Open Your Books
This past week I taught the Finance Management module of the Webster Veterinary Management University for Emergency/Specialty Practice. As we discussed fee setting and income centers, there was one thing we all agreed upon—the practice team should understand and have a basic knowledge of the financial side of the business of veterinary medicine.
No, that doesn’t mean they need to see the Profit & Loss statement every month, but there are some general things the team should discuss so everyone understands what it takes to make the pie, and determine how big their slices will be when it comes to pay day.
First of all, they need to understand what goes into setting prices in the practice. Most team members see a product that the practice pays $6 for, and believes that if they charge $12 the practice is making a huge profit of $6. That is far from true.
In fact, it’s estimated that nearly 50 percent of the price of a product we sell is simply ordering and holding cost. So with a mark-up of double the price, we barely cover our true costs. Ordering and holding costs involve the time to check inventory and place orders, the time to check in shipments and restock, the cost of insurance to protect the goods, the price of the space to store the goods, and more.
Then you also need to factor in the fixed costs to run the practice overall, such as the rent, utilities, and more. Plus, you have to consider the costs of doctor time and staff member time. It’s common for staff members to see the bottom number on a client’s invoice, and think the practice is making that amount…they are not. In fact, if they’re calculated in a profit margin, they are only actually earning that profit amount. If they are not calculating a profit margin into everything they do, then they are lucky to break even.
The team should also be shown in general how the budget breaks out into payroll, supplies, rent, management, etc. They might be surprised to know roughly 50 percent of the budget of a practice goes to paying the staff! So if the team members want to make more money, they need to help bring in income!
We often are under the impression that the practice owner sets our salary based on our own performance. That is somewhat true, but it’s also true that they are limited to how much money the practice makes. In fact, if you are making a steady wage, and the practice is suffering due to the recession or other factors, then they are obligated to still pay you the set wage and figure out how to make up the deficit. Sometimes, unfortunately, this deficit must be made by laying off workers or reducing hours. It’s been a fact of life for many practices recently.
It’s also helpful to compare the month of this year with the same month as last year, so the team can see how the practice is actually performing against historical data. In this way, they may better understand why the practice owner and manager are stressed, or know there may be hope of a bonus or raise in the future! If we all work together to build a bigger pie, we will all come away from the table full and satisfied with our slice!