Examining Your Practice’s Financial Health
When a veterinarian examines a pet, there is an accepted approach that all Veterinary Schools teach regarding evaluating their health that includes a SOAP. How about when evaluating your practices financial health? There seems to be no standard way to assess the financial health of your practices.
After reviewing hundreds of financial statements of practices across the country, we wanted to provide a few important tips that can help you track the progress of your business.
Income Statement Presentation – over half of the practice income statements we see, from either Quickbooks or an outside accountant, present their expenses in alphabetical order. This approach is flawed because you are not bundling similar expenses to see how they are trending over time. We suggest that you create a few categories and organize the information by groupings such as:
- Cost of Goods Sold: Drugs, medical supplies, prescription diets, laboratory expense, vaccines, and other direct costs of providing service to your patients.These should be your truly variable expenses.
- Labor Costs: DVM and Non-DVM labor (present DVM and non-DVM separately so you can trend these two components) taxes and fringe benefits.These expenses have a fixed and variable component.
- Property expenses: Rent, utilities, telephone, property taxes and repair and maintenance costs – which are primarily fixed expenses.
- All other expenses: Marketing, information technology, property and workers compensation insurance, donations, staff appreciation and other miscellaneous items
By putting each line item into one of these groups (feel free to create an additional group or two if it makes sense for your practice) you will be able to track progress on your costs and how you are performing.
Trend Data Over Time – looking at one period (monthly, quarter or year) of your income statement is not typically that useful.The best way to track progress is to compare the current period to prior periods and see how things are trending. Are revenues increasing? Did your costs increase more slowly than the revenue increase? Did you lower your non-DVM labor costs in slow season vs. busy season? These are the kind of trends you can see by comparing monthly or quarterly results. Our recommendation is to track monthly trends but to not pay too much attention to small monthly fluctuations. Looking at 4-5 quarters on one report will really help you see trends over time and your data tends to normalize over a three month period.
These are two fairly simple things to apply to your business to help you track progress and see how your financial performance is progressing. When a healthy pet visits, you do a well exam to make sure nothing is wrong underneath the surface. With your business, a regular review of its health by looking at the income statement and looking at trends, will insure the practice stays healthy and you catch issues before they get bad.
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