Veterinary Practice Financial Fitness

Doyle Watson, DVM | Simmons & Associates Southeast, Inc. | Published: Issue 1 2024

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It is that time of year when many people assess their personal and professional lives and expectations, set goals, and decide what to focus on to be healthy, happy, and successful in the year ahead. 

As with your personal health, an owner or manager of a veterinary practice should conduct periodic examinations. Is the business operating to its maximum potential? Is it serving the community and clientele to the best of its ability? Is it profiting well above the level to cover all true operating expenses?

To answer these questions, let’s examine what you should see in a well-managed small animal practice in the Southeast. Of course, these statistics will vary depending on location.

Three Major Expenses:

COGS/Supplies
In days gone by, the ideal percentage hovered around 20%, but not today. In the Southeast, it seems that the general range is now around 25%. Significant excess can be because of poor management and overstock, insufficient markup, or possibly theft. 

Rent
Although the landlord and practice owner are often the same person, the business must pay the landlord, so the practice should expense “fair market rent”. As to fair market rent, this can be determined by a local market analysis of rent per square foot or by looking at a return on investment to the landlord. A reasonable return on investment in this economy is 8% to 11% of the real estate value. Regardless, ideal rent expense should not exceed 5% of gross revenues. Additionally, the real estate value should not exceed gross revenues. If the rent is too high, there comes a point when the tenant cannot afford the rent, and the expense eventually becomes inordinate for the practice size – resulting in a negative effect on profit. Realistically, the only remedy in this situation is to increase revenues since the value of the real estate is relatively stable. 

Support Staff
The problems we notice with low-profit practices are either low support staff expenses causing doctors to perform staff duties or practices that are overstaffed with ineffective operating procedures. These are big mistakes if your goal is to maximize profit. Reasonable support staff wages typically hover around 20%; though in higher quality practices, we see around 25%.  

Production

Average Transaction Charge(ATC)
Although location and practice culture-dependent, a reasonable target should exceed $150. This will be considerably greater in metropolitan areas. 

Average Daily Transactions
Ad language reflects culture. Are you a fun group that works hard? Add some fun – or puns! Are you highly focused on a particular aspect of service? Discuss why your team has committed to this and why your clients love it. 

Doctor Production
Again, this is location- and practice culture-dependent; however, we see that most experienced doctors are easily able to exceed $500K in annual production. It is not uncommon for this figure to exceed $1M in a fine-tuned practice. 

Profit/Earnings
This is the figure remaining from revenues after all real and necessary operating expenses are met, including a fair market rent and salary for the medical director. In today’s world, a small animal practice does not commonly produce profit until revenue exceeds $500K. There is a threshold of expenses to be met before profit begins to appear on the bottom line. Although 15% to 20% is a healthy target, this is not typically reached until revenues exceed $1M. Profit or earnings is your “EBITDA” (Earnings Before Interest, Income Taxes, Depreciation, and Amortization).

  • How is Revenue trending? If growing, is it due to fee increases, transaction increases, diagnostic workups, or what?
  • Are we retaining clients and obtaining new clients?
  • Have we identified and eliminated personal and/or one-time expenditures? Considering that a general small animal practice will typically appraise and sell for four to six times EBITDA; for every dollar spent to avoid taxes, four to six dollars are lost in practice value. 
  • Is our doctor coverage sufficient? Having a part-time associate on a consistent basis will be more beneficial than utilizing occasional relief doctors. Preferably pay associate doctors on production rather than a flat salary or daily rate. This will motivate higher production.

Cash Flow
Many accountants and practice appraisers distinguish between EBITDA and Adjusted Net Cash Flow. This is the figure available for the owner to pull from the practice for personal, discretionary use. I like to see this hovering around 30% of gross in a well-managed practice. 

Operating Expenses
The typical small animal practice will operate on about 80% to 85% of gross after all necessary expenses including supplies, staffing, and rent.

Although I have not intended to provide a full management course, these are examples of easily identifiable indexes that could have a tremendous effect on your practice’s financial health. The best way to know how your practice truly performs is to have a formal practice valuation by a veterinary-specific practice appraiser, someone who is not only aware of veterinary practice management benchmarks, but who is also involved in practice transitions, helping sellers sell and buyers buy. An appraiser with transactional experience should be able to provide a full-scope examination of not just the profitability but salability of your practice.

Brought to you by:

Doyle Watson, DVM

(800) 333-1984
southeast@simmonsinc.com
simmonsinc.com

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