Success in cutting waste, boosting profit starts at top

Current trends toward bigger veterinary practices — with more people using supplies, technology and equipment — and more part-time practitioners who don't have the concerns and pressures of ownership lead inevitably to decreasing profitability and higher debt.

What is the answer? Fee increases can go only so far. In today's competitive market, several other issues may need to be addressed. A critical one we will discuss here is practice waste and excess inventory.

Private veterinary practice has never had much fat to allow waste, so practice managers must look for solutions in every corner. Many of them look to their partners in industry for ideas, knowing that veterinary vendors live in a somewhat parallel universe of economic pressures.

A key component of any successful practice management initiative is leadership. This is where we differ from our suppliers. Veterinarians are striking in their disregard for rules and standards. They preach quality care and doing the right thing, but when it comes to policies and procedures that increase quality outputs at reduced cost, they balk. After all, doctors know what's best for the patient, and that includes the inventory on hand, how it's used, how it's priced, how it's stored and a whole slew of other ancillary issues that have little to do with diagnosing, prescribing and performing surgery.

In short: doctors of veterinary medicine feel they are better than the rules that pertain to everyone else.

Until a practice's board of directors (possibly just a single person) agrees to the rules and to abide by and enforce them, how can the practice improve? That applies, not just to inventory management, of course, but to all aspects of practice operations.

Let's start small, though.

Several multi-owner practices recently have sought our help in implementing procedures and policies that corporate America does well. Although corporate America (a majority of the veterinary professions' vendors and suppliers) apparently succeeds in policy execution, people who work in veterinary practices/small businesses stumble. Just ask anyone who has moved from a position in a larger company to a management position in a privately owned professional practice.

Let's focus on the practical aspects of implementing purchasing systems that replicate corporate America. Why? Because wasteful use of supply is common in private practice, ranging from how things are stored, to whether doors are locked at night and where commonly used keys are hidden. (It's kind of ironic that everyone in the practice knows where they are, including the one to the controlled-substance locker!) It is amazing how many practice managers are not able to overcome these and other shortfalls.

Practice managers generally know about supply requisition and purchase-order systems (two first steps in cost control), but are never able to implement them as they are meant to be used. Why? Doctors, try not to be offended, but you are the problem.

Until practice owners make ordering, purchasing, security and inventory management daily priorities, it just isn't ever going to work. Veterinary practices will continue to suffer waste and poor profit margins.

The following guidelines model a requisition and purchase-order system that can be adapted to virtually any aspect of practice operations, especially where doctors repetitively break rules.

Practice managers: Use this article as part of your report to practice owners. Hopefully, they will see the logic. Until they do, don't expect any consequential change, and the practice will continue to suffer financially.

It starts with good governance

Do the following statements sound familiar?

• "I'm too busy to go through a requisition process for something I want. I need it, so just order it."

• "I don't have to turn in credit-card receipts. I'm too busy for that. Just deal with it."

• "Nothing will get done unless I just call and do it. And why should I have to tell the bookkeeper about it? I pay her check."

Notice a lot of "I's" in the prior statements? Once you hear that, you know you are dealing with a doctor.

Ultimately, practice owners who also happen to be the board of directors must take responsibility for the success of new policies.

Leadership and accountability are key.

Start small:

• Instill rules and policy accountability in owner-operators first.

• Choose a few money-saving initiatives, and build from there.

• Once owner-operators are successful in their leadership positions, start broadening the application to the next layer: non-owner veterinarians and all managers.

• Reward and recognize compliance; "punish" noncompliance.

Requisition policy and purchase orders

To get owner-operator buy-in, you need to be a bit of a salesperson. Talk benefits and money. A requisition policy and purchase-order procedure is not about saving money through bids. It is about nailing down what the business really needs and documenting it before ordering.

Estimate wasted office personnel time per week — in hours and in total money spent trying to track down missing supporting documentation for vendor statements and invoices and other substantiation of expenditures, including:

• Repairs

• Maintenance

• Service sontracts

• Janitorial and office supplies, especially purchased from big-box stores

• Vehicle operating expenses, such as gas fill-ups

Estimate wasted office personnel time per week trying to return stuff that should have never been ordered. Then present (to the operating committee) the potential payroll dollar savings by instigating procedures that require compliance by all employees, without exceptions.

Present (to the committee) examples of money lost due to bogus solicitations erroneously paid, overpayments for services never contracted and overcharges for work done without bid or contract.

A good bookkeeping system requires supporting documentation for a vendor invoice to be paid.

A bookkeeper who cares about his or her job will seek the supporting documentation before preparing the check or calling to pay by credit card.

Authoritative operating committee

Get the operating committee members to commit to following the rules for 60 days. Rules will not apply to any other employee until owner-operators comply.

Policy should be clear that noncompliance is akin to cheating a partner and will not be tolerated.

Start with a few targeted areas of greatest possible savings:

• Gas receipts for every fill-up, with sign-off by the responsible driver that gasoline went into a company vehicle (under penalty of perjury or some such).

• Formal purchase requisition for any item, ranging from needle holders to new vehicles.

• Formal purchase requisition for any new drugs not currently stocked in pharmacy.

• Formal requisition for major repairs and maintenance, including bid/proposals by independent contractors or companies.

First 60-day trial

Every week, the practice manager organizes all purchase requisitions into a packet for presentation to and review by the operating committee. The manager will include a total of such proposed acquisitions at best price.

If an operating budget exists, the manager will update it and provide it for comparison with the proposed acquisition total and year-to-date totals.

The operating committee will decide the cut-off point of purchase orders requiring its review.

After 60 days, the committee may decide, for example, that orders of less than $100 can be processed without prior approval, so as not to impede patient care by failure to have necessary items on hand.

The operating committee also may decide that the chief financial officer is responsible for reviewing all such acquisitions and summarizing costs at each subsequent operating committee meeting.

The bookkeeper will police effectiveness of new policy compliance – she or he must ensure that all source-supporting documents exist at check processing or at credit-card payment, before the designated, responsible owner can sign the check for vendor payment.

The bookkeeper will provide a complete listing (possibly by highlighting a detailed transaction report from QuickBooks or a check-writing program) of all transactions lacking support documentation and the total in dollars.

The bookkeeper will reconcile each credit-card statement at month's end and highlight all charges for which receipts are missing. This information will be submitted to the operating committee for its sign-off.

The punishment phase

The operating committee will determine appropriate punishments for doctors who do not turn in supply requisitions or their receipts. Perhaps they:

• Will not be reimbursed for out-of-pocket expenses.

• Will have the amounts withheld from their paychecks.

• Will lose the right to carry a corporate credit card.

• Will be required personally to contact vendors and track down missing documents.

Such punishments must be agreed to and enforced by the operating committee and all owners though mutual accountability, not by the practice manager, bookkeeper, or any other compliance nag.

Resources readily available

Don't recreate the wheel. Plenty of forms can be found in practice-management literature and through AAHA.

Establish a requisition-order system leading to purchase orders and greater accountability by all employees. Forms should include:

• Expense forms to be submitted by employees for out-of-pocket expenses. (General rule: Thou shall not be reimbursed unless you complete an expense form and submit it with all supporting receipts.)

• Equipment and special supply requisition form

• Maintenance and repair requisition

• Simple purchase-order form

Bottom line: profit and value

In theory, all practice owners should fully support operating policy compliance. Corporate America uses policy structure to safeguard assets and increase shareholder value. Private veterinary practice should embrace the same concepts. They are proven to optimize one's investment in practice ownership.

Owners who conduct business this way are rewarded for their stewardship and are not financially hurt (or, perhaps, angered) by those who do not comply.

Marsha L. Heinke DVM, EA, CPA, CVPM

Expect higher income streams, and to achieve practice and individual objectives. Establish and nurture systems that sustain profitability over many years. These, in and of themselves, are an important component of practice value when partners decide to sell, merge or buy.

For more help with internal controls and inventory management, use the desk reference coauthored by Dr. Marsha Heinke and Dr. John McCarthy: Practice Made Perfect: A Guide to Veterinary Hospital Management, AAHA Press.

Dr. Heinke is owner of Marsha L. Heinke, CPA, Inc. and can be reached at (440) 926-3800 or via e-mail at MLHeinke@aol.com