How Veterinary Practices Can Increase Profitability And Drive Growth
What do Toys “R” Us, Sports Authority and Blockbuster have in common? They are three respected brands that failed because they didn’t generate the profits necessary to stay in business. In fact, companies of all shapes and sizes fail. There were over 20,000 bankruptcies last year and 60% of new businesses fail within five years. Although corporations may prioritize profits more than a veterinary practice, maintaining an appropriate bottom line provides one of the greatest benefits, the ability to build an organization that represents their ideals and objectives. Although many veterinarians may consider caring for animals their top priority, a reasonable level of profits should rank high on the list. Here’s how veterinary practices can increase profitability and drive growth.
The Importance of Veterinary Practice Profitability
For veterinarians, profits are the financial benefit realized when the revenue a practice generates exceeds the expenses, costs, and taxes necessary to operate the practice. If revenues don’t exceed expenses, a practice will likely fail like the brands above.
What are those financial benefits? Readily available profits translate into increased opportunities for everyone. They allow you the flexibility to increase compensation, hire the best and brightest employees, purchase new equipment, finance a new building or remodel, expand your service offering, put more in your own pocket and more.
Further, profitability is a competitive advantage. If an expansion requires financing, a profitable practice has access to the cheapest capital. And for business owners nearing retirement and considering the sale of their practice, one that generates more profits translates into a business that’s worth more to a potential buyer.
Unfortunately, when profits are lacking, good employees leave, software and equipment upgrades are delayed and if the business stagnates, clients move on to other practices.
Veterinary Profit Margins
Depending upon the size and type of practice, typical profit margins vary widely, ranging from 10% to 25% with specialty and emergency services leading the way. But the profit margin a practice should expect depends upon a variety of factors that center around its goals. For example, are you:
- Trying to maximize your financial return?
- Looking to provide higher than average wages and benefits?
- Delivering lower-priced services?
- Donating time and services to support shelters?
Ultimately, the answer to these questions combined with your financial objectives should guide the profit margin a practice should strive to achieve.
The Importance of Goal Setting and KPIs
Defining a north star, the purpose, services and customers a practice desires to pursue will help frame the big picture goals and ultimate profitability a practice strives to achieve. But to maximize the options you define, establishing key performance indicators (KPIs) is an essential next step.
As James Cleary details in his book, Atomic Habits, there is a surprisingly narrow gap that separates the good performance from the great performance. And that narrow gap is separated by small habits and daily rituals. Establishing relevant KPIs and striving to achieve them brings attention to those tactics and makes it more likely you’ll achieve your profitability goals.
So what KPIs are important?
- Total revenue - revenues are a key component to the overall profitability of a practice. Typically, higher revenues equate to higher profits.
- Revenue by source - understanding the revenues from clinical services, boarding, pharmacy, ancillary products, grooming and more provides insights into the profits you generate by segment and identifies opportunities for revenue growth.
- Expenses compared to total revenue - knowing your revenues and the corresponding expenses by source allows you to see how much revenue you earned for every dollar of expense. This provides a variety of insights. For example, if boarding represents $100,000 in total revenue and the expenses for boarding were $25,000, the income to expense ratio is 4, which means you earned $4.00 in revenue for every dollar you spent. Tracking the ratios for each of your service areas allows you to see which ones are driving the most profits and might warrant additional investment as well as target opportunities for expense reduction.
- Inventory turnover - funding inventory requires a significant cash outlay so it’s important to measure the amount you have and how often it turns over each year. Practices should expect the inventory to turnover 4 to 5 times per year.
- Total number of transactions and average transaction charge- transactions are revenue drivers. As transactions increase, total revenue will increase along with it. But, determining the average practice transaction charge and doctor transaction charge provides additional insights.
- Total number of active clients - active clients are typically defined as those that have had any transaction in the practice in the last 12 to 18 months. Similar to total transactions, this data allows you to estimate future revenue. If numbers are dropping, it can highlight the need for an increase in follow-up and additional promotional efforts to increase that number.
- Number of new clients - a client base will inevitably change and for most practices, that means new clients are important to the growth of their business. Because of hiring challenges and the reduced hours that were common during COVID, practices may have intentionally reduced the number of new clients they took on. Nonetheless, to maintain revenue objectives, it’s important to track new clients.
- Customer satisfaction - people take pet healthcare very seriously and their satisfaction impacts their choice in veterinary practices, the reviews they may leave online and referrals that could lead to new clients. Using satisfaction surveys help identify areas of improvement and client concerns expressed by specific clients that you can address directly. In addition, surveys often lead to insights on other practice improvement areas that can lead to new service opportunities and new business.
Developing regular rituals, focusing in areas with ongoing patient safety challenges, or adding the following elements to your routine, will impact the quality of care you deliver.
The Importance of Veterinary Staff Training
Labor expenses are the single largest cost area for a practice, representing approximately 40% of total expenditures. Providing tools that veterinarians and the clinical services team, hospital managers, administrative staff, kennel workers and more, need to perform their job in the most effective manner will enrich their job and lead to productivity improvements.
This is especially important given staffing challenges, the increase in wages and the uptick in traffic to vet clinics which rose 4.5% in 2020 and an additional 6.5% in 2021, all largely driven by the pandemic.
In addition, consistent and continuous training will help all employees fine-tune their on-job and customer service skills which are essential to serving current clients, attracting new patients and ensuring the practice thrives.
The Importance of Having an Online Presence
When looking to engage with a company or service for the first time, how often do you connect with that business without first visiting their website? In fact, websites are usually the first place a potential client will learn about your practice. A well-designed website that provides details about your services and staff and includes customer reviews and testimonials, makes it more likely that a prospect will engage with your practice.
In addition, adding regular blog content that showcases your practice and covers issues in pet care and veterinary medicine further personalizes your business and allows you to connect with existing and prospective clients.
But having a website isn’t enough, it must be maintained. An outdated, slow-loading site that doesn’t work properly on a mobile device are primary reasons prospective clients leave a website and look elsewhere. Their next stop…probably your competitor.
Keep Track of Spending
Inventory represents the second largest expense next to labor for any practice. Maintaining supplies of:
- Pharmaceutical drugs
- Medicines and ointments
- Shampoos, flea and tick treatments
- Pet food
...not only result in a substantial financial outlay but when not managed properly, generate unnecessary costs. These items represent significant revenue opportunities so you can’t afford to run out but too much inventory, some of which may have passed an expiration date, is like lighting money on fire.
In fact, the largest supply expenditures for most veterinary practices are medications, including pharmaceuticals and over-the-counter drugs and pet food. Managing these higher expense areas is essential. But a common challenge for nearly all practices is managing the other 20% of expenditures, commonly known as “tail spend.” “Tail spend” is the perceived low-value spend that receives minimal attention. By implementing processes to address these lower volume purchases, there are additional cost savings opportunities. And, even though this post was published during the early days of COVID, the cost savings suggestions still apply today.
United Ad Label
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