by Karen E. Felsted, CPA, MS, DVM, CVPM, CVA
In the same way that checking the temperature, pulse, and respiratory rate gives an initial look at a pet’s basic health status, periodic financial and operational reports give the practice owner and manager a look at the practice’s financial health status.
Becoming and staying profitable is harder than it used to be, so, now more than ever, a business needs to understand and regularly measure the metrics that define financial success. And yet many practices don’t do this—owing to either lack of time or not understanding how or where to start or why it’s important to do this analysis.
The first question to be asked before launching into data gathering and analysis is, “Why?”—Why does the practice need this data? What will the practice do with it? Practices generally turn to data either to get an overall understanding of how well the practice is doing operationally and financially (the equivalent of baseline bloodwork) or to solve a particular problem they perceive in the practice (treating an identified medical issue). There are many practice problems for which data can be useful in understanding and solving, but some of the most common and significant ones include the following:
- Flat or declining revenue
- Poor profitability or cash flow
- Doctor production that is too low
- Staff or other costs that are too high
The baseline analysis gives the management team the best chance of selecting the areas where change will have the most impact on growth in revenue or profits. Counting the paper clips on a regular basis would be ridiculous, but what data should be gathered for this initial review?
- Revenue growth/decline percentage in this year/quarter/month compared with the same period in prior years
- Revenue per full-time-equivalent (FTE) doctor (a measure of overall doctor efficiency)
- Transactions per FTE doctor (a measure of overall doctor efficiency)
- Medical (doctor) revenue per FTE doctor (a measure of individual doctor efficiency)
- Medical transactions per FTE doctor (a measure of individual doctor efficiency)
- Average transaction charge for the practice as a whole and for medical (doctor) revenue
- Revenue/transactions/average transaction charge for individual doctors (a measure of individual doctor performance)
- Average revenue per active patient per year
- Revenue by category (dentistry, vaccinations, product sales, etc.)
- New clients
- Active clients
- Accounts receivable aging
- Expenses as a percentage of gross revenue, particularly drugs and medical supplies, laboratory costs, doctor compensation, staff compensation, benefits, facility costs
- Staff and doctor hours per transaction
- Revenue and transactions by species
- Operating profit margin
Most of this data will come from the practice management software (PMS) used in the practice. The expense information will come from the profit and loss statement and/or tax return. Staff and doctor hours worked information will come from the payroll system. The operating profit margin is calculated using data from the tax return, profit and loss statement, PMS, and other sources.
The Next Step
The most useful baseline analysis includes comparison of the metrics over time in the practice—this year, last year, and two years ago as well as a comparison with other typical practices based on published studies such as AAHA’s Financial and Productivity Pulsepoints.
This kind of analysis is excellent for determining where a practice is doing well and what areas need further investigation or improvement. The practice should first start with the question, “Is the practice truly profitable?” And then: If not, why not? The rest of the data can then be used to determine the answers to this second question. Is it due to high inventory costs? Lack of productivity by doctors or staff? Poor revenue growth? Declining new clients?
Sometimes, practices are reluctant to compare their data with published benchmarks because “those practices aren’t like mine.” Often this is true—there isn’t much published data available for specialty and emergency hospitals or for large- and mixed-animal practices. There is, however, a lot of data available for companion-animal practices.
While all companion-animal practices aren’t the same, there is enough similarity that comparison with the published data will provide useful insights. The goal isn’t to change your practice to be like the averages shown in the benchmark studies but to see whether you have a problem. No matter what kind of companion-animal practice you have, if nondoctor W2 compensation in the published studies is 20% of gross revenue and your practice staff compensation is 32%, that’s a red flag and an area that should be investigated in order to see if there really is a problem.
And while there isn’t a lot of data available for referral practices, companion-animal general practice expense data can still be helpful. With some exceptions—such as drugs and medical supplies expense—the expenses as a percentage of revenue are similar.
Obviously, big differences are more concerning than small ones. If your practice’s marketing expense is 1.2% of gross revenue and the average per the study is 1.0%, this comparison alone doesn’t indicate a problem. It’s important to remember, however, that just because your numbers are similar to the published studies, not all may be well. For example, the practice may or may not be spending its marketing dollars efficiently, but other analysis will need to be done to determine that. Comparison with published benchmarks is just one tool to use in understanding how your practice is doing, but often a very useful one.
Once the big-picture analysis has been done, the practice should drill down further into areas that may need improvement. For example, let’s say that the practice owner or manager analyzes the revenue of the practice at the doctor level and finds that the average revenue per doctor is lower than that seen in most practices and that there is a great deal of variation in productivity among doctors. Improved doctor productivity becomes a goal of the practice. What additional data should be gathered?
- Number of hours worked each week by the doctors—revenue variability may be a function simply of the time spent in the practice
- Number of appointments, surgeries, and dentals done by each doctor during this time frame
- Support staff help used by each doctor—some doctors may be able to produce more because they have access to and use more support staff
- Number of key procedures (CBCs, chemistry panels, X-rays) performed by each doctor in relation to the number of transactions they generate—revenue may vary because of different approaches to cases that should be more consistent
- Measurement of client compliance with key recommendations by doctors and staff
- Dollar amount of discounts and missed charges per doctor
As the data gets more detailed, a wider variety of sources may be necessary to obtain it. Occasionally, practices will have doctors clock in and out the same way nondoctor team members do. If this is true, the practice may have good quality “hours worked” information for doctors, although the in-hospital hours may need to be adjusted for any substantial amounts of work done at home (record writing, client callbacks, case research) or for trips back to the practice outside of normal hours. If the practice doesn’t have this information, it will have to be created. Support staff use is a more subjective measure that is generally gained by observation. Key procedure information can be obtained from the PMS. Measure of client compliance with key recommendations isn’t available in all practices but is an important piece of data. When available, it can usually be found via medical record audit or in the PMS if service codes are used to track when recommendations are made, accepted, or declined. Discount and missed charge information comes from a medical record audit.
The findings from the above analysis will drive what the practice does. For example, after controlling for hours worked, if one doctor is doing fewer dentals than another, it may be because the doctor doesn’t do a good job of discussing dental needs with the client either because they are rushed in the exam room or because their communication skills aren’t as strong as they should be. If it’s the first reason, checklists or a consistent exam room technician may help. If it’s the second reason, communication training is the answer. Doctor productivity may also suffer because the practice simply doesn’t have enough patients coming in the door; in this case, improved marketing may need to be the focus.
General Guidelines for Effective Data Gathering and Use
In order to compare one practice with another, it is necessary to set up the revenue and expense categories in both the practice management and accounting systems in a fashion similar to those commonly used in veterinary medicine and used in the published studies the practice will be compared with. An excellent veterinary chart of accounts is available on the AAHA website.
Record information in the same categories or perform calculations in the same way each time they are done in order for the numbers to be comparable over time. In order to achieve this comparability, it is important to carefully set up the categories and define the calculations when the accounting system and PMS are set up. Some aspects of the system will need to be changed periodically; the practice must keep in mind the impact on comparability when it’s time to do this.
Comparison of raw numbers is useful to a point in financial analysis, but, in general, it is necessary to do some kind of ratio analysis or use a common basis of comparison to get the best results. The most common ratio used in veterinary financial analysis is that of expressing types of revenue or expenses as a percentage of total gross revenue. This kind of ratio analysis is critical to accurate comparison over time or between practices of different sizes. Another frequently used common basis for comparison is the calculation of doctors on an FTE basis. This makes it possible to compare information from one practice with practices that have different numbers of doctors or to compare the figures in your own practice from year to year as you add doctors.
The methodology section of published reports explains how the data was collected and how many practices responded, and this helps with understanding how comparative the data is. It is also important to understand how certain calculations were performed in order to know whether that metric is comparable to your practice. No study will be perfectly comparable to a particular practice. This doesn’t mean the study is useless. It is still possible to get very valuable information to help operate the business more effectively. It simply means using these comparisons with a grain of salt and as one tool in running the business, not as the final word about how well the practice is doing.
Finally, and most importantly, identifying trends or problem areas is not enough. It is critical that the management team investigate the changes or potential problem areas and determine whether action is needed to correct an issue, then implement the changes and track the results.
Karen E. Felsted, CPA, MS, DVM, CVPM, CVA, has spent the past 20 years working as a financial and operational consultant to veterinary practices and the animal health industry. She is active in multiple veterinary organizations, has written an extensive number of articles for a wide range of veterinary publications, and speaks regularly at national and international veterinary meetings.
Photo credits: Herman Vasyliev/iStock via Getty Images Plus