An easy way to review your P&L statement

Being able to look at the health of your practice on one financial statement and respond accordingly is empowering

Many people do not get into the veterinary industry to crunch numbers, but it is imperative to turning a profit. Photo ©BigStockPhoto.com
Many people do not get into the veterinary industry to crunch numbers, but it is imperative to turning a profit.

Sometimes it is crazy to think how many hats a practice manager wears in one week’s time—one of those being financial management. If you are like me, you can whip an IV catheter in with the best of them. Pouring over financial statements was not exactly why you wanted to get into practice management.

Even though I am now borderline addicted to diving into every report I can find, math has never been my strong suit. It must be broken down in a language that makes sense to me. It needs to have as much information as possible in one place and be easy to understand.

The financial report I use to keep a pulse on my practices and create short- and long-term management goals is the profit and loss statement, or P&L. This one statement gives you the financial health of your practice and tells the story of how you got there, which is very helpful when mapping out your practice goals. I want to share how I make reading a profit and loss statement easy to understand. It will become a tool you cannot live without!

What is a profit and loss statement?

A profit and loss statement is a financial statement summarizing the revenue (money paid to the practice by the client) and expenses (money paid by the practice to cover all bills—drugs, rent, payroll, etc.) incurred during a specified period of time—typically a month, quarter, and/or year.

Basically, your profit and loss looks at your day-to-day operating expenses. In order to have a solid profit and loss statement you can truly use as a tool to manage your practice, you have to do some foundation work. I like to break it into sections to get started:

For me the simplest way is to break your P&L into five main sections.

1) Revenue

2) Payroll

3) COG (cost of goods)

4) Facility

5) Administrative

There will be a breakdown nestled within each section. The way this happens is through your chart of accounts, which allows you to take a deeper dive into each section. I utilize the American Animal Hospital Association (AAHA) Companion Animal Chart of Accounts to classify my revenue and expenses.

Utilizing this tool provides a way for you to have a more detailed view into your finances. For example, COG will be broken down into flea/tick/heartworm, diets, vaccines, and more. All of this data will then be compiled into your profit and loss statement. Your P&L statement can be produced by your bookkeeper or you can even do it if you have access to your financial management software such as QuickBooks.

What do the numbers mean?

Don’t let all the numbers freak you out. You’ve got this! To keep it very simple, you have your revenue for the period you wish to study (monthly, quarterly, or yearly is very common), and then your expenses for the same time period. Your goal is to have a profit; or money left over at the end of that period of time. To accomplish this, you cannot spend more than the revenue you brought in. It truly is just that simple!

Manage towards a metric

For profit and loss newbies it can feel overwhelming when I throw a bunch of metrics at them at once. To simplify, I like to look at all the categories as slices of a pie. I stick to the five categories discussed above. Industry benchmarks have been helpful when it comes to breaking out expense categories and providing you with those pieces of the pie, and a percentage tied to each. There are many different benchmarks you can work from; I apply these benchmarks when coaching:

Payroll: 40 percent

COG: 20 percent

Facility costs: 10 percent

Administration: 10 percent

Profit: 20 percent

With these specific goals in mind, look at your current numbers and create micro goals that will strategically get you to your final goal. Take each piece of the pie and dive a little deeper to identify areas that are potential bleeders or where there is room for improvement.

Maybe you are starting with only three percent of your revenue left over and, worse yet, maybe you are in the negative and spending over what you are making every period. Evaluate your P&L by section.

Determine which ones need improvement and then utilize some of these ideas to start getting the train on the tracks. If your numbers are crazy, do not panic! I guarantee if you implement a few different tools and stick to it you will see improvement every single time period.

Payroll

With payroll being the largest expense we face in our practices I like to tackle this first.

The 40 percent payroll category is made up of salaries, all benefits, and payroll taxes. Approximately 20 percent will be allocated for your doctors and 20 percent for the remainder of your team (technicians, CSRs, boarding).

When evaluating your doctor payroll, if they are consistently above 20 percent this would be my action plan:

  • Determine how many patients they are seeing in one day.
  • Calculate their ACT (average client transaction).
  • Evaluate their pay structure.

It is important to make sure they are producing enough to cover what it costs to employ them.

Breaking out the 20 percent for your staffing costs, your staff wages should fall between 13 to 15 percent and your practice managers should be in the two to four percent range. This will leave a little left over for benefits and payroll taxes. I utilize a payroll calculator to stay within my benchmarks allotted, and it helps me identify if it makes sense financially to recruit more staff.

COGS

Your cost of goods sold (COGs) lands in the second largest expense spot. The 20 percent includes your inventory, lab expenses, mortuary, specialists, and medical waste.

Many practices struggle with their COGS. Some of the most common reasons I see are poor management (lack of training or understanding), the fear of running out due to back orders (especially in the current climate), the look of the shelves being full (as funny as that sounds), practice management software capabilities, or doctor demand.

Inventory should account for 15 percent of your total COGS and the remaining five percent dispersed throughout the other categories. With inventory making up the majority of the COGS, I focus heavily on ways to improve this area. Follow these three steps to get your inventory moving toward your goal.

Step 1: Create a budget

Create a weekly or monthly budget for your inventory based on your revenue. Generally, your inventory budget includes medical supplies, vaccines, pharmacy, food, and flea/tick/heartworm. Keep the ordering budget at 15 percent. Spend the first couple of weeks inputting what you typically order and see what percentage you are truly spending every week.

It’s important to create micro goals to manage toward your big picture goals; do not try to do it all at once. If you are currently at 26 percent, make a goal to get it down to 22 percent in the first month. Review your spending and then move to step two to continue the trend towards your 15 percent goal.

Step 2: ABC analysis

Create an ABC analysis to determine what products are selling, how much, and how often. From this data, you can create reorder points and reorder quantities to keep you within budget. Consolidate your products as much as possible!

Step 3: Pricing

Evaluate your current markups and margins on all of your inventory items. Don’t price yourself out of the market—stay competitive and realize a profit.

Facility

A lot of the categories in the facility section of your profit and loss are fixed costs, meaning you don’t have much control to tighten the spend. These fixed costs usually include rent, electricity, phone/internet, property taxes, and trash. Some items are competitive and you can price shop to get better rates. Examples of these would be pest control, alarm services, landscaping, and even snow removal!

Administration

Some administration costs are variable and some are fixed. There are a few you can really pay attention to and manage a little tighter:

Office subscriptions: This category includes things like your reminder service and practice management software. You can improve this area by adjusting how you send your reminders—postcards can be pricey. Train clients to use your digital reminders instead of sending postcards.

Advertising: This is an area where typically a lot of improvement can be made. Make sure your practice is up with the times. Advertising in the yellow pages is a thing of the past. Instead, ensure your Google My Business page is up to date and use social media platforms, such as LinkedIn, Facebook, and Instagram for advertising. Be sure you are tracking where your new clients are coming from so you can spend your advertising funds in the right place!

Office supplies: We all have to buy them and the costs can add up. It is not uncommon to order office supplies by convenience instead of strategy. Knowing approximately how many reams of paper, paper towels, and other supplies you go through on a monthly basis allows you to control orders and obtain the best pricing.

Credit card fees: You can improve your merchant service fees by comparing rates. Do some research and see which options are available. Merchant services aggressively compete for your business, therefore being super competitive on rates. If your credit card fees are above two percent of your revenue, this is an area you should actively try to improve.

See? Understanding the profit and loss statement can be simple! Being able to look at the health of your practice on one financial statement and respond accordingly is empowering. The impact in the practice can be profound in many ways, from pay increases to new equipment. So, even though reading and interpreting financial reporting may not come as easy to you as placing an IV catheter, it is totally achievable and you’ve got this!

Emily Shiver, CVPM, CCFP, CVBL, is a certified veterinary practice manager serving as the Florida regional director of operations for Family Vet Group. Her passion is creating and maintaining positive, successful workplace cultures, as well as helping practices increase revenue and the client experience. Shiver and her husband reside in Lakeland, Fla., with their two Patterdale terriers and a few other furry family members.

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