Measuring impact of discounts
As long as a discount truly promotes the sale of a product or service, it should be classed as marketing or promotional cost
in your financial reports. When coded as promotional, cumulative market-strategy discounts don't affect the ratios of other
expenses compared to gross fees charged.
Recall that gross revenue is the practice's total operating income, before any deductions for discounts, write-offs or operating
expenses, and without adding other sources of cash, such as sales tax collections and non-operating income.
In the veterinary profession, the level of discounting can be relatively significant and ubiquitous. When it becomes a consistent
fact of net income realization, rather than a strategic promotional activity, then discounts are recorded as a debit directly
offsetting operational revenues.
At this point, the top line number is no longer gross fees collected, but rather gross fees net of discounts. All expenses
are measured against net fees, so that management has an improved awareness of discounting's impact on all costs of operations.
When offset against gross revenues charged, discounts reduce the total operating figure used to calculate each expense as
a percent of it. Thus, all expense ratios, including those used as KPIs, will increase.
As a separate expense line item, we find the range of discounts among veterinary practices extraordinary, ranging from negligible
to as much as 10 percent of gross revenues. You can see there are many reasons for this. Some don't measure lost charges at
all and don't have a way of showing "free" care to clients. Others meticulously capture all bundled-service discounts and
other discounts and report them.
Most practices fall somewhere in the middle, with a typical range of 1.5 percent to 3.5 percent of gross revenues recorded
as discounts. This doesn't mean they necessarily are doing a good job of managing discounts, only that this is what the computer
happened to capture.
If they really wanted to know the extent of discounts, they would conduct regular audits of patient records against historic
invoices and record the discount amount in the financial statement.
They would also review the detailed list of every service code and track at least two more occurrences:
1. The number of transactions that have no fee associated with them, and their value if a fee had been charged.
2. The number of write-downs of transactions with a set fee, and the value if the correct fee been charged.
If your practice is like most, your team members' homes may be a managerie of adopted strays, some even rescued at work. It's
natural they would look to their co-workers when those animals need veterinary treatment.
Employee discounts are a common fringe benefit. Some 50 percent of practices in one survey treated employees' pets at cost,
and 25 percent treated them at no charge.
But the IRS isn't as lenient, so practices need to bone up on tax limitations on employee fringe benefits. Some benefits may
legally be excluded from a worker's gross income, but others may not be.
In general, the law requires you to include fringe benefits in workers' taxable pay. But under Section 132 of the Code, you
may be able to exclude no-additional-cost services, de minimis benefits and qualified employee discounts from gross income.
Although it may seem kind to offer employees discounted or free pet care, the wisest owners simply pay workers well enough
that they can afford the services they need.
Like most community-minded business owners, you receive your fair share of charity requests, but veterinarians face a double,
and even a triple, whammy.
Let's consider the generosity you quietly provide each year in the community. Because each act of charity tends to present
a hidden financial burden, we believe it should be fully recognized and even budgeted as part of your overall business plan.
Why not review all the acts of kindness your hospital provided in the last year? If you totaled all the donated supplies,
no-charge Good Samaritan services, deep discounts to organizations, you might be amazed at the total.
Why not celebrate the generosity of your practice with your employees and clients? The large retail chain Target does so,
advertising that a certain percentage of all profits goes to charity.
By proactively budgeting for client discounts, employee discounts and charity, you can help protect your profit margin.
Unfortunately, your vendors and service providers (like health insurers) may not be nearly as generous as you are with your
own clients, employees, friends, neighbors and family.
But through proper budgeting, at least you can go to the checkbook with your eyes wide open.
Dr. Heinke is owner of Marsha L. Heinke Inc., and can be reached at (440) 926-3800 or via e-mail at