No – Lo Practices

By Jon Dittrich, MBA, Profit Profile

First a warning: This article may make you mad. Don’t read it if you are easily offended.

The AVPMCA (Association of Veterinary Practice Management Consultant and Advisors) now called VetPartners has developed a new, scary, term – No Lo. No Lo refers to practices with No Profit and Lo Value.

You might cringe at the term, but my 30 years of business consulting with veterinarians convinces me that the term describes many, many practices. Making matters worse, many veterinary owners are totally unaware they have No-Lo practices — or they justify their consistently poor financial performance with a string of (faulty) rationalizations.

Let’s dig a little deeper here. You do not want to be part of the No-Lo circle of doom.

First of all, an owner can manipulate profits by how much they pay themselves.  For instance, let’s imagine a practice with sales of $600,000 nets 30% (or $200,000) before owner salary.  For our purposes here, we are assuming this is a one-veterinarian practice and the doctor earns $250,000 in annual salary. Under this scenario, the practice will show a ($50,000) loss.

On the other hand, if the owner only takes $100,000 on the same $200,000 “net”, the practice shows a $100,000 profit.

Clearly we need a standard…a reasonable average compensation rate. The standard, or average compensation figure, I use is 21% of revenue, which in the case of the practice netting $600,000, would be $126,000.

So, under this new scenario, the owner might more reasonably expect his or her compensation to be $126,000 and profits to be ($200,000 minus $126,000) or $74,000. Although quite modest measured against some veterinarians’ expectations, in business terms this is a profitable practice.

In my opinion, with the right businesses guidance, many veterinarians can do better.

Now what if the “net” is only $100,000 in the above example? If an owner thinks $75,000 is “good” money, the books would show a $25,000 profit. However, I would say this is false because they should take $126,000 and show a $26,000 loss! To me, we should use 21% as reasonable veterinary compensation rate — and subtract that number from the “net” to calculate profits. OK?

Using the above definition, the veterinary industry is becoming less profitable and that is showing up in declining Practice Valuations as illustrated in the AVPMCA No-Lo project. This is an industry-wide trend…and the cause is simple. The cost of providing veterinary services is going up faster than veterinary owners are raising their fees. That’s it! It is that simple!

Customers are not putting guns to owner veterinary heads when price increase time comes around. It isn’t illegal to raise fees. Veterinary services aren’t being outsourced or taken over the borders. There is no “black market” veterinary services industry I am aware of.

Get my point?

It is just the owner veterinarian’s mind set, ignorance or fear that causes it. You pick which of these most applies, but the outcome is the same, and it’s something my consulting practice sees every day.

Is the marketplace determining this? No! We are talking about a self-inflicted disease. And veterinarians who try to justify or ignore having No-Lo profit practices are kidding themselves.

My fear, long term, is that veterinary medicine is becoming a second class profession. With declining profitability and increasing student education costs (average debt from veterinary school is now $120,000), added to the increasing number of students in veterinary school, the outlook is questionable.

Corporations will not fill such a void. Motivated veterinarians must fill it!  And the way to stay motivated in this profession is to stay profitable!

As I say in class, good veterinary medicine is profitable veterinary medicine. (Yes, just like you, my students also cringe when I say that. But it’s the truth.) I have never seen a lazy veterinarian. Or one who is not dedicated to providing excellent care. All of the veterinarians I know work very hard for their money. But I have seen many veterinarians burn out professionally because they worked extremely hard but didn’t have the financial rewards to show for it.

Don’t let that be you. You have to make a decision on how profitable you want to be. Help is out there.

Remember, I warned you…