There are 4 major categories of expenses that are driving your bottom line. These are Cost of Goods, Cost of Staff, Cost of Occupancy, and Cost of Veterinary Staff. We will look at each of these individually to see how they should match up to well-managed practice benchmarks and how they can affect your profit, along with the Value of your Practice.
Cost of Goods (COG’s): This is probably the most common expense category that kills the profit and practice value of Veterinary Practices across America. Cost of Goods includes all of your products, supplies, and services that you pay a 3rd party for and mark up to your clients, including outside lab fees, cremation/burial services, consultations with specialists etc. Industry experts say these expenses should be no more than 25% of your gross revenue and in an extremely efficient practice we will occasionally see COG’s at 20%. Unfortunately, we see way too many practices with a COG’s figure of 30 to 35%. The three primary reasons that will cause a practice’s COG’s to be this far from the industry standard are:
- Proper margins are not set for product sales and those services that involve the use of purchased products.
- A staff member or the Doctor is discounting or giving away products and services.
- Shrinkage due to the theft of products.
As a practice owner, you should take the lead in making sure that you are tracking your COG’s and be proactive to make sure they are no higher than 25% of your gross revenue.
Cost of Staff: This includes your lay staff salaries, company matched payroll taxes and any benefits, such as health insurance, pension matching etc. The well managed practice standard is 18% to 20%. We see this start creeping up when practices have employees that have been on staff for many years and owner’s seek ways to keep them adequately compensated for their longevity and loyalty. Another factor that drives this expense up is staff getting a lot of overtime. Be sure to have your staff schedules set up to minimize overtime, as it is a profit killer.
Cost of Occupancy: This includes lease payments or debt service for the Real Estate, plus property taxes, insurance, and routine repairs and maintenance. These expenses combined are typically in the 5-6% range for a well-managed practice. This figure needs to be well thought out as one enters in to a lease space or buys and existing hospital. Once the lease is set or the debt is established it is hard to change if it does not meet the 5-6% of revenue expectation.
Cost of Veterinary Staff: Whether you are paying yourself or your Associates a salary or on a production basis the veterinary compensation should fall between 20 to 23% of the Dr.’s professional production for a general practice. This includes any benefits being offered as well. Professional production does not typically include boarding, grooming and most over the counter sales on prescription refills and walk-in purchases of products. The trap some owners get into is paying an Associate a salary and them not meeting the production level required to fall into the above percentages.
Example; if you pay a Doctor $100,000 as a salary and they produce $400,000 in professional production, they should only get paid between $80,000 and $92,000 depending on their level of experience and skills. So obviously you are overpaying this Doctor between $8,000 and $20,000 which can significantly affect your bottom line.
It is important to keep a pulse on all four of these cost categories to maintain a profitable and efficient Practice and to maximize your value potential when it is time for you to sell your practice.
Richard Alker, DVM
TPSG Florida Territory