November 2009

Cutting Costs Without Sacrificing Your Standard of Care.
By Jason L. Castner, CPA, CVA

Abstract:

Cutting costs is never the ultimate goal of a practice owner. However, whether the ultimate goal is to make millions or a comfortable living while providing exceptional care to your patients, cutting costs, or more appropriately managing costs, is a key contributing factor.

The difference between cutting and managing costs is similar to the difference between cutting and operating on a patient. In the operating room, you would not make your first incision without having reliable diagnostic information. The same rules apply to cutting costs.

Getting Started

Previous Economic Bulletins have focused on revenue (and rightfully so!) and ways to maximize profits. Increasing revenue is significantly more fun than having to cut costs. Revenue is the largest number on your income statement (profit & loss statement if you are using QuickBooks) and therefore has the greatest impact on profitability. After implementing changes to your practice that will increase revenue, it is time to manage expenses.

Focus your cost cutting attention on expenses that meet two important criteria:

1. Costs that you can control
2. Costs that are worth your time

If you recently purchased your practice, one of your largest payments each month is likely to the bank (or the seller). While this is definitely a significant cost, it is not one you can easily influence. By the same token, shopping around for a new landscaping company that may save you $25 per month is not likely the best use of your time.

Two of the largest costs in your practice, both of which you can influence, are the cost of goods sold and staff costs. Not coincidently, these are two of the most commonly undermanaged components of veterinary practices.

Cost of Goods Sold

A prerequisite to managing your cost of goods sold is inventory management. Use your practice management software to track quantities of drugs you sell and medical supplies you use in the hospital. The amount of money spent on inventory as well as other cost of goods sold items is second only to the amount spent on payroll. Despite this, many practices are not using the practice management software to its full potential. If you cannot print out an inventory report that shows the dollars of inventory you have on the shelves, there is opportunity for better inventory management.

When inventory is well-managed, the reports from your practice management software provide valuable sales information to help determine the order quantities and frequency to keep your inventory to a minimum. A strong inventory system also minimizes missed charges and shrinkage when the entire staff understands their role in inventory management.

According to AAHA’s Financial & Productivity Pulsepoints - Fifth Edition, the median value for drugs and medical supplies expense as a percent of total income is 14.4 percent.

To put that into perspective, in a $1 million dollar practice, the median value for drugs and medical supplies would be $144,000. If that practice is running at 18.4 percent, the amount spent on drugs and medical supplies is $184,000, a difference of $40,000!

Consider these tips when building a strong inventory management system for your practice:

• Perform a complete physical inventory count at least once per year.
• Perform cycle counts of high-dollar, high-volume inventory more frequently. Heartworm and Flea/Tick preventative are good candidates here.
• Avoid carrying many brands of the same product.
• Assign responsibility of inventory management to one detail-oriented staff member. This person must want the responsibility and have the respect of the entire staff to be successful.
• Avoid carrying products that you don’t regularly prescribe. These can be options for your own online store through your website.

Staff Costs

Staff costs are the number one expense in a veterinary practice. Certainly how these costs are managed have a tremendous impact on the financial condition of the practice. For purposes of management, we will focus on non-DVM staff costs. Per AAHA, the median value for non-DVM salary expense as a percentage of total revenue is 21 percent. This percentage accounts only for salaries, employer’s share of payroll taxes and benefits are not included.

This percentage will vary depending on your practice’s mix of services and products offered. For instance, a practice with significant boarding may have higher salary expense than a practice with no boarding and significant food and product sales. Because of these differences, a reasonable range of 19-23 percent is recommended.

Keep in mind that the above median and recommended range does not include benefits such as medical insurance, retirement plan, uniform allowance, CPE, and other benefits. If your staff salaries are at 23 percent, there is not much available for benefits. Ideally, total compensation including benefits would not exceed 25 percent of total revenue.

If your practice is significantly above those percentages for staff pay, compare your pay rates to industry averages. AAHA’s Compensation & Benefits – Fifth Edition can be a good tool to help here.

Make sure you are utilizing your staff fully. Are reminders being sent out? Are follow up phone calls being made? Are recommendations for services being followed through as appropriate? Is inventory being properly managed?

If the answer to these questions is no, it is time to address these issues. Once you have done that and staff costs are still too high, more drastic steps may be warranted. Divide your team into the groups that make up your practice (i.e. client care specialists, assistants, technicians, kennel) and grade them. List them by group starting with the best grade down to the worst. Ask yourself, if the person at 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.

For perspective, a $1 million dollar practice with staff salary of 28 percent plus 3percent (median per AAHA) in benefits spends $310,000 in total compensation. Compare this to 21 percent for staff salary and 3 percent for benefits, or $240,000 in total compensation. This represents a difference of $70,000! For most practices, this additional spending on salary causes significant cash flow problems and needs to be addressed.

Advertising Costs

One other cost that deserves our attention is advertising. In our current economy, the first reaction by many is to stop spending altogether. One area where this is not recommended is in advertising. If you are seeing fewer patients this year than last, you don’t want to further that trend. Rather than cutting your advertising budget across the board, analyze the results of your advertising program and consider reallocating your money.

Print out the referral report from your practice management software to see where you are getting your new clients. For most practices, number one and two on the list are existing client referrals and your location/sign. Despite this, many practices spend significant money on printed yellow pages advertising. Consider how much you spent on this form of advertising during the previous 12 months and compare it to the number of new clients you received from it.

One practice I worked with calculated they had paid $400 per new client received from the yellow pages. That was NOT a good use of advertising dollars. That money would have been better spent on a new sign in front of the practice. Creating incentive programs for existing clients to recommend their friends and family is much less expensive and it causes clients more bonded to your practice.

Management of your costs vs. cutting costs is recommended and can lead to increased profitability despite the current economic environment.

Jason L.Castner, CPA, CVA leads the veterinary consulting division of Lacher McDonald, & Co., CPAs and 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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