Expense Management: Conquer the Middle of Your P&L
The Profit & Loss statement of a veterinary practice is intimidating at first glance. There’s a lot of information on that one document, but it can generally be simplified into three main components:
Top, Middle, And Bottom.
The “top line” of the clinic is the total revenues collected over the period of the P&L. Drawing analogy to a biological system (what we understand better as clinicians), these are the “ins” of the clinic.
The middle of the P&L is where all expenses sit. These are the “outs” of the clinic.
The bottom of the P&L is where you find net income, which is the money left over from revenue after all ordinary business expenses have been accounted for.
Net income is one of the many ways to assess the profitability of a business, although for the purpose of business valuation a further-adjusted metric such as EBITDA is used to remove non-cash expenses from net income and make “fair market” adjustments for the owner’s contributions to the business.
The top and the bottom of the P&L receive a lot of attention because they’re more fun to talk about. Growing your business (increasing top line) is the most exciting path to increasing profitability as a business owner, but it isn’t the only path. Expense management is less exciting, but an important and effective means to improve profitability. Expense management becomes especially important as a path to improving profit margins in a tight labor market where it is especially challenging to attract the talented team members needed to drive large top line growth.
Expenses represent the collision between the “business” and “medical” sides of a veterinary practice.
One of the biggest areas where veterinary practices run into issues with profitability is when there is a fundamental mismatch between who they are striving to be medically and who their P&L says they’re trying to be financially. As I covered in a previous blog post, you can’t and shouldn’t try to be everything to everyone. There is a wide spectrum of valid care options that exist, ranging from highly individualized to community based. On the medical side, the two ends of this spectrum look different:
A highly individualized care-focused clinic has longer appointment slots, spends more time explaining the “why” of gold standard care options, and likely serves a more affluent clientele. Average transaction value is high due to higher prices and greater compliance, throughput is low.
A community care-focused clinic has shorter appointment slots, is focused on meeting the needs of the community by providing maximal access to care, and likely serves a less affluent clientele. Average transaction value is low due to lower prices and lesser compliance, throughput is high.
Financial sustainability is possible anywhere on the spectrum of care, but your practice will struggle to find success if your P&L is not an authentic representation of your clinic’s identity.
Different approaches to care inherently demand different approaches to pricing and expense management if you want to ensure the “ins” are greater than the “outs”. Put simply, a practice that sees 10 patients per day per doctor and one that sees 40 are very different businesses and therefore can’t approach how they operate the same way as each other. As a clinician and a business owner this means that you will need to make an honest assessment of whether your approach as a business owner and as a clinician sit at odds with each other.
All expenses at a veterinary clinic should be audited at least semiannually.
We’ve all got that drawer in our home filled with things that we once thought was important enough to save, but now can’t remember what they’re for and certainly haven’t been used since they were put in that drawer months or years ago.
The Profit & Loss statement at most veterinary clinics has a “junk drawer” of random services and other recurring expenses that are accumulated over time without a clear answer for what value they’re providing to the clinic.
As a business owner, at least twice a year you and your other practice leaders should dedicate time to doing a full audit of all the clinic’s expenses over the prior period. Every expense should be put through the “what would break?” test, where you analyze that expense based on what negative consequences (if any) there would be if that service was terminated. For example, if you’re booking a month out for patient visits and not accepting new clients, would anything break if you reduced or eliminated your marketing service? Chances are, that’s an expense that can at least be put on hold for now.
Periodic RFPs (“Request for Proposals”) are the key to getting the best deals from your vendors and service providers.
It is easy to fall into the trap of assuming that just because a provider was the right choice many years ago that they’re still the best choice for your clinic today. It is beneficial to have vendors engage in periodic competition to keep your business, and to change providers if you can secure a better balance of cost and quality with another. An RFP is a process where you collect competing bids for your services from multiple prospective providers. All participants in the RFP should be informed to provide their “best and final” offers up front to avoid time-consuming haggling, with a final decision made after a set deadline for offers to be provided.
Every third-party relationship of the business should undergo an RFP every two years, in which you should collect at least three bids (including the existing provider, assuming you are happy with them).
It is important to notify the appropriate sales representative for the existing service to inform them that you are performing an RFP and that they should provide their best offer to retain your services. Generally, most companies have sales budgets set aside for acquiring new customers and retaining existing customers who are considering leaving for another provider. Informing your representative that you’re running a process in which you might leave their service opens the door for them to tap into that sales budget, which can turn into better pricing for you. Because your clinic likely has many vendors you can divide the list up into 4 groups and run an RFP for one group every 6 months, ensuring that every vendor is challenged with an RFP at least every two years.
Cost of Goods Sold is one of the largest expenses at most veterinary clinics. Getting COGS under control is one of the most effective ways to improve profitability at your practice.
Controlling Cost of Goods Sold is a very complicated topic. Fortunately, I’ve already written an entire blog post on the topic which you can find here.
Expense management in staffing is counterintuitive: Keeping staff expenses under control means finding, retaining, and paying All Star employees well.
Turnover is expensive! Estimates for the true cost of turnover vary widely (various sources claim anywhere from 33% to 150% of the employee’s annual pay) but the shared theme of all those estimates is that it is extremely costly to be frequently replacing members of your team. Performance also matters. It’s not your imagination that some members of your team are twice as productive as others. Don’t take your All Stars for granted! Ensuring retention of your highest performing team members means showing appreciation, compensating them appropriately for their All Star status, and doing what you can to build exciting career paths for them to continue to advance their career with you.
Leverage is powerful in generating incremental revenue that ultimately drives down % of revenue dedicated to staffing.
Your high performing team members are the fuel that drives the engine of your practice. There are many places where you can trim back expenses from your Profit & Loss statement, but the compensation of your key players isn’t the right place to do that!
Budgets are a powerful tool for managing expenses, but a budget is only as good as it is thoughtful.
The best way to build a budget is to start with general industry benchmarks for various expense categories, and then manually adjust your expense goals to match your individual clinic. There are many sets of benchmarks, and no set of benchmarks is 100% correct for any particular clinic because no two clinics are identical. Setting a good budget is one of the more challenging and nuanced aspects of business ownership. If you need help, perhaps the right business partner could be helpful?
Whew, don’t worry if you didn’t think that was one of my most thrilling blog entries! Expense management is certainly one of the least glamourous aspects of operating a successful business. However, given that nearly all veterinary practice valuations are now made based on profitability, paying close attention to the “ins” and “outs” of your practice can significantly increase the equity value of your ownership. Having the right partner who can help you find success in all three areas of your Profit & Loss statement can make all the difference. If you’re interested in learning more about your practice’s current value and how a partnership with AVP can create value for you and your practice, please don’t hesitate to reach out to me at email@example.com.