If you were to ask the president of any major corporation how much the firm would earn next February, he or she would be able to tell you the projected revenue, expenses, and net income. If you were to ask a veterinarian how much his or her hospital would earn next February, you would probably be met with a blank stare. Why the difference?
The president of the major corporation has to know how much will be made in February because shareholders and directors want to know. Most people would be reluctant to invest in a company that could not tell them how much they expect to earn next year. To get this information, the corporations go through extensive budgeting exercises.
Veterinarians do not go through the same budgeting exercises, because no one is asking them for the information. Before bovine spongiform encephalopathy (BSE), budgeting was not a problem; most veterinarians earned more than they did the year before, so there was never a reason to invest time in budgeting. The advent of BSE caused many mixed and large animal veterinarians to experience significant reductions in revenue and net income. Budgeting for mixed and large animal hospitals is more important than ever before, because there is no longer the assurance that revenues will be higher in the coming year.
Drs. Mike Ritter and Glen Blier, who own a 4-doctor mixed animal practice (New Hamburg Veterinary Clinic, New Hamburg, Ontario), know how much their practice will earn next year. They can review their 2006/2007 budget and forecast their expected revenues and expenses. They can also predict how much each species will contribute to the bottom line for each month. This wasn’t always the case.
Before BSE, the New Hamburg Veterinary Clinic enjoyed a higher than average revenue and an above average net income. Drs. Ritter and Blier used to collect the information necessary for constructing a budget, but never had to use it. Each year they made slightly more than the year before, but when BSE hit, revenues declined. Expenses stayed the same, but net income went way down. This was a big surprise, because it had never happened before.
In response to rising expenses and stagnant revenues, Drs. Ritter and Blier went through a budgeting process to improve the financial viability of their practice. They suspected that the companion animal side of the practice was carrying the swine and dairy sectors and that the equine sector was holding its own; but these were just hunches. To find out for sure, their finances had to be broken down by species. Once revenue and expenses were allocated by species, the impact of BSE on the dairy practice could be determined, and appropriate steps could be taken to increase dairy revenues to match expenses, or carve dairy expenses to match decreased revenues.
Separating revenues by species was an easy task, because the computer software used by the practice had already been generating those data. Separating expenses by species, however, was more difficult. Most of the practice’s resources were shared by the different species, so it was necessary to make assumptions. For example, how much of the pharmacy was used for dairy products, or how much of the practice manager’s time was occupied by each species. Expenses then had to be separated by their approximate usage by each species. Even drugs and supplies proved difficult to split. Many drugs are used by all species, so it was difficult to decide how much cost should be allocated to each species. In the end, it was decided to split up most expenses based on the percentage of time veterinarians devoted to each species or the percentage of revenue. For example, vehicle costs were divided by the time each veterinarian spent with the species, but rent by revenue contribution.
Drugs and supply expenses were calculated based on average markups. For example, companion animal drugs were marked up 100%, so these drug revenues were calculated by taking companion animal drug revenue and dividing by 2. Dairy drugs and supplies were divided by the average markup on dairy drugs and the same was done for swine. Equine and other species’ drugs were grouped with bovine drugs because their markups were similar and the contribution from equine and other species drugs was not significant enough to warrant separate categories.
Budgeting Steps
Allocate revenue into chart of accounts.
Allocate expenses into chart of accounts.
Review monthly revenue, expenses, and net income to identify poor performing months.
Create or change policies to prevent poor performance months from recurring.
-
Forecast future revenue and expenses based on:
Fee increases
Existing seasonal trends (use May last year to predict May this year)
Provincial revenue and expense benchmarks.
Each month, compare actual with expected revenue and expenses and make changes as appropriate.
See the CVMA Web site (http://canadianveterinarians.net) for companion and mixed animal budget templates.
After all of the revenue and expenses were divided by species, Dr. Ritter looked for seasonal patterns in monthly revenue and expenses over the last year that could help in projecting revenue and expenses for the coming year. Looking at monthly revenues, expenses, and net income revealed, for the first time, that the New Hamburg Veterinary Clinic actually lost money 3 months of the year. After associate veterinarians and all other expenses had been paid, there was nothing left to pay the owners. In hindsight, it would have been better, financially, to close the clinic down for those 3 months.
Why had the practice lost money during those 3 months. As suspected, companion animal revenues carried the practice most months. During 1 month, however, bovine and swine revenues were down and vacation pay had been allocated at the same time. Two other months had high staff costs and lower than expected revenues from all species. So, for the coming year, revenue projections for specific species during problematic months would be lowered to more conservative levels. Staff would continue working the same number of hours throughout the year, but vacation pay would be allocated during the busier months.
Allocating revenues is difficult, because the projection for the coming year requires the impact of fee increases and changes in demand to be calculated. These are generally different for each species. For example, the New Hamburg Veterinary Clinic allocated a 10% increase in companion animal fees, along with a predicted 5% growth in companion animal demand. Demand for bovine services was expected to be flat, but hourly rates and call fees were scheduled to increase, resulting in an increase in revenue of 10%. Swine fees did not change but billing policies did, resulting in a 30% expected increase in professional revenues.
After revenue had been allocated for each species for each month, expenses were compared with provincial benchmarks. For the New Hamburg Veterinary Clinic, most expenses were within the guidelines. The plan was not to make any drastic cuts to expenses, but instead to prevent them from creeping up alongside increased revenues. For the past 10 years, the expense: gross ratio for New Hamburg (and almost all veterinary clinics in Canada) has been relatively constant. Before BSE, revenues and expenses had both increased by roughly 10% per year, resulting in a marginal increase in net income. If expenses increased at the rate of inflation while revenues increased 10% per year, veterinarians would be earning more than twice what they are earning today.
The goal for the upcoming year at the New Hamburg Veterinary Clinic is to allow for a 5% increase in wages, an increase in expenses for drugs and supplies, and an increased growth in the companion animal sector, while keeping all other expenses the same. All minor expenses, such as utilities, vehicles, bank fees, and repairs and maintenance, which had risen each year, would be maintained to prevent expenses from increasing. Office expenses were slashed, because they were much higher than the provincial benchmarks.
The resulting budget forecasted moderate increases in fees, predicted realistic demand for each species, and held the line on expenses. Each month was scrutinized to ensure wages matched the forecasted demand. Finally, one-time annual expenses, such as insurance and taxes, were budgeted and billed monthly to prevent cash shortages.
By this time next year, the New Hamburg Veterinary Clinic expects to have $90 000 more that it did last year. Along with increased incomes, budgeting enables the owners to be confident in what lies ahead. A big relief for the owners of the New Hamburg Veterinary Clinic is that they now have a clear picture of what they can expect. Of course, Drs. Ritter and Blier don’t expect each month to play out exactly as planned, but if and when changes occur, they have the ability to deal with them and wind up on top. For the first time in a long time, Mike Ritter and Glen Blier are in complete control.