Steps to improving profit

In our practices it is essential to be careful with incentives.

In this economy, selling clients anything that is not indicated will lead to a backlash.

How to apply this triad?

STEP 1: Scratch from memory most financial data prior to 12/31/07 and start anew. Yes, make 2008 your new starting point, your new baseline.

Practices with little or no profit, also known as "no-lo" practices, face the biggest challenge. But, like a small boat, they can be turned around more quickly than larger "oil tankers."

STEP 2: Revisit expense-groups analysis. Your expense-number trends tell a story. Expense analysis needs to be a routine mental exercise that we perform monthly, semiannually and annually, making adjustments at each interval.

The biggest obstacle is the murky understanding of profit-and-loss statements. A sound understanding of expenses is a starting place. Uniformity and consistency are key.

When we look at all the "benchmarks" for our review, they come down to the median and mean numbers from more than 20 practice niches.

But throw in banker business proformas and expense analysis gets muddled.

A glaring example of the muddle is that in at least one bookkeeping system all taxes are placed in one grouping under "other general expenses," a fixed-expense group.

In that example program, employee veterinarians and support staff are in the same group. (It drives me crazy.) Veterinarian salaries and all their expenses, benefits, taxes and such are separate from "fixed and variable" expenses.

STEP 3: Consider the three sets of books all businesses need: IRS forms, accountant's books and the cash-flow book. Cash-flow books are best in the accrual format, but usually are considered monthly and annually based on actual cash flow.

(The accrual cash-flow assessment allocates all bills related to a given month to that month even if it is paid during another month.)

Other mind tricks take place in the accounting world. It sounds weird, but take depreciation and interest expenses. The IRS considers these deductible expenses, but really they are "profit" numbers — what is left after fixed and variable expenses and veterinary salaries are paid.

Consider the accountant books. Generally accountants use the terms "gross and net profit" with only drugs and supplies being subtracted from gross revenues (variable expenses).

In reality it is the variables (drugs and supplies and support staff labor) that are taken together in determining gross profit.

Cash-flow analysis businesses use the "variable expense" listing to set fees (prices), bid jobs and project the cash needed to flow during the year.

Let us define the terms for cash-flow analysis, as this is to be the homework for the month.

Fixed expenses

Fixed expenses are those that occur weekly, monthly and annually and are not linear with regard to income. The two fixed-expense groups are rent (the facility) and other general expenses.

RENT: Amount paid for the space only; it does not include utilities, maintenance or insurance. It is also the mortgage payment.

OTHER GENERAL: Those expenses associated with the hospital operation. Reaffirming the point — these expense are not linear with income. In this group are utilities, computer expense, office supplies, printing, maintenance, repairs, advertising if less than 3 percent, business insurance (but not insurances associated with employees), accounting, legal expenses.

Specifically excluded are interest, equipment rental, employee expenses, advertising over 3 percent and education expenses.