How do you make sure your veterinary business plan can work?
Prosperity in Your Practice— 6 Fundamental Metrics to Measure the Productivity and Profitability of Your Clinic
Is your practice prosperous? It’s a question we should be asking more often. The question is not: is your practice surviving? It’s not a matter of your practice breaking even. If you are only surviving and/or breaking even, you can be doing better. And if you are doing well, you can always do better.
Prosperity is a goal for all, but for many of us it may feel like an unreachable goal. This chapter addresses six simple things you can start measuring to ensure that your practice isn’t just surviving, but prospering. You can’t manage what you don’t measure. When running a veterinary clinic there are certain rule-of-thumb, or metrics, one should be using to determine how well the practice is performing. But before we dig into specific metrics regarding practice performance, we must look at how a practice should be operating if it was affluent and expanding and at the top of its class—the elite practice.
While we can certainly write a whole book answering that one question about practice prosperity, for the sake of simplicity we will look at the major areas that will make you or break you as far as gross revenue and profit is concerned.
This is a critical control point (CCP) in your income because you want your current and new clients to bond to your practice. Marketing is such an important part of your practice, and if done correctly, can create a fortune for the veterinary business owner. A proper understanding and application of these tools is necessary for success.
The elite veterinary practice:
- Would be visible to its public and participating in community activities.
- Maintains a database of both current and prospective clients and sends regular mailings to them.
- Routinely collects emails from all clients and a monthly e-newsletter is consistently sent.
- Has an increasing internet presence through the use of interactive websites, additional email marketing programs, social media and client reviews.
- Has one person assigned marketing manager responsibilities and spends no less than 5 hours a week promoting the practice.
- Creates promotional and branding materials for new and repeat business based on client surveys and feedback.
- Has an abundance of new and repeat clients coming into the practice on a weekly basis.
The quality of your patient care and how effectively you sell treatment plans determines your success in this area of your clinic. When you’re successful in selling treatment plans, your average client transaction (ACT) rises. However, as you gain more clients, your selling time is typically overwhelmed by patient treatment, causing a lowered ACT and viability issues. This is handled by the proper organization of your clinic for improved profitability.
The optimal veterinary practice:
- Would have superlative patient care.
- Experiences very low cancellation rates.
- Has virtually all clients accepting the recommended treatment plans for their animals/pets and seeing them through to completion.
- Has the staff using time to improve their technical skills or promoting the practice when cancellations do occur.
- Objectively measures each clinician’s technical performance and holding it to a very high standard.
- Has staff DVMs examining all patients prior to discharge and clients returning happily for rechecks on the health of their pet(s).
- Would not suffer in the quality of treatment if the clinic owner was absent since the workload would be competently handled by all staff as a group.
- Experiences no complaints from clients regarding the time it takes to receive care for their pet(s).
- Enjoys excellent and consistent patient results.
Scheduling control is the area that will make or break your practice. Significant lost revenue can be recovered by a standard scheduling protocol even though the prediction of surgical schedules is very difficult. Improving your control over this area can have a significant impact on the profitability of your practice, especially in solving the problem of who does the scheduling and how.
The elite veterinary clinic:
- Would be in total control of patient scheduling.
- Has the staff aggressively making sure that patients are keeping their appointments and the receptionist always confirms the next appointment of each client as they leave the clinic.
- Has a policy of re-confirming those patients that miss appointments.
- Knows exactly what the cancellation rate is and how much money is lost per week due to those cancellations.
- Provides necessary resources within the clinic to handle the increased patient load as the schedule gets busier with higher CPMs (clients per minute), allowing the Average Client Transaction (ACT) would maintain or increase.
- Consistently has staff DVMs on time for their client appointments.
- Enjoys a smooth surgical schedule–one not subject to the rollercoaster effect.
- Has a precise and coordinated activation program in place to ensure that an optimum number of clients are scheduled for recommended services.
Billing and Collections: Planning for Future Income
This is an area which is usually deficient in a typical veterinary practice. Proactive strategic planning for future income is the hallmark of any successful professional practice. The truth is that all revenue is made because it was planned for, even if it seems like your income is the result of unpredictable events like accidents or illnesses. Much can be done in this area to create a greater gross income for the clinic and a greater profit margin for the owners such as getting control over billing and collections actions and intelligent investment in money-making assets.
The successful veterinary practice:
- Would have an extremely efficient system of working out the financial arrangements before treatment is performed and accounts would be followed up to ensure payment is made.
- Would know exactly how much is invoiced and collected each week.
- Would have a high level of prediction of future income and would not be experiencing any cash flow problems while paying the owners a consistent salary or draw.
- Accounts receivable accounts would always be less than 1% of gross income.
- Has correct and readily available financial statements for the clinic owner at any time.
- Enjoys error-free client accounts.
- Experiences a constantly improving Average Client Transaction statistic, providing more profit for the owners of the private practice.
This is a huge and largely untapped goldmine in your practice but very easy to improve. Happy clients are willing to refer if you just ask them. Mastering this area can really expand a practice and your income if you integrate the promotion of referrals into your daily marketing activities.
The excellent veterinary practice:
- Will continually ask clients to refer their friends and family and will provide them with brochures, information packets, online resources and referral cards for this purpose.
- Teaches every referring client exactly what to do to refer new clients to the clinic.
- Acknowledges every client when a referral is made.
- Has an increasing general trend of client referrals.
- Knows who the top five referring clients are and has the staff work to support their referral activities.
- Promotes the importance of referrals in all of its marketing materials and the entire staff promotes referrals in their daily work.
- Surveys pet owners for their opinions and feedback.
- Would routinely track the number and source of new clients to create effective marketing and referral programs.
Many of us do not hire people who are proven to be productive and once we hire them we spend too little time training them to succeed on their new job. This applies to new DVMs and the administrative staff. A practice that is growing will likely need to hire a new DVM. Weakness in your ability to pick the correct candidate and train them to be productive will greatly inhibit your practice’s viability. This also applies to hiring and training your administrative staff. An untrained receptionist who cannot get clients to keep their appointments or collect all the money due across the desk is worthless to you even if she can do everything else. An inefficient staff only makes YOU work that much harder.
The elite veterinary clinic:
- Would be experiencing expansion in gross income as well as take-home pay due to the competence and productivity of each of its staff members.
- Trains all of the staff in clinical and administrative functions on an ongoing basis.
- Has each DVM complete client records before moving on to the next client and has all other administration of the practice well-organized.
- Affords the clinic owner a position where he/she would not be taking work home and would not have to check in when on vacation or away from the clinic, knowing that the work is getting completed correctly.
- Enjoys smooth management since all staff members would be doing their jobs expertly and as a team.
Owning and running a private practice can be a challenge. Working with staff, patients, regulators, vendors and others can take a toll on one’s outlook and relationships with family and friends. It is true that the more one enjoys what he does, the more successful he will be. However, some situations can put one on an emotional rollercoaster, creating worry and anxiety from stressors such as debt, low income, problematic personnel and patients or regulatory threats.
The optimum veterinary clinic:
- Would have an environment where the stress is quite low and morale is high.
- Has a productive group where everyone has the intention of expanding a successful practice and deriving the personal satisfaction of a job well done.
- Has the owner looking forward to going into work every day and excited about future business plans.
- Is where everyone is having FUN. If this is not what your practice looks like, then you are losing a fortune in lost income due to unnecessary, stressful factors.
A veterinary business must be managed by someone who knows what they are doing. A person who runs a business is known as an executive or manager and has tools of the trade just like the methods you use to treat patients in veterinary medicine. The successful veterinary clinic owner knows and uses these tools and techniques, the unsuccessful one does not. There aren’t any other explanations.
The elite veterinary clinic:
- Makes abundant gross income and operates in the upper tenth in profitability compared to other professional practices in the veterinary industry.
- Acts as a cohesive team where the mission and goals of the practice are known and agreed-upon by all staff members and patients.
- Has an excellent credit rating.
- Enjoys increasing profits, cash flow and income.
- Has enough cash reserves to handle periods of low income, avoiding the cycle of boom and bust that often happens with a small business.
- Derives the most value from all assets and personnel in the veterinary clinic.
- Operates on merit, where the more productive staff members are rewarded with a standard and known bonus system.
Owning an elite veterinary clinic is much more fun and interesting than struggling with the multitude of problems that manifest at the low end of the scale in each of these areas. We think you’ll agree that you would prefer to own a successful practice rather than an unsuccessful one.
Now that we know what an elite veterinary clinic would look like, we can compare our current state of operation to determine what needs to be done to attain that higher status.
The Six Fundamental Metrics
You were never trained in veterinary school how to run a company or understand the concept of Return on Investment (ROI); these six fundamentals will bridge that gap to make you successful and prosperous. Now let’s take a look at some of the metrics that will measure our ascent to the elite status of private practices:
Fundamental Number 1: You Should be Taking Home at Least 20% of Your Gross Income in Profit plus DVM Salaries of 20-25% of Gross Income
The main financial purpose of private practice is to make a profit without the “glass ceiling” of a corporate overseer giving you pre-set limits. You are, in fact, an entrepreneur and should, in fact, be thinking like one.
Embrace that entrepreneurial spirit!
To gauge your level of prosperity, a well-run vet clinic should permit the owners to take home about 20% of the gross income on an annual basis as owner profit, plus DVM salaries of 20-25% of gross income. That means if you are generating $600,000 in practice gross income, then you should ultimately bring home more than $240,000 in salary and profits in a one-doctor clinic practice.
In a two-doctor clinic earning $1,000,000, the take-home should be about $200,000 in owner profit and $115,000 (23% of $1,000,000 divided by 2 DVMs), totaling about $315,000 a year, plus or minus for the clinic owner.
This may seem high. But it’s actually not. Still, the average household is taking home much less than that. Why? The average private practice is not utilizing a proven business management system. In the typical scenario, we build and grow our practices and everything seems fine until we suddenly notice a drop-off or leveling in profits. Our expansion hits a wall and rather than doing the standard actions with personnel, marketing, financial management, etc., we look for “tips and tricks” from our peers to help instead of a coordinated system. These “emergency” measures are implemented to make more money until the next “emergency” appears—and on it goes for a lackluster career in private practice.
This haphazard approach ends up costing much more in lost profits than it ever would to hire a consultant and pay his fees. If the consultant is a good one, the return on investment would be much more than the cost anyway—and this would be most noticeable in your bottom line. For example, let’s say you paid a consultant $30,000 for consulting you on proven practice management techniques. Over one year, you experienced an additional $60,000 in gross income. That is a 100% profit in one year to your practice and will repeat itself year after year from now on. There is no other investment that gets those kinds of results. This is the number one reason why practices do not reach their potential. You were never trained in vet school how to run a company or understand the concept of return on investment (ROI); these six fundamentals will bridge that gap to make you successful and prosperous.
Fundamental Number 2: Your Average Client Transaction (ACT) should be 3 to 3.5 X .1% of the Median Disposable Income for Your Area
The first thing to do to figure out the ideal transaction amount for an ideal office call is to determine the median disposable income, after taxes, of the households in a particular zip code where your clinic is located. Let’s say that the amount is $45,000. At .1%, the number then becomes $45.00. Take 3 to 3.5 times $45.00, and the ideal average client transaction would be $135.00 to $157.50.
This ACT includes everything: the vet bills plus all of the front-end stuff (from a $15.00 bottle of shampoo to a $2500.00 knee surgery). What is interesting is that most clinics are well below this level. Anything that can be done to improve this number is imperative to the overall profitability of the veterinary clinic.
Let’s take an example. Each DVM should be able to do between 100 and 125 client transactions per week. If we take the ideal ACT number of $135-$157.50 times 100-125 visits per week per DVM, then a one-doctor veterinary clinic should be making in the range of $13,500 to $19,687.50 per week. This translates to $675,000 on the low end to just shy of $1 million on the high end for a 50-week year in our particular zip code.
Run the numbers for your area. Of course, they will vary widely in different sections of the country. The key is to find metrics you can use to determine if your clinic’s income and profitability can be improved compared to an ideal for the area. If your numbers are short of what is appropriate for your area, then take action immediately to get them more in line. This could include raising your fees, training a more efficient staff, or improving marketing or sales techniques.
Fundamental Number 3: No More Than 24% of Gross Income Should be Going to Employee (non-DVM) Salaries.
As we do financial planning for our DVM clients, we often find that they will pay their staff well and deprive themselves of the fruits of private practice ownership. It is known that a happy staff is a productive staff, but what’s the point if they’re not working for a prosperous owner?
All investments within a veterinary business must make a profit: this includes marketing, property, equipment and staff. When any of these areas do not produce to their greatest potential, other productive areas in the practice attempt to make up for those inefficiencies and the general activity becomes less profitable.
The bottom line is this: If more than 24% of your gross income is going to staff salaries, then something is wrong with the business & financial model and it needs to be fixed in order to produce more profit. You either have too many people on staff or they are not producing at a profitable enough level to justify the expense. A thorough review of your salary expenses compared to the gross income generated by each staff member can help sort this out.
Fundamental Number 4: The Quality Care Index (QCI) Should be at Least 7% of the Household After-tax Median Disposable Income for Your Area.
If you’re looking for a simple method of measurement, look no further than your staff; or, particularly, each staff member. Your practice is a combination of administrative staff and billable clinicians such as DVMs. Administrative staff must be hired to ensure efficient delivery of veterinary services, including a receptionist, collections manager, and executives, etc. As a team, patients are served and gross income is generated.
How efficient is your current team? The answer could be the clue to your current state of prosperity. For instance, if we take $45,000 median after-tax household disposable income multiplied by 7%, we come up with an answer of $3,150.00. This number tells us that ideally, we should be generating $3,150.00 per staff member, per week in our clinic.
If we have 4 staff members in the clinic, then the average income per week should average at least $12,600. This is just below the income range of $13,500 to $19,867 in the previous financial metric. With 3 support staff in a one-doctor clinic, you will be able to measure how efficient your team is.
If your calculations come in under that amount, then attention should be paid to the efficiency of practice. Remember this: if you are only getting $2,000 per staff member per week in gross income, then you are losing about $1,150 per week per staff member in gross income. Add that up over a year and that is a far greater loss than any other possible investment loss you will make in your lifetime, including inexperienced stock trading, amateur real estate speculation or owning dubious chicken franchises.
Again, we need to practice habitual behaviors that make us more profitable; it’s not always the big investments you make for the most return that count, but the things you do every single day that create vast wealth over time.
Fundamental Number 5: Your Weekly Patient Visits Should Roughly Equal the Total Square Feet of Office Space Divided by 10.
Let’s take the square footage of your clinic—for example, 2,500-square feet. At this size, you should be seeing about 250 patient visits a week (or 50 client transactions per day on average). This figure tells us how productive your clinic should be based on physical size (not including boarding or grooming space). This is a rough estimate, of course, but it does give us an idea.
Not seeing 250 patient visits a week? Then that’s a problem that needs to be solved; pronto. Otherwise, you are going to be spending too much on overhead that will eventually kill your profitability.
The solution? Marketing! The average private practice owner grossly underestimates the amount of marketing that must be done—week in and week out—to generate enough new patients to keep the veterinary clinic running at capacity.
The lack of understanding of the importance of marketing is the number one problem for professional practices. Fortunately, there is a solution, since there are proven programs available for private practice DVMs that get results.
Fundamental Number 6: You Should be Spending at Least 5% of the Gross Income of the Practice on Marketing.
We know that marketing is the lifeblood of a business and, as a private-practice veterinarian, it is the difference between a robust, booming practice and one that whimpers along until the doors close.
Here is the typical scenario: A DVM needs new clients, so they promote and spend money on marketing activities. When done correctly, these programs create a host of new clients who come in the door. Everything is fine now since there are a lot of patients to treat—that is, until they complete their treatment programs or fail to enroll in continual preventative programs. Income then slumps, and a whole new surge of marketing activity ensues. New patients come in, income goes back up, and the cycle of boom and bust continues on and on.
The only way to break this rollercoaster ride is to actively market your practice constantly regardless of the number of patients you are treating. The first action is to perform an analysis of your marketing programs. This would be a breakdown of the cost versus the income generated by each marketing campaign. When you determine which programs generate the greatest return on investment, those efforts would then be strengthened. Any program not earning a decent rate of return is then discontinued.
The next action is to allocate money every month toward the most profitable and effective marketing campaigns. How much should you allocate each month? At least 5% of gross income.
This allocation would be done after paying yourself first but before paying rent, salaries, and other monthly bills. It should be accounted for separately so that it isn’t spent on something else erroneously.
You see, without a constant marketing and promotional effort, you will not have a constant flow of clients to expand the practice. This leads to overpaying for staff and overhead and a vaporization of your profits, not to mention the emotional rollercoaster ride.
In working with private practice vets, this is truly one of the major differences between a stable, profitable and expanding clinic and one that isn’t.
Parting Words about Prosperity in Your Practice
This section summarizes just six of the many standard metrics that should be used in a practice to measure its production and profitability. Obviously, there are more ways to measure productivity for your practice, as well as ways to increase profitability if you find your numbers lacking. The goal is to personalize these methods and put them into practice sooner rather than later. If you don’t like the measurements you’re taking, don’t stop measuring; just start producing better numbers to measure! After all, your practice is your key to financial prosperity at home—the engine that provides the money to help you achieve your life goals.
If your clinic doesn’t work for you, then by default you work for it and it will consume you if not controlled, measured and molded to suit your needs. Hopefully, these six simple measurement tips give you some insight on how to improve the quality of your practice and make your participation in it much more enjoyable.