One way to do this is to identify and track the most important key performance indicators (KPIs) for your practice. KPIs are quantifiable measurements that determine the financial success and profitability (or lack thereof) of your practice. They offer an objective way to monitor financial trends and quantify progress toward your goals.
Turning Data into Intelligence
You likely have access to reams of financial data about your veterinary practice — everything from income and expenses to production by service code, supply and retail product inventory, payroll, the number of clients in your system and the number of lab tests ordered last month or last year. The challenge is turning all of this data into actionable intelligence you can use to improve practice financial management and boost profitability.
This is where KPIs come into play. By choosing which KPIs are most important to your financial success — and thus which ones you should monitor and measure — you’re able to focus your attention on the metrics that will make or break your practice financially.
Many vet practice KPIs measure revenue, expenses and production so you could start by comparing total practice income to your biggest expenses. For most vet practices these are:
- Employee salaries and benefits
- Drugs and supplies
- Mortgage or rent
- Ancillary expenses like pet food and other retail products
Choosing Your KPIs
Deciding which KPIs to monitor and measure is the first step. Here are some common financial KPI benchmarks for veterinary practices - including how they are calculated - according to data compiled by Powerlytics, Inc.:
- Current ratio: 1.52
Measures a company's ability to pay short-term obligations or those due within one year (current assets/current liabilities).
- Quick ratio: 1.18
Also measures a company’s ability to pay short-term obligations, but includes only assets that can be converted to cash within 90 days or less (current assets - inventory/current liabilities).
- Days inventory outstanding: 16.34
Indicates how many days on average a company turns its inventory into sales (average inventory/cost of sales x number of days in period).
- Cost of goods sold (COGS): 28.52%
Costs of a product to a distributor, manufacturer or retailer (starting inventory + purchases - ending inventory).
- Days sales outstanding (DSO): 41.99
Measures the average number of days it takes a customer to pay you (outstanding receivables/sales x number of days in period).
- Days payable outstanding (DPO): 68.15
Measures how well a company is managing its accounts payable. The lower the ratio, the quicker the company pays its liabilities. (average payables + COGS x number of days in period).
- Gross margin: 71.48%
Sales revenue that a company retains after incurring direct costs associated with producing the goods it sells, and the services it provides (total revenue - COGS/total revenue).
- EBITDA: 10.55%
Stands for earnings before interest, taxes, depreciation, and amortization. Provides investors a snapshot of short-term operational efficiency, and is a more accurate reflection of a company’s operating profitability (net income + taxes + interest expense + depreciation and amortization).
Another useful KPI for veterinary practices is the average transaction charge (ATC) for each of your vets and the practice overall. Are ATCs for your newer vets as high (or almost as high) as those for more experienced vets? Are new vets recommending the same treatment plans as more experienced vets, and what are the acceptance rates? The answers to these questions will help you determine whether to invest in additional training and/or mentoring for your newer veterinarians.
Keep in mind that practice-wide ATC may not be as meaningful for specialty and emergency veterinarian hospitals as it is for wellness practices. In these cases, you should track ATC and production for each vet and department separately. Also, be sure you’re consistent in which metrics you measure and how you measure them — otherwise, you could end up comparing financial apples and oranges.
Compare KPIs to Benchmarks
To be effective, KPIs cannot be viewed in isolation — they must be compared with some sort of benchmark. By comparing your practice’s KPIs with other practices that are similar to yours, you can see how you stack up to the competition. The American Animal Hospital Association, American Veterinary Medical Association and National Commission on Veterinary Economic Issues publish industry averages you can use for KPI comparisons.
You can also compare your KPIs from one period of time to another. For example, how does your revenue growth at this point in 2020 compare with the same date last year? Or how do your practice ATCs this month compare to last month? Look for trends from year to year or month to month that might indicate financial red flags you should investigate further.
Be sure to share KPIs with your staff and explain their role in achieving your financial goals and keep them apprised of your progress along the way. Getting staff buy-in is often critical to getting the most out of your KPI initiatives.
And remember: Just because you’re measuring and monitoring KPIs doesn’t mean that you’ll achieve your financial goals and objectives. It’s what you do with the data — more specifically, the changes you make as a result of your KPI analysis — that will determine your level of success.
Get Started Now
Financially savvy owners and managers of veterinary practices understand the important role that KPIs play in running a financially healthy practice. As you wrap up 2020 and start planning for the new year, now is a good time to identify the most important KPIs for your practice and implement a plan for measuring, monitoring and analyzing them.