July 2009

Using Metrics to Identify SWOT in Your Practice
Jason Castner, CPA, CVA

Abstract:

Many practices are experiencing a drop in revenue this year for the first time in a long time (maybe ever). Even more are seeing a decline in the number of patient visits. Cash flow for the practice may not be as strong as in years past. Providing bonuses and/or annual pay increases may not be automatic any more.

Where can you go for guidance? Look within your practice’s Metrics or Key Performance Indicators (KPIs) for direction. By identifying which KPIs have the most impact on your practice’s profitability (discussed in last month’s E-bulletin), you can focus on your Strengths and Opportunities while dealing with your Weaknesses and Threats (SWOT).

Cost of Goods Sold (as a percentage of revenue)

Cost of Goods Sold (COGS) can be gleaned from your Income Statement (Profit and Loss Statement if you use QuickBooks for accounting.) Ideally, COGS is a separate section of your Income Statement located immediately after Revenue. AAHA’s Chart of Accounts is a vital resource to fully understand what is to be included in your COGS. Drugs, medical supplies, laboratory expenses, food, retail, boarding and grooming are all included as appropriate for your practice.

Even if you do not have this separate section on your income statement, you should be able to add up the components listed above and divide the sum by your practice’s total revenue. This will give you your Cost of Goods Sold percentage (COGS%). This percentage provides a great deal of information about what may be working very well (or not well at all) in your practice.

Because your practice is different from the one down the street, your goal for your COGS % may well be different from theirs. If they offer boarding and grooming, and you do not, their COGS % may well be lower than yours. Due to every practice being different, we will discuss a reasonable range for your goal COGS %. For most small animal practices, a reasonable range for your COGS % is between 19 and 23 percent. Adjustments to this goal may be needed depending on your practice’s offered products and services.

If your COGS % is above this goal range, something is out of line, and one or more of several areas need attention.

• Is your pricing appropriate? This is a scary question in today’s economy to be sure, but your expenses have likely increased and your pricing must keep or exceed that pace. There are several sources for guidance on pricing including AAHA’s Veterinary Fee Reference. Match your pricing with your practice’s mission statement. If your mission statement describes your goal as “providing the highest level of medical care and service,” your pricing needs to be more in-line with the 75th percentile than the average.
• Are you missing charges? This is one of the most common areas of lost revenue. Once your pricing issues are addressed, this often has the largest impact on profitability. Even in a one-doctor practice, the annual impact of missing one six-month pack of heartworm preventative on a client’s bill each day is tremendous. In a larger practice, with more traffic and staff handoffs, the opportunity for missed revenue is increased exponentially.
• Are you discounting your way to the poor house? No one is saying you should stop providing services for the local shelter or SPCA. You should, however, understand how much discounted service and products your practice provides. Discounting $15 from a $100 bill does not sound like a big deal, does it? When done consistently, this type and amount of discount is the difference between a financially successful practice and you not sleeping the day before payroll!

If all of the above are being properly managed and your cost of goods is still not in the reasonable range, look closely at your inventory controls. You may have a problem with shrinkage (also known as employee theft). If this is a concern for your practice, consider daily count reconciliations on expensive and high-volume products (start with your Heartworm and Flea/Tick preventatives). Comparing food revenue to food costs is a way to identify if your inventory controls are working properly. Some practices have gone to having video on pharmacy and food areas of the hospital. Taking some of these steps will make it clear to everyone that you are paying attention to inventory and the related Cost of Goods Sold.

Average Transaction Charge by Doctor

Average Transaction Charge by Doctor (ATCD) is calculated by dividing a doctor’s production by the number of medical transactions on which that doctor worked. Where ATC for the hospital can be skewed by retail, boarding and prescription refill transactions, ATCD provides information specific to each doctor for whom it is tracked. This KPI provides valuable information that may support your findings from your COGS % metric. For instance, if the reason your Cost of Goods Sold is a high percentage of your revenue is due to significant charges being missed (not entered into your practice management software), your ATC by doctor is likely to be lower than it should.

In addition to the areas that may need attention identified above, a few new issues require further drill down:

Are your clients complying with your recommendations? A disconnect between your mission of “the highest quality care” and an ATCD far below the 75th percentile may well indicate client compliance much lower than you would like to believe.

Cost of Staff (as a percentage of revenue)

Cost of Staff (or non-DVM labor) will ideally range from 19-23 percent. The range depends on how well your practice leverages your staff. If the doctors are inserting catheters, you want to be on the low end of this range. If the staff does everything except diagnose, prescribe and operate, the high side of the range can work financially.

This is a KPI that receives significant attention when revenues and patient visits decline. When visits decline and there is no change to your staffing schedule, the result can be idle time. This will cause the cost of staff percentage to be higher than in the past and quite possibly above the range provided.

If this is an issue for your practice, don’t panic! First identify available time and determine if it can be used to provide better service/medical care. Can your staff use the time to make reminder calls (in addition to the post cards and e-mail reminders you are already doing)? Can they help the doctors by making follow-up phone calls on negative lab results and surgery patients?

If you are doing all that can be done and simply have too much staff cost, is it because you have too many staff members? Divide your team into the groups that make up your practice (i.e. client care specialists, assistants, technicians, kennel) and grade them. If the person (or persons) on the bottom of each list were no longer at the practice, would your delivery of care suffer? If the answer is no, changes are in order.

Measuring and monitoring these metrics can help you identify many Weaknesses or Threats that face your practice. Instituting changes to address these issues can convert them into Strengths and Opportunities. As you consider changes to your practice, keep in mind, changes that increase revenue are much more powerful (and fun) than changes that reduce expenses.

Jason L. Castner, CPA, CVA, leads the veterinary consulting division of Lacher McDonald, & Co., CPAs. He can be reached at jcastner@lachercpa.com or by visiting www.lachercpa.com.

Questions or comments? E-mail EconNews@VetPartners.org.

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