Understand your practice's cash flow?

Take five minutes to quiz your budget acumen

Thought for the Month: When one's rhetoric is different than their deeds,listen to the deeds.

It is time for a budgetary review. We will start with an overview ofthe budget with this quiz on the veterinary expenses and cost of operationstructure for your practice. You have five minutes.

1. What are the fixed expenses for your practice, using a percent_____.

2. What is your goal for this year for fixed expenses, using apercent____.

3. What are the variable expenses of your practice, using a percent___.

4. What is your goal, or budget, for variable expenses for thisyear, using a percent ____.

5. What is the percent of the gross veterinary remuneration, includingowner veterinarian, but excluding boarding, grooming and OTC sales, usinga percent ____.

6. What, after subtracting the fixed, variable and veterinaryremuneration, is the profit of your practice, using a percent of the gross_____.

7. When investing in new technology and education, these are notfixed or variable expenses, but come from the profit side of the ledger.True or false? (answer true)

8. How much of your gross profit dollars are used for new technologyand education to develop and upgrade to new or improved services, usinga percent _____.

9. How do your numbers compare to national norms?

10. And then one sneaky little question...how much of your grossexpenses are hidden personal expenses, using a percent ______.

If you are able to answer all these questions within five minutes, Iwould suggest you skip this article and go back to the medical quiz in theApril issue of DVM Newsmagazine - and if you got 90 percent, I would guessyour practice is running smoothly, you are happy, your staff is happy, andyou are optimistic about the future of the veterinary profession.

Today's message

Blending the practice of veterinary medicine with sound economics isvery important to the overall well-being of a practice.

What we will do today is review the basics of understanding a cash flowstatement from a practice.

We have very complex accounting formulas based on all sorts of too muchavailable information.

What we really need to run our practices is a one-page summary of whatwe are and where we are going.

To do this we need a cash basis "snapshot" of the practice.

To get that snapshot, we reduce the entire general ledger and listingof expenses into four groups: Fixed, Variable, Veterinary and Profits.

The breakdown

Fixed expenses. Fixed expenses are recurring expenses that are not linearwith the income.

Facilities and general expenses are put in this category. Facilitiesincludes rent and the costs directly associated with the physical plant.

General expenses are the billings that show up every month, even if patientsdon't: insurance, utilities, building repairs, maintenance, cleaning andadvertising.

Look out if advertising is a variable expense. Kmart, according to theWall Street Journal, went Chapter 11 because their advertising was a "variable"expense. WalMart advertising is a "fixed" expense. WalMart wins.

Variable expenses. Variable expense are those expenses associated withthe generation of income; the expenses that go into this category have alinear relationship with income.

Specifically, a simple algebra equation can be used to determine feesto keep the budget in line.

Some will debate the management fee may or may not be variable. (It reallydepends on how the practice uses the management fee.)

The equation looks like this:

Variable Expense ÷ Budgeted Support Labor = Fee to Charge.

And a few souls have yet to accept that in veterinary medicine supportlabor costs (does not include veterinarians remuneration) are linear withincome.

But with the careful analysis of veterinary data over the last two decades,it is clear, support labor is a variable expense in the veterinary practice.

Veterinarian salaries and remuneration, even in 100 percent productionpractices, is a broken out expense that is neither in the fixed or variableexpense groups.

How this number is handled would help determine its placement, but auniform consensus of this expense group is for another article.

Profit seems to be confusing, but at least these days we now at leasttalk about profit after paying the veterinary salaries after decades ofignoring this issue.

Magic numbers

So what should these group numbers be these days? The fact is, it istoo confusing to fully understand national norms and each practice niche,each practice style, each practice category, each locale, and each practicemission statement will force the fixed and variable costs into the uniquecategory.

So we must figure out our own numbers for our unique practices.

To figure out what your numbers ought to be depends on a wide assortmentof influences. But some generalizations can be made.

For a typical American practice, consider the following:

* Facilities. About 7 percent is the norm. Exceptions exist.

* General expenses. About 13 percent is the norm. Exceptions exist.

* Total fixed expenses should be around 20 percent.

If these are too high, look out for this budget group to compromise thelong-term future of the practice.

If these numbers are too low, make sure to consider the long-term consequencesof cannibalizing the remaining four groups.

Drugs and Supplies. For a typical American practice 15 percent is nice.

Huge exceptions exist. Insect control is a swing issue and confuses aclear understanding of drugs and supplies. Where possible, track insectcontrol items as a separate grouping.

Support Labor becomes interesting in assorted practices. Routine medicineand "9 to 5" practices can (and will) run these numbers in theupper teens-18 to 20 percent. While advanced technology-based practicescan expect support labor expense to run closer to 25 percent.

Simple and complex algebra equations can be used to determine appropriatefees.

If you'd like to make the equation a little more interesting low profitfees can eliminate the fixed expenses from the equations; high profit feescan be determined by cutting the support labor cost and using that number.

We can use these simplified numbers to help calculate fees, determinepractice value, and carry on discussions about veterinary economic health.

The cash based look at a practice is what we live with-and avoiding theall too common "Arthur Anderson accounting methods."

Homework

Homework this month is to post Table 1 with your numbers. Seek to reachyour targets every month.

(Coming next month: Income structure using rabies ratios and rabies ratiotargets.)

table 1

post these numbers

Your 2001 number ­ expensed

Your 2002 goal ­ budget

Fixed

facilities _____ ( 7%)

general _____ (13%)

Variable

support labor _____ (20%)

drugs & supplies _____ (15%)

insect control _____ (open)

Veterinary Salaries

inclusive _____ (25%)

Profits

reinvested _____ (5%)

cash _____ (15%)