How to Make Your Profit and Loss Statement Work for You
Profit and loss statements are likely the last thing you want to look at when managing your practice (because they don’t always tell the story you want to hear). But, this is important information to know when it comes to making decisions that can improve your practice. Truly understanding your P & L statement will show you what’s the best way to grow your P and shrink your L. So, let’s begin by breaking it down!
The P & L is broken into three parts, for easy digestion = Revenue, Expense and Profit.
Revenue is readily available from the Practice Management Software (PMS). Where the money comes from is much more important than the total; it provides a number that can be managed. Is the revenue that is being produced meeting the practice goals?
Breaking revenue into income centers allows for decisions to be made that can positively impact profitability. For example, a total revenue of $100k (for the month) does not indicate how much money is being generated from laboratory income, or if team members are or are not offering clients lab work that doctors have recommended.
Create revenue centers in the P & L similar to the AAHA Chart of Accounts. Doing so will allow the practice to benchmark revenue in the future, aiding in purchase and management decisions. Translating information from the PMS into accounting software is fairly simple with a monthly journal entry.
All too often, veterinary practice owners only look at a P & L at the end of the year when information is presented by the CPA for taxation purposes. The end result is usually a great surprise: “We made money!” or “What happened to all that money?” Tracking the percentage of profit each month instead of taking a cursory glance at year end would provide the opportunity to make changes, large and small, throughout the year to achieve a desired goal.
Because revenue should be classified into proper income centers, it only makes sense that expenses should receive the same attention. It is important to understand how much the practice is spending on a category in comparison to how much revenue is being generated. Break out the cost of drugs and medical supplies, laboratory expenses and pet food into appropriate categories (versus one lump sum). Is there a profit, or is the practice hemorrhaging money?
Who handles inventory for the practice and the training they have received can make a big difference in the profitability of the practice. Obviously, it is important that what is being purchased is actually being sold - not sitting on the shelf ‘just in case we need it’ expiring or, worse, walking out the door). The desire to ‘never run out’ kills profitability. Providing the inventory manager a clear goal in dollars and/or percent of income can be the difference in having profit, or not.
Listening to the Profit and Loss
‘Listening’ to what the P & L is reporting offers an opportunity to make adjustments and/or tighten up the system.
Laboratory income as a percentage of gross income is a good indicator of whether diagnostics are being offered and accepted by clients. Generally, practices that see greater than 20% of revenue from lab revenue tend to be more profitable. Diagnostics help find solutions that make the practice a champion in the client’s eyes. Analyzing and understanding real numbers offers a solid starting place for team discussions, goal setting, and training. The staff must receive ongoing training to be able to educate clients confidently about lab test options and the benefit to patients. If the team member presents options that cannot explain the “what and why,” the client will likely not accept the recommendation.
Staff payroll percentages (both non-DVM staff and DVM) is another important category to monitor. Keeping staff cost too low may drive good team members away and will impact the customer service provided to clients. A lean staff that is working to exhaustion will not provide good service, resulting in the loss of clients.
However, finding that non-DVM costs are greater than 24% may indicate that team members are not making patient recommendations. A lower income results in a higher expense percentage. The seemingly small 2-5% difference is actually a large amount of money.
The P & L can provide red flags, alerting a manager when a process is not being completed. For example, if the postage expense is lower than normal, an investigation into the reminder system can take place. This may be the only indicator that the reminders did not mail out in the prior month.
Managing Revenue, Expense and Profit
Creating goals and looking for red flags can be difficult without having access to a P & L. Ideally, a plan should be created allowing the review of a P & L at month end. If this cannot be accomplished, some numbers be extracted from the practice management software when revenue centers are accurately used, and inventory is accurately entered and recorded. Don’t underestimate the ability to track numbers and measure progress from month to month utilizing the practice management software reports. Simply looking at reports and paying attention to trends can reverse a potentially hazardous year.
Additional Tips to Keep in Mind:
• Being busy is not the same as being profitable.
• Having a high number of new clients does not translate into client retention and loyalty. High numbers of clients that do not stay will not benefit the practice.
• It costs more to attract new clients than retain existing clients.
• If practice revenue goals are set by leadership, share with the team. Be sure the ‘what, how, and why’ is shared as well, or the team will be incapable of achieving the goals.
• Benchmark percentages from external sources may not be the “right” percentage goal for the practice, but it can raise questions about ‘what, how and why’ of the current structure, and if there is room for improvement.
• Is there room for small adjustments? One or two percentage points can be a sizable amount of money so it is important not be complacent.
• Does the practice monitor discounts or missed charges? The income loss can have a significant impact on percentages.
Whether you’ve been in the vet business for a long time or just starting out, your P & L statement can give you an overall understanding of the health of your business and help you make decisions with confidence. If you have any additional questions about P & L statements, please fill out a contact form and we will connect you with someone who can help!
A special thanks to Debbie Hill, CVPM, SPHR, CCFP and our friends at Patterson Veterinary University for providing this educational content.