 and realistically decreases the amount available to pay veterinarians, as the staff required to function is not easily manipulated. After all, is the default setting for poor management anything else but lower veterinary salaries?

Within the rule of 45 is the 8:9:4 ratio. The paraprofessional payroll is most effective when reception-tech/kennel and administrative staff are related 8 to 9 to 4. In a healthy practice, 8 percent of revenues collected are used for reception staff, 9 percent for technician/kennel staff and, where needed, 4 percent for administrative staff. (Therefore, to have a full time practice manager earning $40,000, one would need to gross $1 million. One receptionist devoting half of his/her time to practice management is more usual).

Of course, where everyone is cross-trained and everyone does everything, just use 17-19 percent of revenues as your paraprofessional budget. (941 salaries only.)

Profitable practices also use the 6:55 Rule. 6:55 is five to seven. You need $5-$7 dollars in revenue for each dollar of non-veterinarian salaries paid.

Then there is my personal major contribution to the economics of our profession; the discovery that the most successful and profitable fee schedule is the one which is developed from the economics of the area wherein 80 percent of a practice's clientele reside.

Two-thousand nine hundred unique veterinary hospitals and clinics in the U.S. and Canada have thus far discovered, to their bottom line's delight, that multiplying the average family income (latest quarterly revision) by a factor of 0.0016 produces a very valid estimate of the average hospital transaction. (In a feline exclusive practice, the ratio is 0.0018.)

And yes, it also produces a 10-25 percent increase in gross revenues, and there is certainly nothing gross about that!

Thus, if a circle with a five-mile radius were to be drawn around ABC Pet Clinic's exact street address, the average family income within that circle might be $76,444. In that case, an average transaction fee of 0.0016 x $76,444 or $122.31 would be easily achieved for at least 98 percent of clients. (You cannot ever, ever, please everybody. If you do, your clients will continue to keep your status as non-profit.)

Now that you have that $122.31 ATF, two more ratios apply. The office visit consultation fee should be one-third the ATF and in this case $40.36 rounded up to $40.40; never $41 as that is perceived to be a marketing ploy rather than a reflection of actual costs required to render the service needed. The doctor only ATF should be 4.3 to 4.5 times the just-calculated office visit fee.

More ratios apply

If ABC Pet Clinic grossed $480,000 in 2003 with guestimated fees generating an ATF of $104, there were $480,000/$104 = 4,615 transactions. The achievable ATF was $122.31, so their loss was $122.31 minus $104 or $18.31 for each and every transaction. That meant a loss in gross revenues of about $18.31 x 4,415 or $84,507, of which about 80 percent or $67,606 was take-home pay lost.

If a practice sale was in the making, the correct demographic fees would have added more than $300,000 to the sale price.

Ready for some more ratios? Oops! Looks like the radiology and anesthesia ratios, the drug and supply ratio, associate ratios, drug mark-up ratios, dentistry and laboratory ratios, the client visit ratios, the Doctor ATF Rule and the Rules of Fair ATF are just gonna have to wait until next month as the words are starting to overflow the page. See ya!