Shown below is the updated graphic we’ve been sharing regularly; this includes the November 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:
Revenue and visit growth spiked a bit in November 2021 but are still less than during the peak months earlier in the year. At least some of this spike is because there was one more workday in November 2021 compared to November 2020. New client numbers again fell but at a lesser rate than in the previous month, likely due to the increase in workdays in November 2021.
Last month I discussed the need for regularly measuring practice profitability. This has always been important but particularly so now because increases in revenue and visits can give a practice a false sense of security regarding profits and most practices don’t actually know how profitable they are.
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. The profit calculation starts with either taxable income per the tax return or net income per the profit and loss statement (P&L) and typically anywhere from 5-15 adjustments need to be made to these number to derive the true operating profit figure. Common adjustments include:
- Remove the following expenses: amortization and interest on debt; these are not considered to be operating expenses.
- Replace the depreciation figure with the estimated average amount spent on equipment per year—purchasing equipment is a true operating expense of the practice but depreciation as determined by tax law is not the best estimate. A reasonable estimate in many practices is 1.5% of gross revenue. Oftentimes equipment lease payments treated as an expense must also be adjusted.
- Adjust owner compensation to represent a fair compensation for medical/surgical work—20% of personal production is a good average in a small animal practice.
- Adjust owner compensation for management work—management expense generally averages 3-5% of gross revenues—if the practice has a practice or office manager, the owner should get less than this amount as management compensation—1.5% is often used to represent owner management compensation when the practice has a manager.
- Adjust rent expense to fair market value if paid to owner at a rate greater or less than what a typical lessee would pay for a facility of this kind.
- Determine the $ amount of personal perks paid by the practice and remove this expense—perks would be items not necessary to the operation of the practice but paid by the practice generally to gain a tax advantage (examples include excess meals and entertainment, excess auto costs, swimming pool payments, personal furniture, trips to Tahiti, etc.).
- Deduct the cost associated with free services provided to the practice—family members may provide bookkeeping or other services to the practice at no charge—if the practice had to hire someone to do this work, there would be a cost involved and this should be included as an expense.
- Add back any compensation and benefits paid to family members who don’t provide equivalent services to the practice.
- Remove any true non-recurring income or expenses such as one-time insurance proceeds or expenses related to a natural disaster.
- Subtract interest and dividend income; these are not true operating revenue items.
Recalculate net income and divide the new net income by gross revenue to determine the true operating profit margin of the practice. How does this compare to other practices? Quoted ranges vary but generally 18% or above would be considered a superior profit margin, 12-13% average and below this poor.
There may be other adjustments unique to a specific practice that should be made as well. The goal is to remove any revenue or expense item that is not normal and necessary in the day-to-day operations of the practice.
The term “EBITDA” (Earnings before interest, taxes, depreciation and amortization) is an accounting term that is being used more frequently in veterinary medicine. EBITDA and profits are similar concepts with one common difference. In a profitability calculation, there is usually an expense included that is the estimate of the annual average amount spent on equipment purchase. This deduction is not made in an EBITDA calculation. The same adjustments discussed above must be made to a P&L before calculating EBITDA as are made in a profitability calculation.
An excellent resource is “The No-Lo Practice” booklet available on the VetPartners website. This document discusses the concept of profitability in more depth and include a worksheet to guide you through the calculation process.
Hope you and your family, friends, colleagues and pets all have a very happy holiday season!
➤ Download Insiders' Insights - KPI, December 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.
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