Cutting Costs To Cope With The Economic Downturn
During the first half of 2008, we in the U.S. struggled through very difficult economic times.
This year started out after a slow Christmas retail season and talk of recession. We’ve recently seen oil rocket to over $140 a barrel and the stock market fall by over 15 percent, both as of this writing.
The discussion about “if” the United States is in a recession became a moot point to most Americans.
As the price of oil has risen, the cost of everything associated with transportation has also increased--food, automobiles, appliances, raw materials, etc. The effect has been less disposable income to spend on non-essential items such as vacations, restaurants, electronics, etc.
As we all know, the companion-animal veterinarian relies on the available disposable income of our clients. Fortunately, many of our clients place the value of their pets above that of most other disposable income items. But how much longer will they do this as more and more of their paychecks go toward food and fuel?
Where is the veterinary economy heading in the next year or two? No one knows. If we did know, we all could make brilliant investments and turn our lemons into lemonade.
On the other hand, we are much better positioned to weather the storm if we use common sense and move to maintain practice income and restrict expenses and personal spending.
We as a profession are somewhat protected from economic downturns, but not completely protected. Therefore, we should be concerned but not in panic mode. The sky is not falling yet. Most practices’ primary focus should continue to be on growth and improving gross income.
Measures that should be considered are regularly evaluating and updating fees, expanding new services, charging for all services performed, increasing efficiency and increasing the re-visit rate. Most practitioners do a pretty good job of controlling expenses, so that is why we should focus on increasing revenue.
But when the economy goes sour for a period of time, one may be faced with trying to just hold on to business. As part of this, all expenses must be carefully evaluated, but the cost of labor and drugs and supplies are the two areas of greatest opportunity.
As the economy slows, a reduction in part-time employees may be needed. Maybe you can get by with just one part-time ward attendant rather than two?
Since support personnel can consume 20 percent to 22 percent of your revenue, a slight reduction in costs can add up to real savings over several months.
Consider not filling an open position or hiring part-time when a full-time position opens. Another major personnel expense is professional staff--associates. In recent years more associates have been compensated using incentive pay. According to the National Commission on Veterinary Economic Issues over 60 percent of associates are now paid using an incentive pay plan (18 percent to 25 percent of gross depending on benefits).
When associates are compensated using an incentive plan, you have some built-in protection as the economy slows. When business slows, the level of compensation is reduced or the individual finds better levels of service to make up the difference. Either way, the owner is better off.
An important concern associated with hiring a recent graduate is the rapidly rising level of student debt. The average debt for new graduates is $107,000 (JAVMA, Dec. 15, 2007). Thus new graduates must do a better job of salary negotiation, which can result in increased expense in hiring. This is another reason for using some type of incentive to allow employee incentive and employer protection.
In addition to personnel costs, the other major area of the expense side of the picture is the costs of drugs and supplies. Expense for this area can run 14 percent to 18 percent of gross income in a companion-animal practice. Therefore, control or reduction here could add to reducing the total practice annual expense.
Consider taking advantage of all discounts offered by suppliers for prompt payment of accounts (i.e.: a 1 percent reduction in cost if paid within 10 days); keeping the level of inventory at adequate levels (do not stockpile); and control the number of items in the inventory--do not have multiple brands of similar product.
In most practices, one person should be responsible for inventory control. A second should be cross-trained to fill in when the primary person is unavailable. When one experienced person is in control, the level of stock can be controlled to prevent stock outage and/or oversupply.
In addition, the inventory should be monitored for level of markup (retail items at 75 percent to 100 percent markup and prescription items at 100 percent to 150 percent markup). The turnover rate-- -number of times an item is bought and sold--should average seven to nine times per year.
Some items like per food may turn over 12 to 16 times per year while specialty items (some oncology drugs) may only turn over two or three times per year. The goal is to have the turnover rate average as high as possible so we are selling items before we are billed. This is known as using other people’s money.
In some cases, a larger drug order may make economic sense if the item is discounted enough, and the manufacturer is willing to hold the inventory in its warehouse and drop ship and bill you as you need and use the items. Be careful to not tie up too much investment in the inventory. Too much inventory will provide a poor return on investment and could result in a loss from outdated and expired product.
Inventory can be a valuable asset to practice income when carefully monitored and controlled, contributing 20 percent to 24 percent of gross revenue.
Since no one really knows what will happen with the short-term veterinary economy, it is common sense to start planning for growth at a slower rate than we have seen in the past several years.
The companion-animal profession is somewhat insulated from a real recession, due to the human/animal bond, but we need to be prepared for a possible leveling off. I believe most practices will still continue to show growth, but it will be less than seen in a healthier economy.
Take the time now to plan to more closely control personnel expenses and drug/supply expenses while continuing to expand gross income. The result will be positive for most as we move into the last half of 2008.
Dr. McCurnin, MS, Dipl. ACVS, teaches at the School of Veterinary Medicine at Louisiana State University in Baton Rouge and is a member of the Association of Veterinary Practice Management Consultants and Advisors.