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If you’re scratching your head on the “revisited” part of the title, you missed the article on “Budgeting your way through the recession,” published in The CVJ last year (Can Vet J 2009;50:301–306. In that article, I introduced the benchmarks needed for budgeting, and offered sage advice on how to improve your bottom line. Things have not changed much in 1 year — companion animal hospitals are spending as much as they did last year and mixed and large animal hospitals have improved their bottom line by 1%. There is still a lot of room for improvement and since the sluggish economy looks like it is going to drag on, you had better pick up your pencil and figure out how to make these benchmarks work for you.
Budgeting is not difficult. To make a budget work for you take what you spent last year as your maximum spending limit for this year. Then increase your fees and project how much revenue will increase for the year. If your revenue goes up and your expenses stay the same, you will make more. This over-simplified explanation is the starting point for every budget. Many practices have seen double digit increases in net incomes by following those 2 simple rules: increase fees and maintain spending.
As you delve deeper into your budget, review your expenses line-by-line and question the relevance of each factor. Wages have to increase with the cost of living but that is the only line item that has to go up. Your landlord may raise the rent, or taxes may increase, but almost every other item is more controllable than you might first think.
Three of the most common mistakes in budgeting include: playing the percentage game, getting complacent, and not sweating the small stuff. Falling into these traps will prevent you from ever gaining any ground on your expenses and also explains why net income as a percentage of gross revenue has not changed in the past 2 decades.
There is only 1 expense item that should be tracked by expenses — drugs and supplies. “Drugs and supplies” is the truest example of a variable expense. For every dollar that is spent in your hospital, roughly 30¢ is spent on drugs and supplies to deliver that service. As the number of clients increases, the amount of drugs and supplies used will increase along side. There is little opportunity for economies of scale, so it is safe to assume that drugs and supplies could and should always be a specific percentage of your gross revenue. The average drugs and supplies (expense as a percentage of gross revenue) is 26% (Table 1) and with laboratory costs thrown in, the amount increases to 28.3% for companion animal practice and 34.6% for mixed and large animal practice. That number is specific to each individual practice. Practices in western Canada tend to sell fewer pet diets than those in eastern Canada, so the drugs and supplies expense in those practices is higher. Mixed and large animal practices sell more drugs, so expenses in those practices are higher again. The percentage also depends on fees. If your practice charges half of what the neighboring practice does, your drugs and supplies expense will be a lot higher percentage. You will be paying the same for the qauze, needles, and biologics, but each bill will be less. However, as a percentage your drugs and supplies will be more.
To find out what your percentage should be, check it against the provincial and national average. If your percentage is higher, check your fees and pet diet sales (this information is available in the Practice Diagnostic Report) (1); if they fall in line with the average you may have a problem. You may have a problem with theft. The consultants call this shrinkage but it is really theft. Clients and staff may be pilfering your goods. Another problem may be inventory.
Regardless of the problem, the solution can be achieved through appropriate budgeting. To budget your drugs and supplies, take the amount from last month’s budget, subtract 2% and make this your budget for this month. For example, if you spent 25% on drugs and supplies last month, try to spend no more than 23% this month. Follow this pattern for the rest of the year and you will find creative ways to spend less. You can use up existing inventory, buy products on sale, find lower cost providers and you can ask staff to help.
Other than drugs, supplies, and lab fees, don’t manage any other expenses with percentages. The problem with using this for other things is that you fall into a dogmatic trap of spending for the sake of spending. For example, if you get 150 more clients coming through the door, you may see a 5% increase in revenue. This does not mean you need more staff, more heat, more hydro, or more rent. Some hospitals will benchmark advertising at 1%, so if revenue goes up they have no problem increasing advertising. Recognize these expenses for the dollar value that they are and try to decrease them as a percentage by increasing revenue and holding the cost constant.
As I mentioned earlier, another problem with budgeting is complacency. If there is no budget in place and nothing written down, there is no good reason why you can’t spend $30 000 on that piece of furniture you really like. You have $30 000 in the bank and you see a nice counter. Why not? Hospitals with budgets can do the math and determine a $30 000 counter replacement may be aesthetically pleasing — but financially ugly. With a budget in place, you can determine that you need to earn $30 000 more in profit to pay for the new countertop. With the increased drugs and supplies expense, you will need roughly $40 000 in revenue to pay for the counter. If each client contributes $400, you need 75 additional clients just to pay for the new counter. With this in mind, the option of resurfacing is more appealing. A budget does not stop you from making additional purchases, but using it to measure the impact from purchasing new items helps you determine whether you really need and want it, or if it is more of a whim.
The last and most important aspect of budgeting is taking the time to “sweat the small stuff.” The little stuff (items that each account for less than 3% of your revenue) make up 20% of your expenses. For the average veterinarian, these expenses amount to $72 000. Letting them run away from you can cost you (literally) thousands of dollars of net income. Historically, practices with the lowest costs control the big expenses such as drugs and supplies and wages; but also control the little things like office supplies, repair and maintenance, and advertising.
As the recession moves deeper into many provinces, take advantage of the opportunity to benchmark your expenses against the provincial and national average. You may not have much control over future revenue but you are in complete control of your expenses.
This article is provided as part of the CVMA Business Management Program, which is co-sponsored by Hill’s Pet Nutrition Canada Inc., Petsecure Insurance, Intervet Schering-Plough Animal Health, and Scotiabank.
Use of this article is limited to a single copy for personal study. Anyone interested in obtaining reprints should contact the CVMA office ( gro.vmca-amvc@nothguorbh) for additional copies or permission to use this material elsewhere.