Bounce back from the bad economy with a breakeven analysis

Bounce back from the bad economy with a breakeven analysis

Your veterinary practice can bounce back from this slow economy
Nov 01, 2010

So you say your business is down, but I say that sounds pretty normal. Get used to it. It's not the same normal of five years ago. This is the new normal. We can ignore it and hope it goes away, but that's like trying to hold back the tide. Is it survivable? Yes. In fact, if you do it right, the new normal can even be profitable. The return of the old normal is too far in the future to even dream about.

What caused the shift? Greed. Not our greed. Heck, we give our services away. It was banking greed and real estate greed, along with a very unhealthy dose of government spending. The new normal persists because of universal financial uncertainty. Faced with this uncertainty, our bread-and-butter consumers are acting exactly as they should—responsibly.

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We can all come up with possible reasons why consumers are spending less. The simplest reason is that the people who control the largest amount of money in our economy—baby boomers—are spending less because it fits their stage of life. They're looking at the future with trepidation. They're asking, "Do I have enough money to retire?" and "Can I afford a new car, a vacation home?" They're wondering, "Should I save more?" Deflation has only compounded the problem.

So, what's the responsible way for us to react? There is only one answer: Manage our practices at a level appropriate for fewer client transactions.

Prepare for fewer clients

What this recession has done for most practices is reduce transaction numbers and reinforce the belief held by certain segments of our society that pets are a luxury. Yes, our transactions are down, but we must ask ourselves, "Who, exactly, is no longer coming in?"

In the United States, 60 percent of households have pets (1.8 pets is the average), but 60 percent of these pets will never see a veterinarian. We make our livings from the 60 percent of the 60 percent, or 36 percent of the population.

In addition, 95 percent of our profit comes from our top 55 percent of clients. That's just half of last year's clients and 20 percent of all pet owners. These clients are also the most responsible and stable members of society.

The lowest 45 percent were usually visiting us for rabies vaccinations and nail trims and were marginal users of our other services. These lower 45 percent may be wonderful people and good drinking buddies, but they're the hardest hit by the recession: three to five times harder than the top 55 percent. In a way, this benefits us. Fewer but more quality-minded clients require less staff.

Trim the fat

Three decades of management consulting have taught me that most practices have a layer of financial fat weighing them down. I can tell you from expert personal experience that, once it's established, that fat is hard to remove. You have to be motivated or nothing ever happens. Debt happens to be a good motivator for many, and our drug distributors are doing their part in providing that kind of motivation. The number of hospital accounts on C.O.D. is at an all-time high.

Banks are also motivating many of us, especially owners holding mortgages on very expensive "hospital of the year" practices with million-dollar practice buildings. Practices that can't maintain a gross exceeding 13 times their rent are chock-full of motivation! Unfortunately, many of the most beautiful practice buildings in the country are suffering badly. The economy is going nowhere for several more years.

With a national 10 percent to 15 percent reduction in client transactions, many practice owners welcome staff attrition as a way to reduce overhead. However, we need a minimum of $5 of revenue for each $1 of payroll cost.

Faced with the need to reduce staff, veterinarians have offered their staff a choice: "I have to reduce staff overhead by 20 percent. I can either lay off X number of people or keep all of our staff but at a 20 percent reduction in pay. I'm going to let you make that decision." Many a staff, probably fearing that each would be the one cut, has opted for the pay cut with the certainty of employment. They work five days for four days' pay. The staff sees the veterinarian as fair, and, eventually, when a staff member leaves, the veterinarian can readjust everyone's pay.