ABSTRACT: This article introduces basic concepts on the costs involved in running a veterinary practice and the difference between revenue and cash. It introduces concepts of fixed and variable costs and illustrates what some of these are for the reader. It introduces the importance of cash collection and the hazards that might arise from confusing revenue with cash collection.

Introduction

It is everyone’s responsibility to ensure that a practice exists profitably. Whether this is a large animal, small animal or mixed practice; or whether it is a private, university or charity practice. This is in our own interests (our jobs!), and in the interests of the patients and clients we look after. Only a profitable and sustainable practice can invest in new and up-to-date equipment, training and the best staff.

A practice’s profitability is basically defined as whatever is left when you subtract all the practice’s expenditure from the revenue (sales) it generates. This article is designed as an introduction to help nurses of whatever level, who have not had much exposure to what costs are involved in running a veterinary practice, to understand better where all the money goes.

Poor cost control wastes your clients’ expenditure (or donations or university grants) that could otherwise be used to improve the practice. As it is everyone’s responsibility to ensure that a practice exists profitably, it follows that it is everyone’s responsibility to know what costs a practice faces, what effect those expenses have and the consequence of poor control of expenditure.

This article is designed as no more than an introduction to financial cost control for nurses who haven’t previously considered their role in their practice’s profitability.

High cost of doing nothing

The first thing to understand is that some costs your practice has are dependent on how busy it is and some exist regardless of how many clients or patients you see.

Even before the day begins, costs exist for your practice. If your practice has a cost which doesn’t change regardless of how busy the practice is, this is known as a ‘fixed cost’. Examples of fixed costs would include rent for the practice premises, business rates (a tax on the practice premises), practice buildings and professional insurance and bank loans for the purchase of equipment.

Once the practice opens up, it starts increasing its costs: electricity, gas and telephones. Once it starts seeing clients, these begin to escalate: patient medication, laboratory tests and postage. Costs that change as the practice is open and working – and are largely dependent on how busy the practice is – are known as ‘variable costs’.

Salaries are often referred to by accountants as variable costs, but most practice managers know these are actually fixed costs and treat them as such.

It is important for a practice to know its fixed costs as these collectively determine the practice’s ‘break-even point’. The break-even point is how much revenue a practice must generate to pay for its fixed costs plus its variable costs. After this point, the practice can ostensibly become profitable, depending on how' well any revenue above the break-even point exceeds the variable costs of running the practice (Figure 1).

Figure 1: Simple Break-Even Analysis – Revised – 6.11

Therefore, just because your practice isn’t seeing clients, it doesn’t mean that it isn’t still costing a great deal to keep the it open. However, even when your practice is busy, it doesn’t necessarily mean that it is generating a lot of profit, as this depends on how high its fixed costs are and how the additional revenue generation matches, or exceeds, the variable costs.

The cost centres we tend to use in practice are split between staff, stock and overheads (sometimes referred to as facilities or premises costs). Wages are often split between vet and support staff costs. Stock will refer to supplies your practice buys in and either re-sells or uses directly in the provision of a service, so your wholesaler supplying vaccines and needles and syringes would come under this cost heading, but a CPD supplier would not (this would come under employee costs).

Each of these cost headings forms a percentage of the practices income and they are called cost ratios. So more specifically, each will be known as staff cost ratio, stock cost ratio and overheads cost ratio. As each practice is different and of different size, it doesn’t matter how much a practice spends on stock, only how much it spends as a ratio (percentage) of its income.

It is important to categorise costs, as each practice’s expenditure is finite. When budgeting, your practice can look at best- practice tables supplied by third-party management information suppliers to gauge its own effectiveness in cost control in certain areas. Because your practice knows how much it spends in each cost centre, it can budget accordingly to set revenue expectations or to further control costs if it needs to.

Difference between cash and revenue

Cash flow is the amount that your practice actually collects (cash) in excess of what it pays out. This is often different from revenue and expenditure and its effect is very different in some practices compared to others.

Most of the fixed costs that we discussed in the first section are also ongoing current cash out-flows – they have to be paid for in the month that the cost is registered.

Frequently, many of the variable costs come with credit attached. This credit can vary from seven to 30 days or longer. Most of the veterinary wholesalers, from whom we buy the majority of our supplies, offer credit of between 20 and 50 days, depending on when you make your purchase.

Clients who don’t pay their bills on time are known as ‘debtors’. Not all debtors are necessarily bad. ‘Bad debtors’ is a specific term reserved to refer to clients who, despite the best efforts of the practice, still won’t or can’t pay their bill. ‘Good debtors’ would include clients for whom the practice is perhaps making a direct claim from the insurance company for the payment of a large procedure; the payment for the account is still outstanding, but the practice may be assured that the insurance company will pay the client’s bill eventually.

Most companies that face trouble do so when cash flow gets out of control. Many start-up practices are loss-making to begin with, but as long as they maintain positive cash flow, then they can control the business until they are able to achieve profitability.

Many otherwise profitable businesses, including veterinary practices, have gone out of business because they lost control of their cash flow. In other words, their charges were at the right level and the amount of work they did and charged for exceeded their costs, but because they were not good at collecting money due to them from their clients, or because they spent too quickly (not keeping enough in reserve for when suppliers or the tax man needed to be paid) they were forced to go out of business.

Knowing when suppliers need to be paid and ensuring your clients settle their accounts on time is everyone’s responsibility and is important for your practice’s success.

Conclusion

Whether it is knowing your practice’s break-even point, keeping costs to a manageable level or ens
uring that expenses incurred can be met, an understanding of cost-control is vitally important for everyone in the practice, regardless of its type or your role in it. Knowledge of costs will help you reduce waste within your practice, will help your practice flourish and ensure that you are able to provide the best you can for your patients (and yourself!).

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 00073.x or Veterinary Nursing Journal Vol 26 pp 278-280

Further reading

SHERIDAN. J. and McCAFFERTY, 0.11993) The Business of Veterinary Practice. Pergamon Press, Oxford.

WILLIAMS. S. |1997| Lloyds Bank Small Business Guide 10th Edition. Penguin Books, London.

• VOL 26 • August 2011 • Veterinary Nursing Journal