2010 Financial Growth Management Strategy for Your Veterinary Practice

Financial Management Eye-Openers for the 2010 Veterinary Practice

(In other words, employ threat assessments and methods to protect your veterinary practice from yourself and others so it can

grow and prosper financially. No Neapolitan Mastiff required)

Contact Information

Mark J. McGaunn, CPA/PFS, CFP®

Managing Member

McGaunn & Schwadron, CPA’s, LLC75 2nd, Avenue, Suite 425Needham Heights, MA 02494-2897

main (781) 489-6651direct (781) 348-9227e-fax (781) 479-5985e-mail [email protected]: www.mcgaunnschwadron.com.com

Today’s Agenda

• Who to Blame• Old Ways• Basic Ways• Key Performance Indicators• Practice Dashboards• Balanced Scorecards• Financial Strength Index

The Great Number Deluge

How healthcare organizations use financial data greatly affects current and future operational and financial performance. Two schools of thought:

• 1st school-Managers ask, “What’s the number?” If bad, they ask “Whose fault?” Organization’s focus only on bottom line.

• 2nd school-Leaders who say, “Now that we have the number, what proactive ideas can we implement based on it?”

Lots of Responsibility

Practice owners and managers responsible for tracking projects, initiatives, clinical outcomes, policies & procedures.

Data “deluge” -owners lose focus, fail to keep strategic thinking aligned with practice's long-term vision.

1. Great strides in information collection and distribution, but

2. Significant improvements in decision-making value still not realized.

Bad Tech Solutions Not Better…

• Technology often just delivers more irrelevant or inappropriate data quicker.

• Great practices demand timely, relevant data.• Jack Welch, former General Electric CEO, had

worldwide operating results by day 5 of each month.

• Veterinary practices have trouble with 30 days.

Use Your Data

• Knowing how to read financial statements and understand the information within them is often the difference between prosperity and just getting by.

• Time-honored question asked by every healthcare professional is:

“Are we making money?”

Know Your Stuff

• Veterinarians who don't carefully read such financial outcomes measurements run risks much as they would in failing to read medical outcomes carefully.

• Financial statements are key diagnostic tools for managing the veterinary practice, tracking revenues and expenses, identifying financial problems, and ultimately increasing everyone’s compensation.

Reporting Basics

You have to know the basics. The 3 financial reports used to monitor an organization’s financial health are:

1. Income statement-lists revenue, expenses, and residual net income for period of time,

2. Cash flow statement-tracks operational, investing, and financing cash flows

3. Balance sheet-indicates veterinary practice’s degree of solvency & ownership equity

Basis of Accounting

• Most healthcare-practice CPA's utilize "cash basis" method of accounting. Cash basis shows what’s been collected and what’s been paid.

• “Accrual basis” presents income that’s earned (not necessarily collected) and expenses incurred (not necessarily paid).

• Both relevant for tax purposes. Accrual basis must be used for practices where inventory is a material income-producing factor.

Income Statements (P&L)

• Of the 3 financial reports, P&L most flexible device for monitoring practice’s financial health.

• Practices should review P&L at least monthly. • P&L reports patient income, employee costs,

and overhead• Can even breakout incremental costs for various

ancillary services (QuickBooks class system).

Comparisons & Budgets?

• Income statements augmented by footnotes can explain to practice owners major deviations in revenue and expense vs. previous periods.

• Checking against a well laid out budget (that already incorporates these timing issues) can show that no extraordinary management is needed.

• Budgets are not meant to be punitive tools.

Cost Structures

2 general cost categories:

• Fixed costs remain the same regardless of volume (rent, insurance and utilities)

• Variable costs, such as medical supplies, fluctuate with volume.

Variable Costs

Recognize, however, that variable costs vary differently.

• i.e. medical supplies have a close relationship to volume, but staffing may vary in steps.

• Important to recognize in budgeting, as well as in developing strategy.

Helpful Hint…

BEFORE printing out financial statements to review:

1. Make sure all deposits, checks, and credit card charges have been entered to month end, and

2. Make sure all checking and credit card accounts have been reconciled

Then print out reports and use for analysis!

And it won’t mess with your tax planning!

Simple QuickBooks Format

• You should modify your QuickBooks® chart of accounts to incorporate the AAHA chart of accounts format. No longer sold in healthcare version.

• Makes practice financials LOGICAL.

AAHA Chart of AccountsBalance Sheet

• Assets-Current, Fixed & Other (100 Series)• Liabilities-Current, Long-term (200 Series)• Equity (300 Series)

-Corporations (C or S)

-Equity for Partnerships or LLC’s

-Proprietor’s Capital (Sole Proprietorship)

-Administrative Costs

AAHA Chart of AccountsIncome Statement

• Income (400 Series)• Cost of Goods Sold (500 Series)• Operating Expenses (600 and 700 Series)

-Staff Expenses-Occupancy Costs-Equipment Expenses-Administrative Costs

• Other Income & Expenses (800 Series)• Income Taxes (900 Series)

Benchmarking

Management must incorporate key factors in developing measures that:

• Extend throughout entire practice.. • Tie into practice overall strategic plan. • Have consensus as to relevant and appropriate

factors. • Based on both internal and external factors. • Empower employees, not stifle them. • Allow systematic review, and• Encompass each operating division in a

veterinary practice.

Benchmarking

• Franchisors have utilized benchmarks to highlight financial strengths and weaknesses in store-to-store and intra-store measurements.

• True progressives utilize intra-entity benchmarking and metrics to measure their progress (if already > average).

• Financial metrics are typically only a component.

• Customer Service s/b measured in all aspects.

• How can we be cutting edge?

Your Primary Competition Is..,

• Relevant benchmarking data available to assess performance?

• Comparative benchmarking data crucial to reporting system success.

• Ideally, practices should have some comparative reference points to evaluate how it is doing with respect to its primary competitor-itself.

Key Performance Indicators

• Quantifiable measurements that reflect the critical success factors of an organization.

• They reveal a high-level snapshot of a

practice’s financial and operational status.

KPI

• Before Key Performance Indicators are selected, vital to identify what the practice’s goals are, which are in turn dependent upon its mission and owners.

• KPIs act as a measure of progress towards these goals.

• Whatever they may be, KPIs must be critical to the success of the practice.

KPI

• Application of Key Performance Indicators provides practice owners with a high-level, real-time view of the progress of a practice.

• Combination of reports, spreadsheets and charts.

• Revenue figures, trends, or any long-term consideration which may be essential in gauging the health of the practice.

• Should not only reflect the organizational goals but also be quantifiable.

KPI

• To be valuable it must be accurately defined and measured.

• A KPI may meet the criteria of reflecting the organizational goal, which may for instance pertain to being the most popular company.

• However, since a company’s popularity can not be measured or compared to others, therefore the KPI would be useless.

KPI

• Considerations regarding how a KPI is to be measured should also be established in advance.

• Definitions as to exactly how the indicator is to be calculated and whether it is to be measured in dollar amounts or units should also be specified.

• Moreover, it is imperative that the organization then sticks to these definitions from year to year in order to allow for annual comparisons.

Potential KPI’s

Indicators can include:

• financial viability• clinical outcomes• patient safety• quality of care• marketing and development• internal veterinary practice procedures; and• employee, patient, and DVM satisfaction.

Underlying Principles

• The process of converting raw or numerical tabular data into a graphical depiction is known as “data visualization”.

• One of the main goals of data visualization is to support decision-making through the use of properly designed graphical representations of information.

Visual Trends Inspire

• For most operations managers, trending data and exceptions to those trends are much easier to understand when they are presented visually.

• Information presented in a visual format allows decision-makers faster perception of patterns or problems that they may not have anticipated.

• Ultimately, they can make valuable conclusions more readily.

KPI - Dentistry

050

100150200250300350

Patient Visits vs. Dental Screen-ings

Month

Nu

mb

er o

f V

isit

s

People Factor

Common approach to measuring financial performance basically little change from capital-intensive operating styles of 20th-century industrial companies.

Old model doesn’t sufficiently account for the contributions of talented, highly motivated employees that more often than not, are the new basic source of integral practice wealth.

Somehow, the component of “people” seems lost in the healthcare practice equation.

Other Industries

Global management consultant McKinsey & Company reports since 1997 30 largest worldwide companies (market cap) have seen their profits per employee rise dramatically.

5 year reward system trend in leading US financial planning firms now centered on fixed-based structures, leading away from variable-based because return on labor statistics were a wild card (IA Mag.)

Practices can redesign their own internal financial performance approach and set goals for an intrinsic return on intangibles by also incorporating greater attention to both:

1. profit per full-time employee equivalent (FTE) &

2. the number of FTE employees

rather than placing an intense focus on profits, returns on invested capital (ROIC), and return on equity (ROE).

New Practice Metrics

Do Homework Before Move?

2006 2007 20080

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

Practice Profit

Owner Payroll

Staff Payroll

89% 68% 49%ROL

Client moved to new practice building in 2007-staffed up for expected demand

Other Uncommon Metrics

• Avg. Unit Cost per Visit• Avg. Occupancy Cost per Visit• Actual Profit Per

Active Client (not avg.)

Calculate Financial

ImpactOf Negative Variances

Examine Numbers

Convert Numbers to Ratios

ObserveTrends

Compare toBenchmarks

Examine

Numbers

Convert Numbers to

Ratios

Observe TrendsCompare w/

Internal Benchmarks

Calculate Financial Impact

Boring But Effective

April 1-8 April 9-16 April 17-24

Pt. Visits 225 211 185

Surgeries 21 16 11

Payroll $10,492 $11,212 $10,222

CheckingBalance

$6,122 $18,225 $9,887

Complaints 4 2 0

New Patients 7 11 8

Presenting Dashboard Data

• "Dashboard" reporting used more in all industries to keep owners and managers focused on critical areas that affect overall performance of the organization.

• Dashboards effectively communicate your philosophy to your entire practice.

• Low cost, strategic approach enables translation of practice’s vision and strategy into implementation.

• Can create visually interactive financial scorecards to help you monitor both your key financial and non-financial metrics and ratios.

• Help employees at all levels monitor individual performances and align their performance against practice goals.

• Instill a culture of responsibility and accountability for results.

Dashboards

Practice Cockpit Indicator

Remember, it's that 15-year strategic financial plan that serves as both the:

1. foundation for financial decision making2. framework against which we measure our

financial performance.

We suggest developing a “one-sheeter” Dashboard to organize pertinent practice information to be reported on a minimum monthly, and preferably weekly, basis.

Developing a Dashboard

Keep it concise and easy to use. Report can be a combination of line and bar graphs, run charts, instrument gauges, and diagrams.

A well-drawn Dashboard has basic guidelines:

1. The practice’s major critical success factors should be included.

2. Comments should be used where necessary to assist in interpreting the information.

Dashboard Keys

• Measures should be compared to targets. • Look at and explain variances from targets. • Use trend analysis so readers can visually see

long-term patterns. • Clear definitions should be published.• Visual appeal shouldn’t be a “bonus”. • Proper use of color important function in well-

designed Dashboards.

Visual Symbols

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0

20

40

60

80

100

Percentage of patients utilizing our pharmacy service . Goal: 80%


0

10

20

30

40

50

60

70

80

90

100

Percentage of patients who are compliant with dentistry rec-ommendations. Goal: 85%


0102030405060708090

100

Average time in minutes from patient check-in to check-out.

Goal: 45 min.


0

20

40

60

80

100

Percentage of patients who report being delighted with care provided. Goal: 95%


0

2

4

6

8

10

12

14

16

18

20

45 5

6 6

8

5

7

9 9

11

9

Number of Surgical Cases per Day

Dr. Dewey Dr. Cheatem Dr.Howe Dr. Shep

0

20

40

60

80

100

Percentage of patients who saw their veterinarian at last ap-

pointment. Goal: 90%


$65 $62

$58

$0

$10

$20

$30

$40

$50

$60

$70

$80

Baseline Current Goal

Overhead Cost per Visit

Our Practice Goal

0

1

2

3

4

5

6

7

8

FTE staff members per FTE veterinar-ian

Qtr 1 Qtr 2 Qtr 3 Qtr 4

0102030405060708090

Percentage of staff who rec-ommend our practice as a great place to work. Goal:

100%

Practice Cockpit Indicator

As healthcare financial leaders, we can perform key management tasks to assist in the application and analysis of financial data:

• Get it right.• Get it soon. • Make it useful. • Get it to decision makers. • Make active decisions with the data.

Balanced Scorecard

Balanced Scorecard

• Robert Kaplan and David Norton developed in 1997.

• Process integrated strategy execution, performance management, and facilitated organization learning.

• Kaplan argued traditional benchmarking based on production and financial indicators provided limited insight into business’s key strategies and that comparisons were generally made to the average of a group of practices.

Balanced Scorecard

Balanced Scorecard approach helps practices develop primary goals directly from a mission statement, practice vision, and defined critical business strategies to implement all 3.

Approach takes a pulse of:

– financial & non-financial measures of practice, – its leading and lagging indicators, – employee and patient satisfaction, and– short- and long-term strategy.

Balanced Scorecard

• Kaplan utilizes a strategy map (Scorecard) to develop a practice’s key strategies.

• Shows cause and effect linkages between various parts of strategy.

• Represents attempt to enhance value of information and exploit IT capability to deliver true value to decision makers.

• Perfect for situations with lack of focus or direction, a new strategy, or need to achieve practice alignment to a common vision.

How Scorecards Help?

Balanced Scorecards state that:

• Reporting should be available on those key performance indicators truly affecting veterinary practice performance, and

• Data is irrelevant if it cannot be utilized to improve veterinary practice performance.

Show Concepts Clearly

Balanced Scorecards present data in a visual format, allowing both a:

• High level review of goal attainment and• Drill down ability

to monitor status against predetermined practice objectives.

You can incorporate your “15 year” strategic plan to everyday practice operations management.

The Four Views

Balanced Scorecards suggest we view a practice from 4 perspectives, and develop metrics, collect data, and analyze it relative to each perspective:

1. Learning and growth perspective

2. Veterinary practice process perspective

3. Customer perspective

4. Financial perspective

Scorecard Framework

Scorecard Review

Balanced Scorecard ElementsBusiness Vision & Strategy

Strategic Themes

Four Business Perspectives

For each Perspective there are:

Objectives

Measures

Targets

Initiatives

Financial Perspective

Customer Perspective

Internal Process Perspective

Employee Growth Perspective

RevenueStrategy

ProductivityStrategy

CompensationStrategy

OperationalExcellence

Pet NeedSolutions

ClientEducation

OperationsEfficiency

MarketingDriveInnovation

EmployeeCompetencies

TechnologyInfrastructure Responsibility

Practice Vision & Strategy

Blank Strategy Map

Balanced Scorecard

Strategic Theme:

Process Improvement

Customer Satisfaction

Financial Performance

Employee Satisfaction

Objectives Measurement Target Initiative

Statement of what

strategy to achieve and

what’s critical to its

success.

How success in achieving strategy will be

measured and

tracked.

Level of performance needed.

Key action programs

required to achieve

objectives.

Customer Perspective

ObjectiveKey

Performance Measure

Target Initiatives

Encouragepatient owner

compliance with AAHA dental

screening recommendationsover current 30%

standard

Percentage of patients compliant with semi-annual screenings and

recommendations

100% DVM recommendedfollow through (PMR review)

ComplianceYear 1-45%Year 2-60%Year 3-75%

-Implement PetCare TV® & dental education in waiting areas

-Document!!!-Develop staff

communication plan (DVM, tech, kennel, recept., other) & training

Internal Processes Perspective

ObjectiveKey

Performance Measures

Target Initiatives

Develop diagnostic and

therapy protocols for practice to

ensure consistent medical treatment

and care

# of ProtocolsWritten

# of MissedCharges Found

on RandomCharge Audits

80% of all practice visits covered by

formal written protocol

Target CoverageMonth 1= 20%

Month 2-9=60%Month 10-12=80%

-Functional areas responsible for

part of each protocol

-Training!!! -Develop staff

communication plan (DVM, tech, kennel, recept., other) & training

The Result!

KPIs, Balanced Scorecards & Dashboards measure and evaluate performance and pinpoint veterinary practice successes or problems.

Saves valuable energy and efforts on coming to such conclusions.

Practice owners can rely on that information about practice operations and performance in order to act correctly and make good decisions.

A special thanks to Elizabeth Bellavance, DVM(Camlachie, Ontario) for her Balanced Scorecard expertise!

Financial Strength Index (FSI)

• Simple measure of human hospital financial health.

• Composite measure of 4 critical dimensions that collectively determine hospital financial health.

• FSI implies hospitals with large profits, great liquidity, low debt, and newer physical facilities are in excellent financial condition.

• Conversely, hospitals with poor profitability, low levels of liquidity, heavy debt, and aging physical plants are in poor financial condition.

• I’ve seen it in action.

FSI

In a study of human hospitals, four key drivers of financial strength were:

• profit (total margin), • liquidity (days cash on hand), • financial leverage (debt to total assets), and • age of physical facilities (accum. depr. %)

FSI Critical Key Factor is…

Profitability strongest relationship to financial strength.

• High-FSI hospitals had greater mix of surgical patients.

• Pricing far more important than cost control as a driver of financial strength.

• High-FSI hospital fees on avg. 13% higher but costs that were only 2 % lower than those of low-FSI hospitals.

FSI Calculation

FSI = [(Total Margin - 4.0) / 4.0] + [(Days Cash on Hand - 50) / 50] + [(50 - Debt Financing Percent) / 50] + [(9.0 - Average Age of Plant) / 9.0]

FSI Score Financial Health

>3 Excellent

0 - 3 Good

-2 to 0 Fair

<- 2 Poor

Other FSI Factors

• Liquidity. High-FSI hospitals had better liquidity, higher values for cash on hand.

• Financial leverage. High-FSI hospitals had lower debt.

• Age of facilities. High-FSI hospitals had significantly newer facilities and greater rates of investment.

In Closing

• Seek help from CPA or veterinary consultant

• Decide -number crunching or “big” picture ?

• Set short- and long-term goals for success.

• Well-developed financial plans merge strategy and financial capability.

• Management mantra-"anticipation, attention, analysis, and action."

• Financial performance-currency of an effective competitor.

Thank You!

谢谢 Merci

Danke Schon

Grazie

ありがとう 당신을 감사하십시오

Obrigado

Gracias

Contact Information

Mark J. McGaunn, CPA/PFS, CFP®

Managing Member

McGaunn & Schwadron, CPA’s, LLC75 2nd, Avenue, Suite 425Needham Heights, MA 02494-2897

main (781) 489-6651direct (781) 348-9227e-fax (781) 479-5985e-mail [email protected]: www.mcgaunnschwadron.com.com