A wake-up call might be in order when we study the profit-and-loss ledger for the year. What might look like a 25 percent labor cost is really 33 percent. A huge difference.

The importance of this discrepancy is the reality that income is linear with support staff.

When calculating fees, we need to know the real cost of labor in dollars per hour — not the hourly rate we pay staff, but the total cost of support staff per hour.

The published national norms are not precise. They don't consider the differences between wellness outpatient services, middle-market practices, mixed-animal practices or the multitude of emerging specialty practices. When we see "labor cost data" at 25 percent, that may or may not represent the total cost for all the employees.

Practice management must know the total cost of support labor.

To fully appreciate what that means, we must consider the basic hourly wages, plus health insurance, retirement, worker's compensation, bonuses, unemployment costs, employer's share of Social Security, Medicare, incentive pay and practice discount costs.

A major issue with poor labor numbers is that the overrun on labor cannibalizes the budget groups — specifically the profit groups. When profits are down, it becomes hard to fund debt service, invest in training and even to provide the best customer service.

Last month we discussed the cost of a single employee. Now let us track that number annually for the whole practice and see what we can do with that information.

Shrinking labor pool

The airline industry is under pressure because of rising fuel prices, the housing industry is under pressure because of banking issues, the domestic auto industry is struggling with historically guaranteed health and retirement benefits and veterinary medicine is under pressure because of rising labor costs — our most expensive budget item.

Those costs are expected to keep rising because the traditional skilled labor pool is shrinking. Along with that, there is competition between veterinary clinics, and from other related and unrelated businesses, for the best employees.

To set fees objectively, practices must determine labor costs objectively. There are but three issues to address to contain the cost of support labor:

• Get a handle on the real cost of labor; then set fees.
• Get a handle on the number of daily hours put in by the staff; then tune up the daily work schedule.
• Work out delegation processes to improve productivity.