The path less traveled to profit: Expenses and budgeting

The profitability of a veterinary hospital, as in any business, is a product of 2 factors: revenue and expenses. The proceeds earned, subtracted by the amount spent to run the business, leaves the practice with their income. However, too often the focus is on the first part of this equation, boosting revenue, while neglecting expense control. Both aspects need to be targeted and improved to help grow a practice’s bottom line.

Each year, the CVMA Provincial Practice Owners Economic Surveys are distributed to veterinary practices across Canada. The 2015 survey gathered data in each province on revenue, expenses, fees, employee wages, etc.

Tables 1 and 2 outline the provincial average percentage of gross revenue for each expense, in both companion animal and mixed and large animal practices. For example, if a practice generates annual gross revenue of $1 000 000, and spends $250 000 on drugs and supplies over the same time frame, this expense would equal 25% of gross revenue. By using this figure, we are able to compare practices of various sizes; simply using dollar figures for each expense would make this comparison difficult, as a larger hospital is, by necessity, going to outspend a smaller hospital.

Table 1.

Companion animal hospitals average expenses as a percentage of gross revenue

	Average percentage of gross revenue (%)
Expense	NFL	NB	NS	ON	MB	SK	AB	BC
Drugs and supplies	29.3	31.8	31.9	27.4	27.6	24.6	28.2	25.9
Non-DVM wages	22.0	20.3	22.0	20.3	22.9	19.9	21.9	22.1
Associate DVM Wages	7.1	8.0	8.2	8.3	8.9	12.1	10.8	9.3
Specialists	0.0	0.0	0.0	0.4	0.3	0.0	0.4	1.2
Rent	4.7	5.0	6.1	6.1	4.0	3.7	5.8	5.1
Office	2.2	1.9	2.7	1.8	1.4	1.6	1.5	1.6
Accounting and legal	0.1	0.8	1.0	1.0	0.8	0.6	1.0	1.0
Bank charges	1.3	1.5	2.9	2.1	1.5	1.3	1.6	1.6
Depreciations	1.3	2.3	3.0	1.5	2.1	1.5	1.3	1.2
Utilities	0.9	1.9	1.0	1.6	1.2	1.0	1.3	1.1
Repair and maintenance	0.4	1.3	1.0	1.5	1.2	1.8	1.1	1.1
Laboratory	0.1	0.7	1.5	2.6	1.6	2.6	1.6	2.5
Professional dues	0.3	0.5	0.8	0.5	0.5	0.7	0.7	0.5
Other expenses	0.0	0.1	0.1	0.1	0.0	0.0	0.1	0.3
Advertising	0.4	1.6	0.8	0.9	0.6	1.1	1.1	1.0
Equipment rental	0.4	0.4	0.6	0.6	1.0	1.1	0.4	0.6
Bad debt	0.2	0.0	0.5	0.1	0.0	0.0	0.1	0.1
Vehicle	0.0	0.1	0.1	0.1	0.0	0.0	0.0	0.0
Grooming expense	0.0	0.0	0.0	0.1	0.3	0.0	0.2	0.0
Continuing education	0.2	0.2	0.3	0.6	0.5	0.9	0.6	0.7
Insurance	0.6	0.5	0.5	0.8	0.2	0.7	0.5	0.7
Total expenses (including associates)	71.7	79.0	85.0	78.6	76.6	75.3	80.1	77.7
Adjusted expenses (not including associates)	64.5	71.0	76.9	70.2	67.7	63.2	69.3	68.4
Net income to owner(s)	28.3	21.0	15.0	21.4	23.4	24.7	19.9	22.3
Adjusted net income to all DVMs	35.5	29.0	23.1	29.8	32.3	36.8	30.7	31.6

NFL — Newfoundland and Labrador; NB — New Brunswick; NS — Nova Scotia; ON — Ontario; MB — Manitoba; SK — Saskatchewan; AB — Alberta; BC — British Columbia.

Table 2.

Mixed and large animal hospitals average expenses as a percentage of gross revenue

	Average percentage of gross revenue (%)
Expense	NS	ON	MB	SK	AB	BC
Drugs and supplies	42.5	35.2	33.9	49.7	35.4	32.2
Non-DVM wages	11.1	14.2	16.9	10.5	14.8	19.7
Associate DVM wages	4.2	10.4	8.7	7.6	10.8	8.3
Specialists	0.1	0.2	0.6	0.0	0.2	0.0
Rent	2.2	3.1	2.9	3.5	3.2	4.1
Office	1.2	1.4	1.6	1.0	1.2	1.5
Accounting and legal	0.1	0.5	0.7	0.5	0.6	0.5
Bank charges	1.0	1.4	1.7	1.1	0.9	1.6
Depreciations	0.0	1.0	2.8	0.7	1.6	1.2
Utilities	1.3	1.5	1.1	1.1	1.1	2.4
Repair and maintenance	1.2	1.1	1.1	1.0	1.1	0.9
Laboratory	2.6	1.2	0.4	1.8	1.2	0.7
Professional dues	0.2	0.3	0.4	0.4	0.5	0.4
Other expenses	0.0	0.3	0.1	0.3	0.1	0.0
Advertising	0.5	0.4	0.3	0.5	1.1	0.7
Equipment rental	1.0	1.2	0.1	0.3	0.3	0.0
Bad debt	0.1	0.1	0.4	0.1	0.0	0.3
Vehicle	1.6	2.3	1.0	1.3	1.6	1.2
Grooming expense	0.4	0.0	0.0	0.0	0.0	0.0
Continuing education	0.5	0.4	0.7	0.5	0.5	0.8
Insurance	0.3	0.8	0.7	0.5	0.7	0.8
Total expenses (including associates)	72.0	77.1	76.4	82.5	76.9	77.4
Adjusted expenses (not including associates)	67.7	66.8	67.7	74.9	66.1	69.2
Net income to owner(s)	28.0	22.9	23.6	17.5	23.1	22.6
Adjusted net income to all DVMs	32.3	33.2	32.3	25.1	33.9	30.8

NS — Nova Scotia; ON — Ontario; MB — Manitoba; SK — Saskatchewan; AB — Alberta; BC — British Columbia.

The starting point to increasing profit through controlling expenditure is to figure out exactly what the expenses are; as the saying goes, if you can’t measure it, you can’t manage it. Through a system of monthly bookkeeping, it becomes possible to accurately track revenues, inventory, wages, operating expenses, and thus the practice’s net income. Without this crucial first step, attempts at budgeting are doomed from the get-go. Even annual bookkeeping is less than ideal, as it is far too late to identify and adjust trends by the time the bookkeeping is done. A monthly assessment will allow for a quick response to changes in revenue, over-expenditure, etc., rather than allowing the situation to drag on for the next 11 months, until it is tax time again.

Once expenses are regularly tracked, they can be divided into three broad categories; those that are set in stone, those that have some wiggle room, and those that can be easily adjusted. Expenses such as taxes, rent, insurance, and interest payments typically fall into the first group, as there are few options for changing these.

A number of expenses do provide some limited opportunity for savings, such as utilities, repair and maintenance, and office supplies. However, they tend to be less easily adjusted than the final category of expenses.

The expenses that are most within the control of the practice owner also happen to be those which make up the bulk of the money spent by the business: drugs and supplies, non-DVM wages, and associate DVM wages. For many practices, these 3 expenses can account for nearly 60% of their total expenditure.

When setting a budget, the simplest method is to look back over the past 12 months, and carry forward each month’s expenses to the current year. Those categories of expenses in which there is some degree of control (and thus opportunity for saving) should be carefully assessed to determine if there is any room for reduction. Reviewing advertising strategies, cutting back on inventory held on hand, and minimizing electricity usage are just some of the myriad of examples of relatively easy cost-saving measures. Particular attention should be paid to any areas in which the practice is far outspending the provincial average, as a percentage of gross revenue.

Through monitoring expenses and sticking to a monthly budget, practices can control the amount of money flowing out of their doors. This strategy, in tandem with even a modest fee increase, can push profits dramatically upwards.

Notes: Average expense percentage of gross revenue was determined using the 2015 Provincial Practice Owners Economic Surveys. There were insufficient responses from Quebec and Prince Edward Island to present average data, while ensuring confidentiality.

Biography

Dr. Doherty completed his BSc at the University of Guelph and his DVM at the Ontario Veterinary College. He works as an economic analyst for the Ontario Veterinary Medical Association and does some voluntary and locum veterinary work in his spare time.