ABSTRACT: This article continues an introduction into the costs of running a veterinary practice, detailing specific hidden costs and owner-specific costs. It introduces the concept of leakage' and steps that individual nurses can take to help ensure costs are kept proportionate.

Introduction

Last month we discussed key financial concepts and how they related to you and your job. Now we become a bit more specific and scratch the surface on specific costs and what you and your owner can expect from practice.

You don’t have to be an owner, practice manager or head nurse to be affected by how financially successful your practice is. Your wages, the ability of the practice to invest in training and new equipment, and the ability for the practice to make special offers to worthwhile causes – discounts to a local charity, for instance – are all dependent on its financial health.

It is important to remember throughout that all costs are relative. The effect of 610 to someone earning £100 is twice what it would be to someone earning £200. By similar token, the effects of poor cost control become much more significant in small practices.

Some ‘invisible’ costs

Many of the costs involved in running a practice are ‘invisible’, but are no less important or significant because of it. When considering the costs involved in running a practice, it is natural to consider the wages of the staff, the cost of the drugs and supplies, and even the rent and the utilities.

However, there are many costs which are not generally shared, often because they are personal; but also because they aren’t really relevant to the day-to-day responsibilities of being a nurse. An awareness of these costs may help you understand decisions that are being made and your role in helping the practice grow and develop.

For the purpose of simplicity, we shall break these costs into two categories: practice costs and ownership costs. Practice costs include business rates, employer’s national insurance contribution (including NIC on benefits) and banking fees, to name just a few.

Business rates are a form of taxation levelled on businesses, including veterinary practices. They are similar to the council tax you pay at home, only at a level that would be unsustainable by an individual.

Business rates, or Uniform Business Rates (UBR) to give them their correct term, are taxed at 40.7 per cent of monthly rental value for the property (or the equivalent rental value if the property were owned) based on the value of the property in April 2008. Therefore, if your own rates were due at the same level, you would be liable for £407 tax each and every month for a flat you rented for £1,000 a month.

There is another tax that the practice has to pay each month and which you never see, but one that affects you directly – employers national insurance contributions. When you look at your payslip each month, you will see that a deduction has been made for national insurance (NI); what you don’t see is that the practice is liable for another 13.8  per cent of your salary to be paid in your name directly to the Government.

What this means in effect is that your true cost’ to the practice is actually 13.8 per cent more than your gross (total) annual salary. In addition, if you receive any benefits, such as private healthcare, the practice has to make a contribution of 13.8  per cent of the value of this benefit as a tax as well. 

 Taxes are, of course, inevitable and someone has to pay for the services the Government provides, but you should be aware of what these hidden costs are, and how they affect the costs of running your practice. While we are on the subject of easy targets – the Government and taxes – let’s shift to another easy target: banks. Each bank is different and has different scales of charging and various services which are charged for and those that are complimentary; however, all banks charge for handling money (some building societies still make no charge for handling cash).

Most of us are aware that the practice (called the merchant in this sense) is charged money when a client pays with a credit or debit card. But how are these charges calculated? The fees payable on each transaction are variable depending on the deal that the practice has negotiated.

Credit cards take a percentage of the transaction total (often 1- 3%) while debit cards take a straight fee each time you make a transaction (often 12 – 20p). Therefore, if your rates are 2.5 per cent for credit cards and 15p for a debit card, and you discharge a patient with a £300 bill and they pay for it on credit card it costs the practice £7.50 where it would have only cost the practice 15p if the client had used his or her debit card. On top of all this, there will be the rental fee for the credit card terminal and, generally, a rental fee for the telephone line.

Even if they had paid by cheque or cash, there would have been a cost to the practice. Business banking is different to personal banking. With business banking, the bank charges the practice to pay cheques and money in – usually a percentage of the cash and a set fee per cheque – and it charges the practice to withdraw money as well. Furthermore, banks often require regular contact with their small business advisor or ‘relationship manager’, for which many banks charge.

These are just three examples of invisible costs directly related to running the practice. There are many others, such as recruitment, practice compliance costs and domestic and clinical waste removal.

There are also owner-related costs which, if nothing else, must be appreciated. The partners in your practice will have had to take out quite considerable loans. These loans need to be repaid from the profits the practice earns and these loans are often secured with the partner’s house. Therefore, a sustained drop in profits (not keeping costs below and in proportion to revenue) could mean that the partner could lose his or her house.

Don’t think it could happen in veterinary practice? It can and it has. Now you may know why the practice owner may look so worried when it is so quiet for so long.

There is so much that goes into running a practice that exists below the surface. The costs of staff, drugs and overheads may be the largest components, but these other hidden costs can be just as significant, harder to control and can be the difference between your practice prospering and it struggling.

Using what you know to help

It is important to differentiate between profit and profitability. Profit, as discussed in Part 1 (VNJ August 2011, 26: 282) is what remains when all the costs are subtracted from all the revenue. Profitability is ensuring that the practice’s costs are correctly balanced relative to its revenue. A practice with poor profitability can still be profitable, but it runs the risk of having its costs eclipse any future growth.

One way in which you can help ensure that costs are controlled in their proper ratio, is to ensure that charges for work are made completely and in full.

‘Leakage’ is where a fee is not charged for an item despite its being performed and accepted by the client. For instance, when a lab test is performed which the client was expecting, but is never charged. This type of leakage is surprisingly common, especially in small animal practice, but has profitability implications.

While the overall visit by the client may have been profitable, the costs as a proportion of the transaction are increased, thereby reducing the profitability.

Summary

Veter
inary practices are businesses, and while we must not forget the reasons why we are here – to provide full-service healthcare for animals [pets or livestock] and their owners – it is also our duty to help ensure that the practice exists on a financially sound footing and with reasonable profitability. But what is ‘reasonable’?

Reasonable means that the owner’s investment, less all their direct costs, must exceed the rate of return that they would be able to achieve on a similarly risky (i.e. not very) investment, such as a long-term government bond (gilt), or otherwise why wouldn’t the practice owner just work as a vet and invest his money?

Practice has to work for everyone. Your reward for your part should be continued wage prosperity, a practice that continues to re invest in itself, and the job satisfaction of having a safe place to work and one that makes a difference. 

Author

Ray Girotti MBA CVPM

Ray is the hospital manager for North Downs Specialist Referrals, a multi-disciplinary referral centre in Surrey. He has an MBA and the Certificate in Veterinary Practice Management (CVPM). He has over 15 years experience in veterinary practice management and worked in and around veterinary practice for over eight years prior to this in a variety of nursing and commercial roles.

To cite this article use either

DOI: 10.1111/j 2045-0648.2011.00082.x or Veterinary Nursing Journal Vol 26 pp 327-329

Further reading

CARTER. S and JONES-EVANS. D 120001 Enterprise and Small Business Prentice Hall. Harrow WILLIAMS. S 119971 Lloyds Bank Small Business Guide 10th Edition. Penguin Books, London 

KAPLAN, R and ATKINSON, A [1998] Advanced Management Accounting Prentice Hall. Upper Saddle River

PARKINSON. A [1997] Managerial Finance Bulterworth-Hememann. Oxford

• VOL 26 • September 2011 • Veterinary Nursing Journal