Most of the small business owners are haunted by different variations of the same question: Is my business doing well? What does that even mean and how do I measure it?
This is not a straightforward question and one that deserves a nuanced answer. However, if we want to boil it down to as simplistic terms as possible this author’s opinion is:
A successful business is producing as much or more profit as comparable peer businesses.
How do we measure the profitability for a veterinary practice?
There are many financial methodologies for calculating profit, but we can simplify the concept of profit as being the money that is left over after the expenses and costs involved in operating the business. The important thing for practice owners is not to confuse “take home” money with profit. As a practice owner your take home has several components to it, even if you aren’t used to thinking of it in this way:
1) Fair market salary for any clinical work that you perform at your practice. Any revenue that is generated in your clinic needs to have a fair market clinician salary accounted for before we can start to treat excess as profit, even if you (the owner) were the one that performed that clinical work.
2) If you own your property, your clinic’s legal entity should be paying a fair market rent to the legal entity which holds ownership of your property. While this money ultimately ends up in your pocket, it is not clinic profit.
3) Any excess money from the practice, after fair market compensation and rent is the profit!
How profitable should my clinic be?
There are many different industry benchmarks. General veterinary practices should aspire to generate at least 10% profitability, but 12-20% or higher is common for well operated practices. Profit margins tend to scale up with practice size, both due to economies of scale and because it is easier to minimize the relative impact of fixed expenses with a larger amount of revenue. However, that doesn’t mean that profitability isn’t a reasonable and attainable goal for small veterinary clinics, as the economic fundamentals of the veterinary industry are strong enough to support profitable clinics of all sizes. For example, the pre-tax/pre-debt take home for the practice owner of a well-operated solo clinic should be as high as $180,000!
Example solo clinic:
Gross revenue: $600,000
Fair market owner clinician salary (20% of production, $600k of production): $120,000
Profit distributions at 10% profitability: $60,000
Total owner’s pre-tax/pre-debt take home: $180,000
What are common reasons why veterinary clinics might not be achieving their profitability goals?
1) Fixed expenses are too high: Many clinics under-utilize their facility or pay too much for the facility space that they have. Veterinary hospitals are very valuable tenants (stable businesses with very positive image) and can negotiate competitive rent terms with proper guidance. Consulting with a real estate professional well in advance of renegotiating a lease can set you up for success with your next lease renewal. It is important not to wait until you’re too close to the end of your lease to start negotiations: You lose leverage if the conversation doesn’t start until after it would be practical for you to walk away from a bad deal and relocate your business. Keep in mind that there is more to a good lease than just the price per square foot: factors like lease duration, terms (how are they defining “triple net” or “double net” and what is being included/excluded, etc.), and tenant improvements (TI) are all the things that need to be negotiated alongside the price and can play a significant role in the overall value of the lease to you and your landlord.
2) Variable expenses are too high: Undercharging, particularly on non-shoppable services, is usually the largest driver of excessive variable expenses. Poor charge capture (addressed in a previous blog), poor quality or training of staff, and poor inventory management/turnover can also drive excessive variable expenses.
3) Opportunity cost of not driving revenue growth: Driving more top line makes it easier to drive more bottom line! Capturing growth usually involves making an up-front financial investment in more clinical capacity. In a thriving, growing industry like veterinary medicine it is important to see success as a race to the top in revenue rather than a race to the bottom in expenses. Investing in more, better staff and properly delegating work to them (addressed in a previous blog) is a proven method of success for veterinary practices that have untapped growth potential. Incremental revenue is high quality revenue since your practice’s fixed expenses are already accounted for, so you can expect a higher eventual profitability margin on the revenue that you drive through growth than in your existing revenue pool (assuming you continue to follow similar variable expense trends).
What can I do if my practice isn’t doing well?
1) Do your homework: Business ownership isn’t easy and there’s a lot to know! Fortunately, there are many resources out there for small business owners to self-educate or get formal education on business ownership (general and/or veterinary-specific). An investment now in building knowledge for how to run your business at its maximum potential will reap great rewards in the future.
2) Consider hiring a professional: There are many veterinary business consultancy services to choose from. Not all consultants are cut from the same cloth, so it is important to do your research and pick closely. Make sure to talk to their former clients, discuss their fees, and research what professional relationships or conflicts of interest they may have that might not align their incentives with your own (i.e., if they sell their clients on specific products, services, or exit strategy partners).
3) Consider bringing in a business partner: As a business partner, AVP brings extensive operational and financial expertise in order to maximize the profitability of your business. Our equity partnerships are a true, fair partnership where you experience the financial upside of the growth of your business on the same terms as we do. The time, energy, and knowledge required to maximize performance of a business is extensive and not a reasonable expectation for most practice owners on top of the burden of time and energy that goes into being a full-time clinician at your own practice.