Shown below is the updated graphic we’ve been sharing regularly; this includes the October, 2021 VetSuccess revenue metrics shown on the Insiders’ Insights KPI dashboard (https://www.vhma.org/resources/insider-insights
) as well as placeholders for other related metrics that should also be reviewed regularly in order to get a full picture of what’s going on in a practice.
In order to put this in perspective, here is some of the same information over the last few months showing the overall trends:
Because many practices have been so busy, they haven’t had the time to do any kind of deep dive into the usual financial and operational metrics; it just hasn’t been a priority. As we approach the end of the year, however, and as we seem to be moving back into more normal operations, this kind of analysis needs to be focused on again, especially if the practice’s profitability or cash flow isn’t as strong as desired.
The gold standard measure of a practice’s financial success is the operating profit margin so it makes sense this calculation would be the starting point. Unfortunately, most practices don’t really know how profitable they are. Since profitability drives both cash flow and the value of a practice and is critical to understanding the operations of the practice, a regular analysis of true profitability and what drives it is essential. Other metrics are, of course, important but they need to be looked at within the context of the profitability. A practice can have strong revenue growth or a high number of new clients and still not be profitable.
The operating profit of a practice is the one single number that tells a practice owner or manager whether or not the practice is really financially successful. Unfortunately, in the last fifteen or twenty years, the number of practices with no or little value has been increasing—to the point where the Veterinary Valuation Council of VetPartners coined the term “No-LoSM practice” to describe these practices. More and more practices do not have the value that would normally have been expected. And, in almost all cases, the owners of these practices were totally unaware of the problem.
Calculating the true operating profits of a practice is, however, not a simple task. None of the standard financial or management reports a practice usually gets includes this figure. Neither the taxable income from the tax return nor the net income from the profit and loss statement represents true profitability. This doesn’t mean those reports are improperly prepared; it simply means the reports required by the IRS or accounting standards for small businesses weren’t designed to determine profitability. No one report will give a practice all of the financial information it needs to make intelligent operating decisions; unfortunately, the report that seems to be prepared least often is the one that calculates true practice profitability. Because practice owners and managers aren’t used to getting this kind of information, they generally don’t know what the true profitability of their practice is. The first time many owners realize their true profitability is when they get ready to sell and find the practice isn’t worth what they hoped.
The operating profit is the difference between the operating revenues and expenses of a practice. Operating revenue and expenses include only items normally and necessarily seen in the day-to-day operations of the practice such as fees for professional services and drugs and medical supplies expense. These items should be stated at fair market value rates. For ease of comparison with other practices, the profit margin is generally stated as a percentage—this is calculated as practice profits divided by gross revenue. Some of the items that must be calculated differently to determine operating profit versus taxable income or net income include: practice owner payments, facility and equipment rent if these items are owned by the practice owner and leased to the practice, services provided by family members to the practice, depreciation, interest on debt and perks.
Next month, we’ll dive into HOW the operating profit is calculated; if you want to get started before then, download you free copies of: “The No-Lo Practice” booklet and the “No-Lo Practice Threat Advisory Worksheet” available from: https://www.vetpartners.org/practice-valuation-resources/
These documents discuss the concept of profitability in more depth and includes a worksheet to guide you through the calculation process.Hope you and your family, friends, colleagues and pets all have a very happy Thanksgiving!
➤ Download Insiders' Insights - KPI, November 2021 Report
➤ VHMA Members can access the dashboard to drill down by region, species, and practice size filters, access the interactive KPI dashboard
Data review and commentary is provided by Karen E. Felsted, CPA, MS, DVM, CVPM, CVA of PantheraT Veterinary Management Consulting, www.PantheraT.com.