VNA Level III Module 1: Business Realities Learning Objectives After completing this module, the benefits you realize should include: Understanding some of the costs of operating a successful veterinary practice, and the contributions of variable costs. Appreciating the implications of a veterinary practice as a fixed-cost-service business. Recognizing opportunities to ethically and professionally increase profits in a veterinary practice. Knowing you and others on your health care team can be substantial contributors to practice productivity, thereby enhancing pet health and the health of the practice. Your progress is saved. Slide 1 of 17
Introduction Just as there are natural laws governing our physical world - the law of gravity for example - there are certain business tenets governing the practice of veterinary medicine successfully. Veterinarians and veterinary health care team members who appreciate the economic and financial tenets of their practice as a service business should be able to provide great medicine through great business. Of course, knowing these tenets is only part of the productivity equation. Also very important are appropriate actions, (applications) for the benefit of all involved, especially the pet! Understanding and applying fundamental business tenets can enhance your practice s ability to deliver exceptional pet and people care. Your progress is saved. Slide 2 of 17
The Big Picture While most of us cannot directly influence increasing pet ownership a great deal, veterinarians and health care team members can and should try to influence proper pet care, with products and services available through the veterinary practice. Considering all the things pet owners often purchase and provide for their pets, veterinary practices typically receive a relatively small percentage of overall pet owner expenditure. Where do the other expenditures take place? Primarily in pet stores, the pet aisle of grocery stores, and the pet aisle of large format retailers. Other expenditures go to businesses such as boarding facilities, grooming shops, and training/obedience businesses. Out of all this, pet food is usually the number one expenditure for most responsible pet owners. Just like people, pets usually eat regularly, so, like pet owners in general, more money is spent on food than medical bills. Also, as discussed in previous VNA Modules; by having pet owners visit your practice for their Hill s pet food products multiple times a year, you are not only providing critical nutritional guidance, you are much more likely to influence clients about many other efficacious products and services provided for the pet s best interest. Don t abdicate pet care to grocery stores and other outlets! Clients who visit your practice are dependent on your effective communication. Help them be compliant regarding products and services your practice provides. Without sound recommendations from you and other members of your health care team, pet owners will rely on marketing from other businesses to influence their pet care decisions. As a result, will the pet be receiving the best products and advice for proper nutrition, parasite control, skin and coat? Your progress is saved. Slide 3 of 17
The Big Picture Veterinarians and health care team members have an obligation to help pets; by having pet owners purchase the efficacious products and services from your practice, with money they are currently already spending elsewhere on their pets! Pet owners should depend on you and others on your health care team, and not have to rely solely on other sources, especially a confusing pet food aisle in a grocery store! Note: With pet owners buying their pet s nutritional products from your practice, they will not necessarily spend more, just where it s spent- at your practice! This is extremely positive- remember, you re in a service business, and pet owners will expect you to provide them with the efficacious products you recommend. Focus on effective communication in shifting pet owner pet-care spending from outside the veterinary practice to inside YOUR veterinary practice. Your progress is saved. Slide 4 of 17
Practice Productivity and Value How is revenue, (gross income) produced in your practice? Very simply, practice revenue is generated when your clients give up something of value - money - in order to receive something of perceived equal or greater value - in this case, veterinary products and services. As discussed in Level I, Module 10- Marketing and Merchandising, the Value buying equation is expressed as: Value = Benefits Price To be of value, the numerator, (Benefits perceived by the pet owner) must be larger than the denominator, (Price). For a purchase to occur, (the clients agrees to buy a product or have a service performed) the benefits derived by the client must equal or exceed the monetary cost. The only two ways to increase value are to increase the benefits, (advantages) or decrease the price. You are strongly encouraged to always identify and deliver opportunities to increase the benefits. Remember, compensation for most people employed in a veterinary practice is a result of providing professional products and services, combined with exceptional, recognizable VALUE, (e.g. Benefit > Price) to pet owners for their pets. The benefits perceived and received by the pet owners should always exceed the price paid. Your progress is saved. Slide 5 of 17
Practice Productivity and Value On average, veterinarians, managers, technicians, and receptionists earn less than their counterparts in dentistry, optometry, and human medicine. On the bright side, most veterinary practices have incredible potential to address this situation, and in doing so, will actually be able to practice better medicine. There are ample opportunities to improve veterinary practice productivity. Veterinary health care team members with a keen understanding of how, where, and when income is generated in a small animal practice, and how it can be enhanced, are invaluable resources! Since most practices would benefit by greater profits, let s examine the profit equation. It can be expressed very simply as follows: Gross Income (Revenue) - Expenses = Profit The greatest opportunity to ethically and professionally increase profits in a veterinary practice is to increase the top line - or gross income. There is typically far less opportunity to increase profit through cost cutting, (holding down appropriate expenses). Since growing the top line, (Gross Income) is a key fundamental to improving practice productivity, we will study it in greater detail in VNA Level III, Module 2 - Revenue Sources and Module 4 - Passive Income. While increasing gross income is usually far more productive than cutting costs, a basic discussion of veterinary practice costs, (expenses) follows. To increase profits, focus on increasing the gross income of the practice. This approach to smart business allows the practice to provide even better medicine. Your progress is saved. Slide 6 of 17
Fixed Cost Business Expenses in a veterinary practice can be broadly classified as fixed and variable. Fixed costs are those costs that remain relatively constant or unchanged regardless of the level of business activity. Examples of fixed costs in a veterinary practice include: Salaries, wages, payroll taxes, and employee benefits Mortgage or rent payments (land and building) Debt-service payments (e.g. buying-out a former owner) Lease payments (equipment) Insurance Real estate taxes Personal property taxes Maintenance/service contracts and cleaning supplies Interest expense Accounting and legal services Licenses, dues, and subscriptions Continuing professional education Utilities Telephone Laundry/uniforms Vehicles Your progress is saved. Slide 7 of 17
Fixed Cost Business Usually, about 70% to 80% of costs, (expenses) in a veterinary practice are fixed, not unlike other professional service businesses, such as dentists, physicians, accountants and lawyers. Gross Income (Revenue) - Expenses (Fixed portion ~70-80%) = Profit (Net Income) Staffing levels of veterinarians, technical assistants and office support personnel - and their associated payroll and benefits costs - are generally fixed. Also, facility-related costs (mortgage payment, rent payment, lease payment, property taxes, insurance, utilities, and telephone) for the most part don t fluctuate with changes in case load. Veterinary medicine is a fixed cost business, with approximately 70-80% of the expenses, (costs to run the facility) relatively constant from one day to the next. Your progress is saved. Slide 8 of 17
Fixed Cost Business Fortunately, the implications of enhancing productivity in a fixed cost business are clear: Maximize capacity utilization. In a veterinary practice, capacity consists of people, equipment, and the facility. These expensive items, necessary in operating a successful service business, are utilized - bought and paid for, each month by the practice. The goal then, is to use them more fully. In the course of a twenty-four hour day, how often is the surgery suite in use? How often is a pet on the dentistry table? What percentage of the day is the radiograph or blood chemistry equipment in use? How many cages are occupied? In most veterinary practices today, there is tremendous excess or unused capacity. Maximize use of the most finite resources. In a veterinary practice, the veterinarian s time is usually the most scarce or finite resource. Therefore, doctors should try to focus exclusively on those procedures and activities that require their direct, full-time involvement - those areas that require a license to practice veterinary medicine. Leveraging the skills, talents and abilities of a competent and confident health care team and delegating to them appropriately, is vital in a fixed-cost professional service business. See Level III, Module 4 - Passive Income for more information. Your progress is saved. Slide 9 of 17
Fixed Cost Business To increase profits, focus on gross income. To the extent you can increase gross income by $1, almost all that $1 falls to the bottom line as profit, (once incurred expenses are covered). If fixed expenses are too low - specifically salaries and wages - employee turnover may become a problem, putting additional strain on the other health care team members, and possibly forcing the veterinarian to spend a great deal of time on activities that could have been done by others. Manage seasonality. For veterinary practices in certain geographical locations, gross income often forms a bell-shaped curve when charted on a calendar year (see below). For example, a practice may not generate much income in cold winter months, compared to when it is easier for pet owners to get out and about. Developing strategies that encourage pet owners to bring their pets into the practice during slow months is critical, for example; dental, senior and weight management programs. As an advocate for the pet s best interest, recognize that pet foods - unlike many other veterinary products - are not very geographical or seasonal; dogs and cats eat all year long! SEASONALITY Expenses Gross Income JANUARY DECEMBER Your progress is saved. Slide 10 of 17
Fixed Cost Business Variable costs are those costs that fluctuate in proportion to levels of business activity. If more is used or sold, the practice benefits financially, (the cost of the product, plus a profit- paid by the pet owner). Examples of variable costs in a veterinary practice include: Hill s Science Diet and Prescription Diet brand pet food products Heartworm prevention products Flea control and prevention products Medical, surgical, and laboratory supplies Radiographic film Outside laboratory fees Shampoos and other skin and coat products Miscellaneous pet supplies Office supplies Variable costs account for about 20% to 30% of total practice costs in a typical small animal practice. Gross Income (Revenue) - Expenses (Variable portion ~20-30%) = Profit (Net Income) Your progress is saved. Slide 11 of 17
Fixed Cost Business In a predominantly fixed-cost business such as a veterinary practice, variable expenses are generally good expenses to incur! Why? Because these items are conveyed to clients at a profit. Since veterinary practices sell these items for more than cost, money is available to help cover the fixed expenses discussed above. Minimizing or de-emphasizing variable expenses, (espoused by some practice management consultants) can actually decrease overall practice profits, let alone possibly compromising pet care! The key to managing variable expenses is to focus on Earns x Turns, which will be covered in Level III, Module 3 - Inventory Insights. Variable expenses, (like Hill s pet food products) are favorable expenses to incur, since the products are sold to pet owners for a profit! Your progress is saved. Slide 12 of 17
Appropriate Fees are Critically Important A major tenet in a productive business -a critical fundamental- is that appropriate fees be charged. Historically, veterinary fees have not increased as much as economic inflation. Consider: It may cost more to have a pet groomed than to have a veterinarian perform a physical examination on that same pet. It may cost more for a service call from an electrician or plumber than it might to have a veterinarian conduct a physical examination on a pet. Many people pay more for their own hairstyling, or to have the oil changed in their car, than to have a veterinarian conduct a physical examination on their dog or cat. In Level III, Module 2 - Revenue Sources there is a more detailed discussion of professional fees. To learn more about this topic, you are encouraged to visit the following sites: www.ncvei.org www.aahanet.org Variable costs, (for example from the sale of Hill s pet food products) while part of practice expenses, (initially bought by the practice) add to a practice s gross income, because the products are sold to clients at a profit! Gross Income (A % derived by increasing variable costs) - Expenses (Fixed costs, ~70-80% + Variable portion ~20-30%) = Profit (Net Income) Your progress is saved. Slide 13 of 17
Accounting for Everyday Opportunities Even in high-performing veterinary practices, thousand and thousands of dollars probably walk out the door each year in terms of services and products that never were recommended or delivered, or if they were provided, were never charged for. These are existing clients, with existing pets, who know where your practice is located! Doing more with existing clients, (many who are ideal - expecting specific product and service recommendations) is much easier, is better medicine and is more productive and cost-effective than attracting new clients. A detailed opportunity audit of veterinary profit centers is beyond the scope of this module, but you re encouraged to carefully consider and enhance, for example, each of the following veterinary services and products in your practice: Veterinary Practice Services Laboratory (including pre-anesthetic testing, offering screens as part of the annual wellness examination, and following-up with dispensed, longterm medications) Dentistry Senior care (Remember the ERD test mentioned in Level II, Module 5!) Behavioral care Strategic deworming While every practice needs a steady flow of new clients, it is critical to ensure that existing clients understand, appreciate and are receive the best pet care possible. Your progress is saved. Slide 14 of 17
Accounting for Everyday Opportunities Veterinary Practice Services Hill s Science Diet and Prescription Diet brand pet foods Flea control and preventives Heartworm preventives With effective communication, increased productivity related to better medicine is the result. You have an important role in the compliance continuum! Your progress is saved. Slide 15 of 17
Ideal Clients Most veterinarians and health care team members are surprised that the American Veterinary Medical Association consistently reports that the top 25% of an average practice s clients generate about 75% of the practice s gross income. What may be even more surprising for many, (and potentially more alarming) is that approximately 45% of an average practice s client base, generates only about 5% of the practice s gross profit! As discussed in VNA Level I, Module 10- Marketing and Merchandising, understanding who your ideal clients are, and making sure your entire health care team communicates effectively with them, is a critical key to proper pet care. Too often, when things get busy in a practice, the ideal clients and their pets are the ones that are negatively affected! In general, the bottom half of a typical practice s client base contributes little to the practice s productivity, mainly because these pet owners are not well-informed by the health care team, or even if they are, still only want the minimal veterinary care for their pet. At the same time, though, such pet owners may be very demanding, which limits the veterinary health care team s ability to serve ideal clients to the fullest. These challenging types of clients are often focused solely on low cost, (instead of high quality, proper) veterinary care. A large percentage of these types of pet owners may never become ideal clients. That does not mean the veterinary health care team should not try and effectively communicate with these people. It does suggest, however, that you shouldn t forget the needs of concerned pet owners who truly want, and will follow, your recommendations. Be careful about spending too much time and effort with non-compliant pet owners, at the expense of your ideal clients. Low fees increase the likelihood of attracting fee-sensitive pet owners. This can limit the veterinarian and health care team from delivering products and services that are in the pet s best interest, no matter how hard you try to communicate. Your progress is saved. Slide 16 of 17
Summary Every veterinary practice is in the service business. As such, all veterinary health care team members should be encouraged to continually search for ways to provide more and more value for pet owners and their pets. Advocating for the pet s best interest, along with appreciating the business realities covered in this module, will undoubtedly promote better pet care, utilization of the practice s products and services, and enhance practice productivity. Great Medicine + Great Business: Hill s Pet Nutrition, Inc. is there to support your efforts in both areas! Are you ready? To continue, you will need to complete the quiz for this module. When you are ready, click on the forward arrow below to take you to the quiz. Your progress is saved. Slide 17 of 17