Stop costs from gobbling up your revenue

Back in the roaring '90s, when growing a veterinary practice by 10 to 20 percent per year was commonplace, I thought it would be great to own multiple practices. Ten seemed like a good number. If I only made a 12 to 15 percent profit at each, I'd still be doing very nicely, thank you. A few stock market crashes later, that idea wasn't looking so great. Instead of profits multiplied by 10, I was looking at impending losses. The battle was on—I was determined to figure out a way to remain profitable.

Many financial management speakers assume that veterinary practices base their operations on a yearly budget plan. But in my experience, most hospital owners eyeball their expenses and hope for the best. For years I wasn't too different—I didn't stick to a formal budget either. But when cash flow started to slow, I realized I had to control costs. And to do that, I needed to change my ways.

Making a budget for a veterinary hospital isn't difficult. Most budget expenses are related to payroll and inventory. If practice owners control and monitor these, our budgeting is just about done. Payroll, including taxes and benefits, takes about 50 percent of a practice's revenue, with 25 percent for staff and 25 percent for doctors and management. Inventory costs, including laboratory equipment and food, take about 20 percent of revenue. Rent and associated building expenses eat up another 8 to 10 percent, and general administrative costs come close to 8 to 10 percent.

What does that leave for profit? If you're lucky, 10 to 20 percent. Much of your rent, utilities, and general administrative costs are fixed, which means you can't do much about them. Therefore, to be profitable, you must control payroll and inventory costs.

Many hospitals spend 52 to 55 percent on payroll rather than the targeted 50 percent, and inventory runs 22 to 25 percent of total revenue versus the ideal of 20 percent or less. Do the math and you'll quickly see that these clinics are minimally profitable at best. If this describes you, don't give up—there's still hope for profits ahead. Here's what I do to keep major expenses from gobbling up too much revenue.

MANAGE DAILY PAYROLL EXPENSES

I give my practice managers a budget of 18 to 20 percent of revenue to spend on payroll hours during busy times of year and 20 to 22 percent to spend in slow times; our overall goal is 20 percent. The managers look at our revenue history and average hourly wage to forecast how many hours they can spend on their weekly schedules. A spreadsheet scheduling system shows them whether they're staying within the payroll budget. After each payroll period, managers plug in the actual revenue and payroll numbers to see what percentage of our income went to payroll expense. If payroll exceeds 20 percent, a column in the spreadsheet shows the actual amount paid by the hospital for unneeded labor. While we don't begrudge the staff their wages, we don't enjoy spending that money unnecessarily.

When my practices first started doing this, I found that one location was overstaffing by 100 hours per week! It seems absurd, but it's true. In addition to glaring problems like this, I learned a few other lessons from tracking payroll. First, while you can often tell that you're overstaffed, it's hard to tell to what extent because folks typically find some way to "keep busy." Second, it wasn't that difficult to cut the wasted staff time and function just fine—everyone just worked a bit less. Over time, a staff member or two left the practice, which freed up more hours for others.

Taking payroll management one step further, our managers and head doctors often check their upcoming schedules at the end of the day. If a team member is scheduled to work the next day but isn't needed, the manager lets him or her know that night. We also send folks home or out for a long lunch on slow days. No one likes this approach, but team members realize it's a better option than failing to make payroll.

TRACK INVENTORY EXPENSES WEEKLY

My inventory managers take a similar approach with inventory control. Our budget, which is very aggressive, allots 15 percent of the revenue generated by a given clinic in the past week for purchasing drugs, medical supplies, and pet food for the next week. A spreadsheet helps managers calculate what they can spend. As they order items, managers add those purchases to the spreadsheet, which keeps a running total of how much money is left.

If there's a problem, inventory staffers find a way to "balance the budget." Some doctors will argue that, at the end of the day, you need what you need and you don't want to run out of something important. That's true, but discipline and a good inventory control system go a long way. Perhaps the practice is carrying too many products, too much of each product, too many sizes, larger sizes than needed, or some combination of these problems. If an inventory manager is running a tight ship, the practice should be able to stick to a budget of 15 to 18 percent.

While my practices' payroll and inventory systems aren't perfect, they work reasonably well. By closely monitoring both types of expenses, we save thousands of dollars each month, and we celebrate that. Our teams know that when we do a good job of controlling costs, we have more dollars available for staff events or bonuses.

FIND HIDDEN EXPENSES

In the good old days, veterinarians didn't have to worry about cost-controlling the small stuff. We were better off putting our time and efforts into growing the practice rather than micromanaging expenses. These days, all expenses are significant. To find cost savings in your practice, look at recurring expenses. Are you getting the best rates on your phone and Internet services? How about waste and hazardous waste removal? Look at your expenses for radiology badges, radiology maintenance, cremation services, and so on. Compare pricing and ask about group rates—many state and local veterinary associations offer special rates for their members.

During this review, ask yourself if you really need every service. Consider postage machines, floor mat service, purified water machines, and janitorial services. Don't let the staff make you feel guilty about giving up a service even if the vendor is a "friend" to the clinic. Remind the crew that you're making changes so money is available for payday.

AVOID EXPENSIVE CONTRACTS

Service contracts lock you into a service for an extended period of time. Avoid them! Many industries try to force these contracts on business owners, and they're sneaky about it—trying to get managers or front-desk staff to sign off on paperwork, for example. Often these contracts are binding and lock you in for three to five years. I'll be celebrating next month when our postage machine contract expires. What seemed like a good idea three years ago at $30 a month didn't seem so great after it ended up costing $80 to $90 per month with hidden expenses. I'm still angry that the rep duped our manager into signing a contract.

ESTIMATE, ESTIMATE, ESTIMATE

Get three estimates on any major repair. With multiple locations, my practices' maintenance costs are constant. And I can't tell you how often multiple service providers quote significantly different prices—and even different diagnoses. Often we've been quoted for a large job only to have someone else determine that the problem was simple, at little cost to repair. Getting a few opinions and estimates is always a good idea. Even when you know you'll need a comprehensive repair in the long run, you may discover that a small, temporary fix will get you by for the time being and save thousands of dollars when money's tight.

PAY ATTENTION TO THE BOTTOM LINE

Remember that revenue is only half of the story. What's more important is your profit. My group of practices experienced a 1.9 percent decline in revenue for 2008, but because we controlled our expenses better, our profits increased. The top line went down but the bottom line went up. No one is ever happy about a revenue decline, but at the end of the day, profit is more important.

LOOK BEYOND EXPENSES

With costs under control, you can refocus on growth. And to grow your practice, especially in hard times, you need your team to be vested in the success of the business. They need to understand that growth means raises, new equipment, improved facilities, celebrations, and the feeling of success. It's easy to think, "Times are tough, and if we're down just 5 percent, that's OK." Teach your team that everyone must be focused on growth.

You might wonder how you can possibly plan to grow and become more profitable when the economy is down. Here's how: by recouping missed charges and capitalizing on all opportunities. Most practices don't realize the potential revenue slipping through their fingers every day. During adverse times, especially if a clinic's traffic is slower, putting energy into capturing this revenue makes sense. There's still a lot of "gold" in our clients' charts. We just have to mine it. Here are the most frequently missed charges and how to avoid them:

Charges "lost" in translation. These are charges that were never entered into the computer. Maybe they weren't circled on the travel sheet or were skipped during computer input. Ask those who handle checkout—usually the receptionists—to make sure the number of transactions in the computer is the same number on the travel sheet. And make a habit of double-checking travel sheets at the end of the day. When you do find a mistake, don't just chalk it up as a loss. Notify the client of the missed charge and recapture that revenue.

Undercharges. When it comes to valuing our services, we veterinarians are our own worst enemies. Clients come to us not only for our time but also for our knowledge. That means we need to charge appropriately. To remedy your undercharging, periodically review your average client transaction (ACT) and average doctor transaction (ADT) to see whether your clinic has room for improvement.

Noncharges. Maybe you've never thought of charging for blood draws or hospitalization exams, but these services take both time and knowledge, and your clinic should be compensated for them. Other examples of noncharges that should be charges include surgery packs, preanesthesia medications, additional restraint, surgery and anesthesia monitoring equipment, and cystocentesis.

Missed opportunities. Our patients depend on us to be their advocates for better health. Services or procedures we miss by not being thorough or by deliberately cutting corners can quickly add up. So don't skimp on ear cleansing, ear cytology, anal gland expression, or skin cytology. Each of these procedures is an opportunity to improve your patients' health as well as your bottom line.

Remember, too, that you can treat only what you diagnose, so make ophthalmoscopic and otoscopic exams part of your patients' regular checkups, and insist on total parasite control for both dogs and cats. Book recheck appointments while clients are still in the exam room or waiting area, or at least follow up with a phone call after they've left.

Clinics that do a better job of capturing missed charges and capitalizing on pet healthcare opportunities can see up to 15 percent in additional revenue. Why wait?

A report by the NCVEI showed that practice growth in 2008 was about 4 percent. I suspect growth for 2009 was even lower. But don't be discouraged. The way we respond to adversity is what makes the difference. We can hang our heads and wring our hands, or we can make our clinics more efficient and profitable—either attitude is self-fulfilling. So be innovative, watch expenses, respond to clients' needs, and mine the gold in patients' charts. Regardless of the economy, your team will be celebrating satisfying paychecks and better patient health.

Veterinary Economics Editorial Advisory Board member Dr. Jeff Rothstein, MBA, is president of Progressive Pet Animal Hospitals in Michigan.