No doubt your customers are monitoring their profitability closer than ever.

The current recession has been tough on you, your customers and your customers’ clients. But if there is a silver lining, it’s that hard times have probably forced your customers to adopt a better business model for their practices. Chances are, they’re more open than ever to listening to their distributor reps’ solutions for controlling expenses and increasing the productivity and profitability of their practices.

Recession-resistant, not recession-proof
Today’s economic situation has proven that veterinary medicine is recession-resistant, but not recession-proof, said Karen Felsted, CPA, MS, DVM, CVPM, and CEO of the National Commission on Veterinary Economic Issues (NCVEI), who gave a series of lectures on practice management at the recent Western Veterinary Conference in Las Vegas, Nev. And while patient care will always be your customers’ No. 1 concern, economics and the well-being of their practices are becoming more and more important considerations for them.

Founded in 2000 by the American Veterinary Medical Association, American Animal Hospital Association and the AAVMC, NCVEI addresses the economic and business issues facing veterinarians.

Based on the results of a new online tool, the Profitability Estimator, which was developed by NCVEI and VetPartners, the average profit margin for today’s veterinary practice is a little over 5 percent, said Felsted. If one considers that a profit margin of 18 percent or more is needed in order to be able to sell one’s practice at 100 percent of gross revenue (the “gold standard” rule of thumb), then 5 percent doesn’t look good.
Roughly one-third of the country’s veterinary clinics reported a decline in revenues in 2009, one-third reported roughly flat revenues, and another third were less affected by the recession and saw some growth, said Felsted. Of the clinics that saw a decline, most agreed it was due to fewer patient visits. Some practices have been able to make up some of the difference by providing more services per visit, which to a certain extent is a function of the degree to which they can communicate their value to their clients, she said.

To put these figures in perspective, the average revenue growth in the years preceding 2008 was between 7 percent and 11 percent. “So we’re not a recession-proof industry,” said Felsted. “And it’s been a challenge for veterinary medicine.”

Clients more cautious
In a January 2010 NCVEI online “Quick Poll,” roughly 45 percent of the 250 people responding said that their clients are postponing care for their sick pets, and another 22 percent said clients are treating sick pets but choosing less expensive treatment options. In a May 2009 “Quick Poll,” 27 percent of respondents said that accounts receivable balances were growing, while 12 percent said that more clients were seeking payment plans. “What’s clear is that clients are looking for more ways to pay for veterinary medicine,” said Felsted. Will this trend outlast the recession? “I think it will,” she said. “It’s a long-term change. We’ll see a more cautious public in their spending.”

Industry figures indicate that between 2004 and 2006, veterinary clinics raised their fees at a healthy rate, outpacing inflation many times. The rate of those increases slowed – but didn’t stop – in 2007 and 2008. What’s more, many veterinarians experienced a decline in transactions per FTE veterinarian in 2007 and 2008. “We’ve also seen a decline in median new clients per FTE veterinarian, and a decline in median active clients per FTE veterinarian,” she said.
“Americans are cutting back on human healthcare costs too,” said Felsted. People postpone visiting their doctors more than ever. Is it any wonder pet owners are doing the same?

Fee raises ‘not sustainable’
In times of trouble, the quick fix for business owners – including veterinarians – is to raise fees. But the recession appears to have slowed down even that option. In fact, half of the respondents to an August 2009 NCVEI poll said they were prepared to raise their fees from 1 percent to 4 percent in 2009, said Felsted. Another 25 percent said they would raise them between 5 percent and 8 percent, while 20 percent said they wouldn’t increase fees at all. “So fee increases became much more modest last year. Most of that is a response to the recession.”

Fees have been driving growth for the past eight years, but “I don’t believe that’s sustainable,” said Felsted.

“Fees appear to be impacting the number of people who bring pets to veterinarians,” said Felsted, adding that even for pet owners in the United States, “no matter how much you love your pet, [spending] $2,000 per year isn’t going to happen often if your household income is $52,000 – the median for the U.S.” That means there is a limit to how often and how much veterinarians can raise fees. For that reason, they should be considering other ways to increase their profits, such as improving productivity. “It’s more difficult than increasing fees, but it’s necessary,” she said.

Increasing productivity
Improving a practice’s productivity and efficiency begins with determining how the practice is performing today, said Felsted. That means tracking internal trends, comparing the practice’s performance to that of others, and implementing better business practices. An AVMA/Pfizer study showed that 62 percent of practice owners fail to use financial concepts to manage their practices, Felsted pointed out. Those that do use financial concepts (budgets, key performance indicators, etc.) have earnings that are two-thirds greater than those that don’t. “Obviously, just looking at the numbers doesn’t cause earnings to increase. It’s taking action based on them.”

Good patient care and good financial management go hand in hand, Felsted told the veterinarians. “I believe it’s impossible in the long run to provide good patient care if you’re not financially successful. And if you’re not measuring [your performance], you don’t know whether you’re doing a good job or not. You can’t make intelligent personal, financial and operational decisions without measurement.”

Increased levels of profitability mean increased cash flow, and for the practice owner, that means the ability to invest in people, facilities, etc. Profitability also translates to higher practice value, an important factor when the vet is considering selling his or her practice.

Profitability is key
Studies show that fewer than a quarter of veterinary practices monitor their profit-and-loss statements on a monthly basis, yet these statements are a starting point for the veterinarian to calculate his or her practice’s true operating profitability, said Felsted. “You can’t rely on any other measure to guarantee that your practice is financially healthy.”

Determining profitability isn’t easy, though. It can’t be determined, for example, by looking at the practice’s taxable income. “You must do a separate calculation of practice profitability.” NCVEI has an online tool – the Profitability Estimator – to help veterinarians do the numbers.

Reasons for revenue problems
Looking at the revenue side of the equation, veterinarians face a variety of problems, said Felsted, including:
• Inconsistent fee increases. It’s not uncommon to see practices that haven’t raised fees for several years suddenly raise them substantially to make up for the shortfall.
• Excessive discounting or mischarges. “It’s a rare practice that isn’t inadvertently giving stuff away,” she said.
• Inefficient use of doctors and staff. In many practices, there is little correlation between production and compensation. What’s more, doctors may find themselves performing tasks that lower-level staff could do just as well. “Delegation is an art,” said Felsted. The owner or manager must take care to match the task with the appropriate person. “If you delegate inventory control, don’t delegate it to someone who isn’t detailed-oriented,” she said. And once a task is delegated, the owner or manager must provide the correct level of control, authority and recognition.

• Inefficient use of buildings. Extravagant offices are nice, but only if they pay off.
• Spending too much time and energy on less profitable services.
• Failing to perform necessary clinical services. If the practice believes that a fecal is an important part of a wellness exam, for example, it should determine whether the number of tests performed is in line with the number of wellness exams. If they aren’t, there may be a training issue … or a recordkeeping issue. In either case, it means lost revenue.

• Poor location or poor scheduling practices.
• Poor inventory control.
• Excessive debt.
• Upward creep in expenses.
• Poor management system.
• Failure to recognize the true cost of employee turnover. Some calculations put that cost at somewhere between 50 percent and 200 percent of the lost employee’s annual salary.

Strong leadership needed
In well-managed practices, doctors and support staff spend most of their time on activities that best achieve the practice’s goals, said Felsted. Employees’ skills are used to the maximum, and tasks are carried out as efficiently as possible. “It’s a rare hospital I’ve been in where the employees are standing around doing nothing,” she pointed out. “Usually, they’re doing something. It’s the ‘something’ that’s the critical issue.” If they’re rearranging the drug cabinets four times a week, is that a good use of their time?

Making full use of the staff – even stretching them a little bit – leads to better patient care as well as happier, more skilled employees, who are likely to stay with the practice for a long time, said Felsted. What’s more, doctors are more productive because they’re doing the things they have to do, not tasks that can be done by others. And better utilization contributes to practice profitability. “You can provide better medical care, and you have more money to invest in your staff,” she added.
This happy state of affairs doesn’t happen without planning and effort, said Felsted. The owner or practice manager must have a strong set of financial, managerial and human-resources skills. He or she must also:
• Possess detailed knowledge of the skills employees must have in order to provide outstanding patient care and client service. “Most practices haven’t sat down and spelled out, ‘This is what we want our employees to do,’” said Felsted.
• Hire effectively. That means hiring employees with the right skills and attitude necessary to help the practice achieve its goals. These include not just technical skills, but communication skills and the ability to work as part of a team.
• Institute high-quality, effective and ongoing training programs.
• Draw up a clearly defined set of policies, procedures and systems for getting things done.
• Review staff utilization metrics, such as total time per transaction.

Hiring a practice manager is a step in the right direction, said Felsted. It is estimated that 85 percent of practices have such a person in place. But that alone won’t guarantee success. In fact, some practices are failing to take full advantage of their managers. They may hire people who lack appropriate skills, and then fail to train them properly. Many managers lack solid financial skills, and the changes they institute may not help the practice from an economic standpoint. “So somebody has to be looking at the economic impact of changes made in the practice,” said Felsted.

It is a mistake for owners to abdicate this responsibility. “As an owner, you have to be able to assess whether your manager is doing a good job,” she said to the veterinarians. “And no matter how good your manager is, you still need to provide leadership,” she said to the vets in attendance.

Sidebar:

Six common management mistakes

Like any business, veterinary practices are prone to mistakes. Here are six of the most common ones, according to Karen Felsted, CPA, MS, DVM, CVPM, and CEO of the National Commission on Veterinary Economic Issues (NCVEI). She shared them at the recent Western Veterinary Conference in Las Vegas.

Mistake No. 1: Failure to understand the financial ramifications of management decisions. Poor financial decisions become all too obvious in recessions such as the current one, said Felsted. Before incurring the expense, veterinarians need to consider the potential impact of that new piece of equipment they’re thinking of buying, or of the doctor or assistant they’re considering hiring. “Not every decision has to be based on finances, but you need to understand the financial implications of every major decision you’re thinking of making,” she said.

Mistake No. 2: Poor accounting systems. Many veterinarians use a cash-based accounting system, that is, one in which revenues and expenses are recorded as soon as they are received or paid. But that can result in some skewed numbers. A better system is the accrual method, in which revenues are recognized as soon as procedures are performed, and expenses are recognized as soon as the commitment is made.

Mistake No. 3: Failure to talk clearly to clients about money matters. Every practice should draw up a financial policy, make sure everyone in the office understands it, then share it with clients. The practice should be prepared to give clients 1) treatment plans or estimates, and 2) information about payment options. “You will increase client acceptance if you are straightforward and clear about costs,” said Felsted.

Mistake No. 4: Ignoring cats. Despite the fact that cats outnumber dogs in U.S. households, most practices see dogs more frequently than cats. The practice needs to do some exploring, such as asking clients if they have any cats at home that haven’t been to the doctor for awhile. If the staff is more comfortable with dogs, give them training on cat care. And if possible, the practice should set up a cat-friendly reception area.

Mistake No. 5: Failure to know the profitability of one’s practice. Many practices tend to rely on tax returns and financial statements to gauge their profitability. But they don’t always reflect what’s really going on from a profitability standpoint.

Mistake No. 6: Failure to manage cash flow. Practices should prepare a cash flow budget, showing expected cash inflows and outflows by month. “You need to understand in which months you’ll have a cash flow deficit,” Felsted told the veterinarians. Again, tax forms alone don’t accurately depict the cash flow picture.