Improving the Bottom Line

How to Improve the Bottom Line at Your Veterinary Practice
By Jon Dittrich, MBA, Profit Profile

Not surprisingly, most vets – like businesses owners everywhere – want to increase profits. The question quickly becomes one of strategy.

  • The best way to improve the bottom line of your practice is to focus — one-by-one — on the components of your profit centers. 
  • Trying to improve the bottom line without this more narrowly defined focus usually is a waste of time. 
  • Too many owners focus efforts in the wrong areas to improve profits.

Having clarified this “line of attack,” it is helpful to define a few key terms.

  • Bottom line = Profits after taxes

Bottom line = Determined by Revenues – Cost of Goods Sold – Operating Expenses – Professional Salaries – Taxes

  • Revenues – are based on sales of goods and services.
  • Cost of Goods Sold = these are “variable expenses” associated with revenue.

Examples are drugs, lab fees, X-ray expenses, food, etc. The best way to think of this category is ask the question, “If revenues go up 10% will this item likely go up 10% also?” If the answer is yes, then it goes in the category of Cost of Goods Sold. If not, it goes in the next expense category.

  •  Operating Expenses, also known as “fixed expenses” – These are expenses that are less likely to go up and down directly relative to sales.

Examples are rent, staff wages, employee benefits, telephone, advertising, insurance, etc. All expenses that are not Cost of Goods Sold nor Professional Salaries (i.e. owner, associate and relief veterinarians) go here.

  • Professional Salaries – consist of all compensation paid to the owner, associate and relief veterinarians. In the case of owner compensation, it includes any monies received out of the practice due to ownership, whether from veterinary salary, owner bonuses, return on investment, management fees or division of profits.
  • Taxes = are all taxes due federal, state and local governments on the profits of the practice. 

Issues and Options

Maximizing the bottom line

  • The table below is based on many years of consulting work with veterinary practices. It lays out the components you need to focus on in order to improve profits. Study this, and you can begin to see a step-by-step strategy needed to achieve your goals. The notes below the table explain the use – and importance – of the terms used. Study this, then we will discuss the effectiveness and efficiency of changing management strategies in each area.

Note: Each column in the table affects one item in the profit equation and contributes to make this practice an additional $45,000.

Terms Used in the Above Table

  • Current Situation – this column is an average veterinary practice based on AAHA numbers. Notice the 1% profit.
  • Goal – the goal here is to make a 10% profit.
  • Sales Increase– this column is based upon the “more people in the door” or “working harder” approach. The argument goes like this: If we can just get more people in the door and do more for them, our profit problems will be solved. This is the most common method used to increase profits. 
    • Common marketing strategies are large Yellow Page ads, newsletters, school lectures, newspaper articles, coupons, outdoor signs, etc. See our Management Tip, “Marketing,” for more up-to-date, targeted strategies.
    • Actually, you have very little control over sales. One can try to influence buying patterns, but you cannot control it. 
    • To achieve a 10% profit solely using this strategy would require a 17% increase in sales due to more visits or services. A positive outcome from this very unlikely. 
    • Increasing sales this way by doing more work or seeing more people is only 75% efficient in helping profits. That’s because 25% of increasing services goes to pay for products used to create those services (Cost of Goods Sold.)
    • Ease of implementation is 2 (with 0 = difficult and 10 = Easy).
  • Price Increasecolumn determines to see same people and do same work. “Working smarter” 
    • Normally severe reluctance by owners to implement. 
    • Have 100% control of your price structure. 
    • To achieve a 10% profit solely using this strategy would require a 13% price increase. This strategy assumes you see the same number of clients and do the same number of procedures. This is all about working smarter and not “harder. A positive outcome – increased profit – is very likely. 
    • Increasing sales this way is 100% efficient since Cost of Goods Sold remains the same because there are no additional services offered. 
    •  Ease of implementation is 10 (0 – Hard, 10 – Easy).
  • Cost of Goods Soldstrategy is summed up as “Let’s make a Deal with vendors”. This strategy requires lowering the cost of goods by buying in larger quantities to receive discounts. Typical “deals” from sales reps fall into this category. Also “invoice dating” (get product now, pay for it later) is included in this strategy. 
    • Common management strategy. Drug companies and distributors use it often to entice selling goods to veterinarians. 
    • You have some control over purchases to take advantage of this strategy. 
    • To achieve a 10% profit solely using this strategy would require a 52% discount ON ALL PURCHASES of Cost of Goods Sold. A positive outcome is very unlikely. 
    • Increasing profits this way is 100% efficient as every dollars saved can go to the bottom line. 
    • Ease of implementation is 1 (0 – Hard, 10 – Easy).
  • Operating Expensesstrategy is summed up as “keep employee wages to minimum”. Since staff wages usually represent the largest expense in operating expenses and normally represent 40% – 60% of those costs, owners try to keep these costs low. Poor facilities and equipment are symptomatic of this strategy. 
    • Common management strategies are “pay the least you can get by with” for employees, minimal employee benefits and under staffing. 
    • Typical symptoms of this strategy are unmotivated employees and high turnover. 
    • You do have much control over operating expenses. 
    • To achieve a 10% profit would require a 23% reduction in ALL operating expenses (including staff wages, benefits, rent, insurance, etc.). Outcome is likely to be neutral. 
    • Increasing profits this way is 100% efficient as every dollars saved can go to the bottom line. 
    • Ease of implementation is 4 (0 – Hard, 10 – Easy).
  • Owner Salaryis the default way a poorly performing practice “makes ends meet.” The owner is the last person to get paid, so if there is no money there, the owner suffers. 
    • Typical symptoms of this strategy are skinny kids of veterinary owners.
    • You do have much control over this strategy and it usually is implemented whether the owner wishes it or not. A positive outcome is VERY LIKELY! 
    • Ease of implementation is 10 (0 – Hard, 10 – Easy).
  • Taxes refers to trying to use tax strategies to lower taxable income. 
    • Common management strategies are buying large pieces of equipment and depreciating them all in current year, paying future bills now to increase expenses in current year, and other tax strategies offered by your accountants. 
    • The problem with most of these strategies is that you only get a one-time benefit. For example, if you write off the whole purchase this year, you will not have any deductions over the rest of the equipment’s useful life. If you prepay future expenses in the current year, then the next year your income will be higher because those expenses have already been “booked”. Therefore owners must repeat this strategy annual or lose the initial benefit they received. 
    • To achieve our 10% profit would require a $40,500 tax REBATE. A positive outcome is extremely unlikely, yet owners spend inordinate time trying to implement this strategy. 
    • Increasing profits this way is 100% efficient and you do have some control over it. 
    • Ease of implementation is 0 (0 – Hard, 10 – Easy). 
    • If you are not making enough each month after taxes, the problem is you are not making enough money BEFORE taxes. The problem is NOT the taxes!

Summary

  • When examining each strategy for increasing the bottom line, the order to implement your strategies due to efficiency and ease of implementation is:
    1. Raising Prices 
    2. Reducing Operating expenses 
    3. Increasing Sales volume 
    4. Decreasing Cost of Goods Sold 
    5. Reducing owner salary 
    6. Reducing tax

Author: Jon C. Dittrich MBA