2 ways to increase profitability in your veterinary practice

When it comes to increasing the bottom line of your Profit and Loss (P&L) statement, you have options. You can take the approach of focusing on expense management, or you can focus on increasing revenue. Which do you choose?

Scenario 1: Jack decides to increase profitability using the revenue approach

Jack manages a $2 million-a-year practice that is currently operating at 7% net profitability (bottom line). He wants to boost his net profit by increasing the clinic’s revenue. Currently, for every additional dollar in revenue he brings in, he gains 7¢ in net profit based on his bottom line. Jack has bigger goals though.

Ultimately, he wants to operate at 15% net profitability, which he is far from achieving. In this scenario, if he wants to increase his net profitability from $140,000 a year (7% of $2 million) to $300,000 (15% of $2 million) he will need to increase his revenue by $2.3 million, at 7% net profit.

Scenario 2: Jack decides to increase profitability using the expense management approach

Jack manages a $2 million-a-year practice that is currently operating at 7% net profitability (bottom line). Rather than focusing on revenue, he wants to increase his net profit by focusing on expense management.

Looking at his P&L, he notices that his cost of goods sold (COGS) are currently at 28%, and that his total payroll, including all staff, benefits and taxes, is at 48%. Given industry standards, Jack sees that he should be able to reduce his COGS to somewhere between 21-23%, and total payroll to around 43%.

If he manages to achieve this, he’ll be able to add 10-12% to his net profit. Even without increasing revenue, he’ll be boosting his total net profit up to somewhere between $340,000 – $380,000.

What should Jack do?

As we learned in scenario 2, Jack’s expense management system is essentially broken. If he leaves his system as it is and focuses solely on increasing revenue, he’ll continue to earn just 7¢ of net profit for every dollar of revenue he brings in. If, however, he focuses on fixing his system before increasing revenue, he will have a much larger impact on the financial health of his practice.

By undertaking scenario 2 before he undertakes scenario 1, Jack will add short-term profit to his practice and maximize his long-term revenue increase. Once the expense management issues outlined in scenario 1 are under control, he’ll be able to add 17¢ in net profit for every dollar of revenue.

In short, while you do have options when it comes to increasing profitability, these options deliver very different outcomes. You can:

  1. Drive more revenue into a broken expense management system, and get less out of it; or
  2. Fix your expense management system prior to driving more revenue into it, and get more out of it.

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