Veterinary Business Management 101: What Practice Managers Need to Know

Let's put on our management cap and break down the basics of running the business side of a veterinary practice, highlighting best practices to ensure far more profit than loss.

Profit and Loss

A profit and loss (P&L) statement, sometimes called an income statement, is a financial statement with two important data sets: revenue and expenses. It may examine a fiscal year or even just a month at a time. In order for your practice to thrive, the total revenue must be greater than the total expenses—or rather, the profit must exceed the loss.

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Practice revenue comes mainly from one source, our clients, and the best way to track this is through a practice management system. Our system will usually records credit card payments, cash, and checks (if still accepted), as well as payment plans through CareCredit or Scratchpay, or pet medical insurance, such as TruPanion. The important thing is to make sure your system accounts for all payment sources, including house calls, grooming, and your online store or pharmacy if your practice has one.

With loss, it's important to distinguish it from expenses, as generally speaking, expenses are required to generate revenue. Loss is just about anything other than an expense. So, rent and utilities are an expense while selling an asset for less than the purchase price, or paying for a lawsuit, represents loss.

Understanding both sides of the P&L report is vital to support the practice's financial health.

Accurate Tracking

The practice management system can play a critical role in boosting profit and minimizing loss through accurate tracking. The essential point, however, is to make sure the data going into the system is accurate and correct—otherwise, it fails to achieve its purpose.

A few common errors to avoid with practice management system reporting include incorrect tracking codes for services and inventory, duplicate "new" client accounts, and inaccurate service providers.

For example, if a practice is closely monitoring vaccine revenue on a new system, and different service codes are used for the same vaccine by different team members trained by different people, then the vaccine revenue report is not valid.

Also, keep an eye on revenue production by provider, as it affects compensation. If provider codes are not utilized by the team properly, an associate may be compensated or given credit for boarding, grooming, or another service instead of the practice itself.

Maintaining accurate tracking will not only save you time, but also provide the factual reporting needed to make smart assessments and decisions.

Areas of Flexibility

Few practice managers have full access to financial data and usually do not have any control over loss or other expenses of the practice. However, costs of goods sold (COGS) and payroll are the two major areas of expenses usually under the practice manager's direct control.

COGS has several sub-categories of costs, including drugs and medical supplies, lab, radiology, cremation and care of remains, prescription diets, and other ancillary over-the-counter products and services. The largest portion of the COGS sub-categories is drugs and medical supplies, which should make up about 10% to 12% of revenue. If the current expense is higher than this, creating and implementing good inventory procedures and controls can trim this figure down, causing a direct, bottom-line, net-profit increase.

Drugs and Supplies

Lowering inventory of drugs and medical supply costs can be accomplished by reducing waste or expiring drugs. Posting an up-to-date list of drugs expiring in the following three months in an area the veterinarians frequent, such as the treatment room, reminds them to use the soon-to-expire drug on the shelf. Also, be sure to cull any expired drugs on the shelf that shouldn't be there.

Reconsider reordering practices, too. Will the product be used before it expires again? Is there a new drug that has replaced this one? Can this be ordered for clients on an as-needed basis or through the online store or pharmacy? Answers to these questions may offer more savings.

You can also reduce the footprint of inventory around the practice by keeping it in a central location. When several boxes of syringes clutter each exam room, for instance, this increases the amount of inventory and cost.

Labor and Payroll

Practice managers should review, understand, and control labor costs, including regular hours, overtime hours, and revenue per hour for labor in comparison to total practice revenue. Assign team members to their corresponding departments, such as licensed technicians, veterinary assistants, client service, kennel, and so on as accurately as possible, given that some team members work in multiple areas. Once payroll is complete, calculate total practice revenue with the same time frame as the payroll period and use these figures to develop a payroll report or budget.

The payroll budget should be monitored daily, weekly, and monthly, keeping an eye on these important KPIs. If overtime hours are increasing, for example, this may mean the schedule needs to be adjusted to have certain team members arrive later or perhaps signal the time to add another team member. A payroll report can also be used for projection on future employee scheduling and wage increase projection.

Blind Spots and Challenges

Practice managers may struggle with incomplete information at times. As much as possible, they should try to fill in the gaps. For example, if the practice owner does not share payroll figures, the practice manager should ask for percentages of revenue that payroll takes. From there, benchmarks may be compared as a percent of revenue.

The same goes for inventory, service costs, and COGS. If merchant service, for instance, is benchmarked at 1.5%, and the P&L states it is 2.5%, it's time to renegotiate with the credit card merchant service company. If drugs and medical supplies are benchmarked at 10% and the P&L is showing 13%, it's time to revise inventory practices. If utilities are too high, consider replacing light bulbs with LED-efficient lighting, or switch internet or telephone companies.

Best Practices

For each KPI, connect every detail of the data to the P&L statement. Determine ways to drive this data in the right direction—up for revenue and down for expenses—and set a goal to add one KPI to manage per month. Moving the needle for each KPI means a direct increase in the net profit, which is a win-win for everyone. Before you know it, business management and practice finances won't be so daunting, and you'll be effectively managing every aspect of your veterinary practice with ease.