Okc 2012 business workshop handout

AAEP Business Education Workshop

Oklahoma City

July 2012

Strategy for the Day

• Explain elements involved in creating and sustaining profitability

• Goal Setting• Metrics• Tools

Tactics for Today

• Pricing• Inventory• Compensation• Accounts Receivable

What Is The Only Constant In Our Businesses?

CHANGE!

Jack Welch, former CEO of GE

“If the rate of change inside your organization is less than the rate of change outside your organization,

THE END IS NEAR.”

Practice Management Rules Prior to September 2008

• Work hard for long hours• Raise fees once a year• Desired Results

– Increase Gross– Keep up with inflation – Sustain profitability

New Practice Management Rules

• The old rules no longer work– Fewer subscribe to long hard hour

strategy (probably a good thing)• Work life choices

– Many markets will not tolerate fee increases necessary to sustain profitability

• Demand Elasticity

What Do We Do Now?

• Manage the top line aggressively with selective fee increases, new services and marketing

• Manage the bottom line aggressively by setting financial objectives and then managing EVERY line on your income statement to reach your objective.

Define Your Objective

• Not lose too much money?• Break even?

– “profit or cash”• Make Money?

– If so, how much?• Have an exit strategy?

– What does that look like

Measure Your Progress Toward YOUR Objective

“I don’t know where to start!”• Sick Horse-lab work• Sick Practice-financial statements

Financial Statements

• Lab work for your practice• No Normals!• Develop your own.

Tax Accounting

• Accounting used to provide information and analysis to the IRS

Managerial accounting

– Accounting used to provide information and analyses to managers within the organization to assist them in decision making.

Financial Statements We Will Use Today

• Profit and Loss / Income Statement• Cash Flow Statement• Balance Sheet

Profit and Loss Statements

P & L Statement

A ‘snapshot’ summary of financial activities over a period of time • Revenues earned from operations• Expenses incurred to generate the

revenues

For the period ended December 31, 20xx

REVENUESField Service Revenues 618,695Surgery Service Revenues 270,340Medicine Service Revenues 349,422

Total Veterinary Service Revenues 1,238,457

Pharmacy Revenues 351,553Laboratory Revenues 265,890

Total Other Service Revenues 617,443

Total Revenues From Operations 1,855,900

EXPENSESLab Fees 12,500Drugs and Medical Supplies Expense 225,253Office Supplies Expense 14,286Utilities 10,982Maintenance and Repairs Expense 11,797Mileage& Vehicle Expenses 56,046Rent Expense 120,000

Total Operating Expenses 450,864

Compensation – Veterinarian 367,323Compensation – Staff 332,872Payroll Taxes 83,166Benefits Expense 80,776

Total Employee Expenses 864,137

Dues & Licenses ‐ Veterinary Prof. Dues 1,700Meals and Entertainment Expense 1,098Continuing Education Expenses 3,495Collection Related Expenses 42,009Depreciation Expense 44,398

Total Other Expenses 92,700

Total Expenses 1,407,701

Net Income/(Loss) 448,199

RevenuesOn the top

ExpensesOn the bottom

Net Income/Loss

P & L RevenuesFor the period ended December 31, 20xx

Field Service Revenues 618,695Surgery Service Revenues 270,340Medicine Service Revenues 349,422

Total Veterinary Service Revenues 1,238,457

Pharmacy Revenues 351,553Laboratory Revenues 265,890

Total Other Service Revenues 617,443

Total Revenues From Operations $ 1,855,900

P & L ExpensesFor the period ended December 31, 20xx

EXPENSESLab Fees 12,500Drugs and Medical Supplies Expense 225,253Office Supplies Expense 14,286Utilities 10,982Maintenance and Repairs Expense 11,797Mileage& Vehicle Expenses 56,046Rent Expense 120,000

Total Operating Expenses 450,864

Compensation – Veterinarian 367,323Compensation – Staff 332,872Payroll Taxes 83,166Benefits Expense 80,776

Total Employee Expenses 864,137

Dues & Licenses ‐ Veterinary Prof. Dues 1,700Meals and Entertainment Expense 1,098Continuing Education Expenses 3,495Collection Related Expenses 42,009Depreciation Expense 44,398

Total Other Expenses $ 92,700 Total Expenses $ 1,407,701

P & L Net IncomeFor the period ended December 31, 20xx

Total Revenues From Operations $ 1,855,900Total Expenses $ 1,407,701Net Income/(Loss) $ 448,199

Questions on Profit and Loss Statements?

Cash Flow Statements

I’m Going to Fire My Accountant

HE SAYS I MADE A PROFIT…THERE IS NO MONEY IN THE BANK!

Cash Flow Statements provide financial information about cash receipts and cash payments over a specific period of time.

• Where did cash come from during a specific period?

• What cash was used during the period?

• What was the change in the cash balance during the period?

Cash flows from operating activitiesCash receipts from operating activities $125,000

Cash payments for operating activities (62,000)

Net cash provided by operating activities 63,000

XYZ Equine ClinicStatement of Cash Flows For the Month Ending 8/31/2010

Cash flow from investing activitiesPurchased diagnostic equipment (21,000)

Purchased office equipment (3,000)

Net cash used by investing activities (24,000)

Cash flows from financing activitiesIssued note payable 5,000

Payment of dividend (owner draw) (2,000)

Cash flows from operating activitiesCash receipts from operating activities $125,000

Cash payments for operating activities (62,000)

Net cash provided by operating activities 63,000

Cash flow from investing activitiesPurchased diagnostic equipment (21,000)

Purchased office equipment (3,000)

Net cash used by investing activities (24,000)

Cash flows from financing activitiesIssued note payable 5,000

Payment of dividend (owner draw) (2,000)

Net cash provided by financing activities 3000

Net increase in cash 2,600

Cash at beginning of period 0

Cash at end of period $44,600

Questions on Cash Flow Statements?

Balance Sheet

Balance SheetNet Worth of Your Business

A ‘snapshot’ of your business at a point in time

1. Records the assets owned by the business

2. Records liabilities, the claims against those assets

The ‘accounting equation’ defines a balance sheet

Assets = Liabilities + Owner’s Equity

ASSETS

on the left side of the equation

LIABILITIES AND OWNER’S EQUITY

On the right side of the equation

Andrew R Clark, DVM, MBA

Why Is It Called a BALANCE sheet?Because it must BALANCE

Algebra Review Quiz – definition of an equationA = B + C

1. B and C together are pretty close to A2. B and C together just about equal A3. B and C together actually equal A

therefore the equation BALANCES

Why Is It Called a BALANCE sheet?Because it must BALANCE

If you only learn one thing today, learn to confirm that your balance sheet

balances!!!!

Assets

LiabilitiesOwners Equity

Assets –the things your practice owns

• Two Categories of Assets– Current Assets– Long Term Assets

Current Assets-can be converted to cash in one year

• Cash• Accounts Receivable• Notes Receivable (due within one year)• Inventory

Andrew R Clark, DVM MBA

Long Term Assets-everything else owned by the practice (converted to cash in more than one year)

– Property– Plant– Good Will– Equipment– Note on a buy-in (the portion not due in 1

Liabilities –What your practice owes

• Two Categories of Liabilities– Current Liabilities– Long Term Liabilities

Current Liabilities – obligations that are due in less than a year

– Accounts Payable • Includes mortgage and auto payments due

within a year– Accrued Wages– Accrued Taxes

Long Term Liabilities – obligations that are due in greater than a year

– Mortgages (the portion not due in 1 year)– Vehicle Payments (the portion not due in 1

year)– Etc

Owner’s Equity

– Think of it as:• what the practice owes the owner• Or what the owner owes the practioce

Owner’s Equity

Algebra Review• Begin with the accounting equation

Assets = Liabilities + Owner’s Equity

Owner’s Equity

Assets = Liabilities + Owner’s EquityAssets - Liabilities = Owner’s Equity

Beware OfNegative Owner’s Equity

• If your balance sheet shows a negative number for owner’s equity…– You have overdrawn the account!– You are taking more out than the practice

is generating.

Questions?

Questions on Balance Sheets?

CompassionBreak Time

AAEP Business Workshop Sessions

• Pricing• Accounts Receivable• Inventory• Compensation • Summary Session

Objectives for Today• Look at your financial statements for

opportunities to make your practice more profitable

• Hot Sheet• Break out Groups• Action Items• My objective for you

– Return to your practice with action items– MAKE A DIFFERENCE

What Generates Profit?

• Veterinary Medicine Generates Gross Revenue

• Management Strategy and Execution Generates Profit!!!

Strategy

• If you create the right strategy you can almost always get to the right number

• If you start with numbers you will almost never get to the right strategy

• What is your objective?• What is necessary to achieve your objective?

Execution

• Small Changes Have Big Impact– Explore the profit drivers / leakers in an

income statement• Small changes that repeat have a

tremendous impact to the bottom line, positive or negative

Reference

The 1% Difference; Kelly Lyons

Sample Financials

• Data is based on a hypothetical $4mm practice

• Assumptions– 10 doctor practice– 4 veterinarian / owners– Retail margin 50%

Income Statement

Revenue $1,000 % of Sales

Fee from Services $3,200

Retail Sales $800

Total Revenue $4,000

Cost of Professional Services

Retail COGS $400 10.00%

Drugs & Professional Supplies $440 11.00%

Discounts Taken ‐$10 ‐0.25%

Laboratory & Imaging Costs $70 1.75%

Animal Housing & Husbandry Costs $52 1.30%

Gross profit $3,048 76.20%

Expenses

Payroll & Employee Costs $1,864 46.60%

Administrative Expenses $181 4.50%

Fee Collection Costs $48 1.20%

Facility & Equipment Costs $452 11.30%

$2,545 63.60%

EBITDA $503 12.60%

•Pricing• Accounts Receivable• Inventory• Compensation • Summary Session

Paths to Increasing Profitability

• Increase Revenue– Fees– Volume– Pharmacy

• Reduce Operating Expenses• Reduce Product Costs

Cost of Providing a Service

There are 3 components of cost to provide a service

1. People Costs2. Process Costs3. Technology Costs

Cost of Providing a Service

There are 6 places to incur those three costs

1. Being prepared to provide the service2. Providing the service3. Cleaning up after providing the service4. Communication before and after

providing the service5. Record Keeping6. Compliance

3 X 6 = 18

• 3 ways to incur costs and six opportunities to incur those three costs

• 18 opportunities to incur cost to provide a service to your clients

But Wait

• You have not made a profit• (ROI)• Need to add ROI to the sum of the 18

sources

Fees Must Include1. People Costs

(Including profit)2. Process Costs

(Including profit)3. Technology Costs

(Including profit)

1. Prepare to provide2. Provide The Service3. Clean up after

providing4. Record Keeping5. Communication6. Compliance

Example

• Purchase Exam • Not the farm call, radiology, lab etc.

People Costs

• Prepare to Provide the service– Receptionist 30 minutes @ $25/hour to

make the appointment, collect information and prepare paperwork…

– Subtotal $12.50

People Costs

• Provide The Service (purchase exam)– Technician 1 hour @

$25/hour– Veterinarian 1 hour @

300/hour – Subtotal $325

People Costs

• Clean Up after Providing The Service– Technician 0.25 Hour @ $25/hour– Subtotal $6.25

People Costs• Communication

– Veterinarian 45 minutes @ $300/hour• Conversation with buyer 15 minutes• Conversation with seller 10 minutes• Conversation with trainer or agent 10 minutes• Conversation with one other veterinarian 10 minutes

• Subtotal $225

People Costs• Reporting

– Veterinarian @ 300/hour• Create purchase exam report 20 minutes

• Subtotal $100

People Costs

• Compliance $0.00

Total People Costs

• Prepare to Provide Service $ 12.50• Provide Service $325.00• Clean Up after Providing $ 6.25• Communication $225.00• Record Keeping $100.00• Compliance $ 0.00• Total People Costs $668.75

Do You Want To Make A Profit?

• Establish your ROI target 15% for this example

• Add ROI to your total cost• Total Cost $668.75 • ROI @ 15% $100.31• Appropriate Fee

$769.06

Increased Fees

– Demand Elasticity– Pricing Strategies

INCREASE FEES 5%

Revenue % of Sales Increase Fees % of Sales

Fee from Services $3,200 5.00% $3,360

Retail Sales $800 $800

Total Revenue $4,000 $4,160

Retail COGS $400 10.00% $400 9.60%

Drugs & Professional Supplies $440 11.00% $440 10.60%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.20%

Laboratory & Imaging Costs $70 1.75% $70 1.70%

Animal Housing & Husbandry Costs $52 1.30% $52 1.30%

Gross profit $3,048 76.20% $3,208 77.10%

Expenses

Payroll & Employee Costs $1,864 46.60% $1,864 44.80%

Administrative Expenses $181 4.50% $181 4.30%

Fee Collection Costs $48 1.20% $48 1.20%

Facility & Equipment Costs $452 11.30% $452 10.90%

$2,545 63.60% $2,545 61.20%

EBITDA $503 12.60% $663 15.90%

Change to EBITDA 31.80%

Increase Fees 5%

Increase Fees

• Greatest single impact to the bottom line

• Can you increase fees?• What is the danger of increasing fees

too much?• How often do you increase fee

schedules?• Ten Bucket Strategy

Increase Fees

• If you successfully increase fees 5% have you;– Impacted the business 5%, or

–Impacted the business >31%– Does staff and other stakeholders

understand the magnitude of the impact?

DISCOUNT FEES 5%

Fee from Services $3,200 ‐5.00% $3,040

Retail COGS $400 10.00% $400 9.60%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.20%

Gross profit $3,048 76.20% $2,888 69.40%

Expenses

$2,545 63.60% $2,545 61.20%

EBITDA $503 12.60% $343 8.30%

Change to EBITDA ‐31.80%

Discount Fees 5%

Decrease Fees

• If you decrease fees 5% have you;A. Impacted the business -5%, or

B. Impacted the business >-31%– Does staff and other stakeholders

understand the magnitude of the impact?

Discounting

• In this example the multiplier effect is 6 to 1– Every 1% of discount has a -6 times multiplier to

the bottom line if nothing else changes• Do those influencing pricing understand the

impact of discounting?

Increase Volume 5%...

Retail COGS $400 10.00% $400 11.10%

Drugs & Professional Supplies $440 11.00% 5.00% $462 10.60%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.20%

Gross profit $3,048 76.20% $3,186 76.60%

Expenses

$2,545 63.60% $2,545 61.20%

EBITDA $503 12.60% $641 15.40%

Increase Charges Billed 5%...

No Increase in Costs

Increasing Volume…

• Can you increase volume 5% without affecting costs?

• Can the doctors in your practice bill an additional 5% in fees?

• Additional expenses for volume increase erodes the 27% multiplier effect of volume increases.

• A rule of thumb in business says “only let your expenses rise at 75% of your volume increase”

Retail COGS $400 10.00% $400 11.10%

Drugs & Professional Supplies $440 11.00% 5.00% $462 10.60%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.20%

Gross profit $3,048 76.20% $3,186 76.60%

Expenses

Payroll & Employee Costs $1,864 46.60% 3.75% $1,934 46.50%

Administrative Expenses $181 4.50% 3.75% $188 4.50%

Fee Collection Costs $48 1.20% 3.75% $50 1.20%

Facility & Equipment Costs $452 11.30% 3.75% $469 11.30%

$2,545 63.60% $2,641 63.50%

EBITDA $503 12.60% $545 13.10%

Break Out Groups

• Pricing

•Accounts Receivable• Inventory• Compensation • Summary Session

Accounts Receivable Tiradean Exercise

• Divide your annual gross production by 365– yields your daily production– 1.5 Million / 365 = $4,110

Accounts Receivable Exercise

• Divide your balance sheet accounts receivable by your daily production– Yields number of days production on the

books– $82,192 / $4,110 = 20 Days

Accounts Receivable Exercise

• Compare the number of days accounts receivable you have on the books to these equine practices (the ends of my bell shaped curve)

• 3 days on the books• 102 days on the books

Accounts Receivable

• Accounts Receivable are NOT as good as cash!

• Has your practice has ever borrowed money for any short term need?– Payroll– Taxes– Etc

Accounts Receivable

• If your answer is yes,– you need to get out of the credit business

and collect more of your fees at time of service!

Accounts Receivable

How to Reduce DSO

• Recondition customers to a new payment expectation– Place collection calls earlier

• Reward prompt payment with a discount• Use credit cards more

– Reduces margin– Do not use to settle outstanding A/R,

unless it is the only way to get paid

Break Out Groups

• Pricing• Accounts Receivable

• Inventory• Compensation • Summary Session

Reduce COGS 5%

Fee from Services $3,200 $3,200

Retail COGS $400 10.00% ‐5.00% $380 9.10%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.20%

Gross profit $3,048 76.20% $3,068 73.80%

Expenses

$2,545 63.60% $2,545 61.20%

EBITDA $503 12.60% $523 12.60%

Reduce COGS 5%

Reduce COGS…

• Another form of margin growth• Forms of cost (COGS) reduction

– Cash discount terms– Volume rebates– Growth incentives

Reduce COGS 1%

• Observations– The supplier community does not have the

margin to sustain this strategy – Increasing fees 1% has 4 times the benefit

compared with reducing cost– Often times when product cost is reduced

so is the selling price• What happens when we pass on the

COGS decrease?

Reduce COGS 5%and

Reduce Price 5%

Retail Sales $800 ‐5.00% $760

Retail COGS $400 10.00% ‐5.00% $380 9.10%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.20%

Gross profit $3,048 76.20% $3,028 72.80%

Expenses

$2,545 63.60% $2,545 61.20%

EBITDA $503 12.60% $483 11.60%

• Market price increases – Our best friend if:– We implement effectively– Maintain or improve our margin %

• History shows we revert to historical margins and gains turn to losses

Reduce Retail Price

ce Retail Price 5%

Retail Sales $800 ‐5.00% $760

Retail COGS $400 10.00% $400 10.10%

Discounts Taken ‐$10 ‐0.25% ‐$10 ‐0.30%

Gross profit $3,048 76.20% $3,008 76.00%

Expenses

$2,545 63.60% $2,545 64.30%

EBITDA $503 12.60% $463 11.70%

Starting Margin20% 25% 30% 35% 50% 60%

Price Re

duction

4% 25 19 15 13 9 75% 33 25 20 17 11 910% 100 67 50 40 25 2015% 300 150 100 75 43 3320% 400 200 133 67 5025% 500 250 100 7130% 600 150 10040% 400 20050% 500

reduce your prices, have to sell MORE to maintain margin

% Change to Pre Tax Profit5.0%

Increase Fees 31.8%

Increase Fee Based Volume (75% Expense Ration) 8.5%

Reduce Product Cost (Retail Sales COGS) 4.0%

Profit Leakers

Reduce Fees ‐31.8%

Reduce Retail Price 5% ‐7.9%

Reduce Retail Sales ‐4.0%

Not Passing on Price Increase ‐4.0%

Inventory Turnover

• A ratio showing how many times a company’s inventory is sold and replaced over a one year period

• Often expressed as days of inventory– 365/inventory turnover– 365/6 turns = 60.8 days

Net Inventory Investment…

• Book value of the inventory which is equal to the physical inventory value on the floor, less what you owe supplies.

Average Inventory Value minusAverage A/P Balance (inventory payables)

Turns Within Terms

Turns Within Terms– Turns within terms occurs when – days to

collection is fewer days than terms with suppliers

– Your inventory is on consignment from the supplier!

Why Turns Within Terms

• As a business you have the opportunity to generate gross profit without investing any of your money in inventory

• This is a great way to fund growth or other capital investments

How to Impact Turns Within Terms• Dating from suppliers

– Often times the dating has more value than the discount offered

• Focus on growing the business to improve turns, thus reducing days of inventory

• Carry less inventory, reduces days of inventory

• Review the logic used to make a buying decision

Elements in nventory Decision

• Days of Desired Inventory (DDI)– Function of predictability of demand, criticalness of

item• Lead time

– Number of days it takes to receive inventory from the day the item is ordered

• Safety Stock• The amount of safety• Payment Terms

How to Improve Inventory Turnover

• Increasing sales volume is the best way to improve turns

• Carry less inventory– Eliminate or reduce product redundancy– Buy in smaller quantities

How to Improve Earn/Turn

• Sell more, increase velocity which improves turns

• Buy smaller quantities more frequently to improve terms

• Carry less safety stock• Increase margin %

Questions?

Break Out Groups

• Pricing• Accounts Receivable• Inventory

•Compensation • Summary Session

Non Doctor Staff75th percentile Hourly Wage

75th Percentile Hourly Plus Benefits

Receptionist $ 17.58 $ 19.88 Practice Manager $ 38.81 $ 42.19 Office Manager $ 19.35 $ 21.18 Maintenance $ 26.73 $ 31.21 Licensed Tech $ 20.92 $ 24.10 Barn Worker $ 14.08 $ 15.86 Vet Assistant $ 15.77 $ 18.46 Book Keeper $ 16.63 $ 20.44

Break Out Groups

Summary Session

Thank You Merck

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