8 veterinary practice financial myths busted
The rules which experience suggests are better than those which theorists elaborate in their libraries. — Richard Slater Storrs
Myth 1: Cutting the employee/veterinarian ratio saves money.The standard 3.5-to-1 ratio is a mythical rule, as is the theory that cutting the ratio improves profits. In reality, you can employ eight employees per veterinarian — maybe 12?— and produce even better results.
Cutting support staff labor to less than 15 percent of gross expenses works only in some situations, like the no-value/low-value (no-lo) practices. Practices receive $1.2 million a year in services per veterinarian when the employee-to-veterinarian ratio is 12-to-1, and this is a realistic goal.
Fewer support staff guarantees that the veterinarian spends part of the day as a "technician." Veterinarians working as technicians earn only as much as technicians.
Myth 2: Expense analysis reigns supreme.
We're told that expense analysis is the key component to understanding our practices, but income is more important. Track your sources of revenue: What's driving the income? Which services can be expanded? How can you expand them?
Spend some time on income analysis and you'll wind up providing better service and watching revenue climb.
Myth 3: Goods are the only variable expense.
Generic accounting templates record variable expenses as the cost of goods alone. But considering the correlation between support staff and the production of income, our variable expenses must include the cost of labor as well. Understanding this issue is important, because we use the measure of variable expenses to set fees and make capitalization decisions.
We can set fees by dividing variable expenses by the percentage budgeted for the expenses. For example, $3.50 of actual variable expenses divided by a 35 percent budget number gives a fee of $10. (In this example, 35 percent accounts for the variable cost of goods and support labor.)
We can also use variable expenses to calculate the break-even point (BEP) for any new expense. For a piece of equipment that costs $10,000, using the same 35 percent variable expenses budget, the BEP calculation would be $10,000 ÷ (1–0.35) = $15,385. This means you would need to generate $15,385 in revenue to "break even" on the cost of the equipment. Amortizing that BEP over a year changes the "cost" of the equipment from $833 per month to $1,282 per month — quite a difference!
Myth 4: In-house labs are essential.
In-house chemistry systems are all the rage and are wonderful for emergency clinics. In typical practice, though, an over-reliance on in-house labs causes the diagnostic ratio to fall.
The diagnostic ratio compares the income generated from laboratory, radiology, ultrasound and endoscopy to gross veterinary revenue. The typical small animal practice should seek a diagnostic ratio of 5-to-1.
In-house labs cannot support all diagnoses, and a key driver of additional revenue for most practices is testing from outside labs.
Balance in-house to outside lab incomes by a ratio of 6-to-4.