Take control of your expenses

In this economy, we could all stand to hear what financial thinker Gregory Berns says about fear: "Think of fear like alcohol. It impairs judgment. You shouldn't make any decisions while under its influence."

This recession has created a new economic reality, and we as practice owners need to fearlessly prepare for this new era. It's true that American consumers are saving more and spending less, but more than 100 million of them are still working, and their animals still need care. The challenge for us is to look at the short- and long-term economic landscape and adjust our business plans accordingly.

Let's begin by looking at fixed expenses, starting with rent.

Rent

I've seen some practice rents or mortgages eat up 15 percent of a practice's budget. That's too high. Rent should be in the 5 percent range.

If your real-estate costs are too high, now is the time to renegotiate or spread out payments.

Other general expenses

Consider these fixed-expense cost-cutting measures:

> Replace filters, install smart thermostats and don't skimp on preventive maintenance. Consider what your staff members can do rather than hiring outside help.

> Set the hot water heater to a lower setting. Wrap the hot water tank with an insulation blanket.

> Look at your bank fees to see what could be adjusted or reduced, and watch for hidden or excessive fees. Last month, I found a new "coin and currency" fee on our bank statement. For what? Our deposits had too much "cash." We stopped that fee.

> Monitor the closing dates, interest rates and fees on your credit cards. Encourage your clients to use debit cards to cut costs.

> Look at your insurance to see whether higher deductibles would work for you.

In short, go line by line though this section of your profit and loss statement, and consider each item for adjustment or change. General fixed expenses should be roughly 11 percent of your budget.

Next, let's look at such variable expenses as labor, drugs and supplies.

Drugs and supplies

For most general practices, this category should be at 15 percent. When it comes to tracking and monitoring supplies, the trick is to make sure that everything used on a patient is charged to that patient. I think all of us can decrease our drug and supplies costs by 15 percent with judicious use and always charging for items used.

How do you do it? Ensure you're using current supplies, limit out-of-date losses and charge appropriately for all supplies used.

Support-staff labor

Take a look at these facets of support-staff costs:

> Charge appropriate fees for inpatient services. Do not try to subsidize other areas of the practice with high vaccine fees. An upside-down practice is one where outpatient services are too expensive and inpatient services aren't inexpensive enough. Make sure the fees you collect actually pay for the cost of labor to perform these duties.

> Monitor your benefits package, but be aware that reductions in benefits are usually bad for morale.

> Limit overtime to essential patient-care services. If overhead is more than 1 percent of total staff expense, you'll need to change work patterns, schedules, floor leadership or duties.

Support-staff cost can be 15 percent to 35 percent depending on practice management and the team's skills. Try to hit a 40 percent to 50 percent level when you add professional labor to support-staff labor on your budget.

If you're not close to those numbers, carefully assess support-staff skills, address work patterns and seek employees' input. You can trim labor costs by 10 percent without affecting morale, mission or productivity.

Veterinary labor

If you're paying on individual production, compensation can be tricky. When compensation packages reward teams, team behavior is reinforced. When individual behavior is rewarded, that's exactly what you get.

It's also important to pay practice owners for floor "clinic time" separately from management time or their owner's dividend. Excellence in practice leadership is really important these days for the delivery of veterinary medical services, but it's a difficult task. However, the new reality also means that owner veterinarians need to lower their expectations for their own dividends and still reasonably compensate associates.

Profit

It may seem funny to see this category here, but if a practice's profit is 10 cents on the dollar, it's not just deposited directly into owners' pockets.

Generally speaking, nonrecurring purchases are typically made from this category. For example, a new ultrasound — whether leased or purchased — counts here. Profits ultimately pay capitalization expenses.

This category can also fund the development of new services, IRA plans or dividends.

Now, the government does allow us to deduct these expenses via the depreciation category, but be wary of new capital expenses. A new piece of equipment should generate at least its gross cost in new business within five years.

In summary, renegotiate terms of leases, loans and lines of credits to keep the budget balanced. Cut down owners' draw to keep the other four groups within target range. A typical business cycle is three years. So look at the practice with this in mind. Set new targets and new goals and prepare to review this data in three years.

Dr. Riegger, Dipl. ABVP, is the chief medical officer at Northwest Animal Clinic Hospital and Specialty Practice. Contact him at riegger@aol.com. Find him on AVMA's NOAH as the practice management moderator. Order his books Management for Results and More Management for Results by calling (505) 898-1491.