A key step in managing the expenses of any veterinary practice is learning what things actually cost.

For instance, do you know what it actually costs to attract a patient or to sell a service? For that matter, what does it cost to open the doors to your animal hospital, clinic or practice each day?

Often wrongly considered boring, time-consuming and less than helpful to the principals in small veterinary practices, the costing and budgeting processes have a significant impact on the bottom line.

Budgeting involves forecasting the amount of money needed to make the practice prosper. Costing turns the guesses in that process into educated ones.

What does it cost?

What does it cost your veterinary practice to perform its services? Although your financial statements do show total expenses, rarely do they break them down into specific services or categories of services. That is where cost accounting enters the picture.

Cost accounting is the process of detailing all of a veterinary practice's costs associated with attracting new business, performing services, etc., both direct and indirect.

Direct costs include such things as total wages paid to workers, supervisors' salaries, supplies purchased, etc. Anything beyond that is an indirect cost.

It is the rare veterinarian who does not know whether his or her practice is profitable. Accounting statements, or even the practice's tax returns, provide that information.

But how many DVMs know which aspects of the services they routinely perform are profitable or even which types of services make money? Few owners, in fact, know whether their best customers are generating enough profit to warrant the degree of services provided.

It also is surprising how few veterinarians understand what a particular patient, service or type of treatment actually costs. Too many believe that, if they charge a certain sum for a service and pay a worker slightly less, then that service is profitable. In reality, nothing could be further from the truth.

As is the case with many business expenses, the cost of money often is misunderstood. Many veterinarians seem to believe, for instance, that using savings and investments for most necessary purchases is sound economical strategy.

What they may fail to realize, however, is that there is even a "cost" to spending that money. Removing funds from savings incurs a so-called "lost-opportunity" cost. If those funds had remained invested or stayed in a savings account, they would have earned interest or increased in value. Using them in the practice means that the practice should consider that "lost opportunity" as a legitimate cost of doing business.

Any practice that offers a "prompt payment" discount also incurs a cost. The practice usually must pay its workers and its bills before receiving payment for services. Often, this means borrowing money. It is up to the principals in any practice to decide whether it is more economical to borrow the money needed to keep the operation going or to offer clients an incentive for paying early.

Budget basics

Like a road map of a rapidly growing city, a budget establishes a path to get to a selected destination, usually a set profit amount.

The budget attempts to show what expenditures will be necessary to achieve goals set by the veterinarian.

After income and disbursements have been estimated, a minimum cash balance usually is established. How much does the practice's bank require to be kept in an account?

How much reserve must be maintained to comply with loan terms? How much is needed to meet monthly bills and payroll? All of these figure into the minimum cash balance needed.

Put another way, if $10,000 per month is necessary for payroll, rent, utilities, advertising and the like, the veterinarian should plan to maintain a cash balance of $10,000.

If sales slip, and the practice does not have sufficient income to promptly make payments, creditworthiness may be affected, or the practice may be forced to borrow to make up the shortfall.