2010 Financial Growth Management Strategy for Your Veterinary Practice


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2010 Financial Growth Management Strategy for Your Veterinary Practice

  1. 1. Financial Management Eye-Openers for the 2010 Veterinary Practice (In other words, employ threat assessments and methods to protect your veterinary practice from yourself and others so it can grow and prosper financially. No Neapolitan Mastiff required)
  2. 2. Contact Information Mark J. McGaunn, CPA/PFS, CFP® Managing Member McGaunn & Schwadron, CPA’s, LLC 75 2nd, Avenue, Suite 425 Needham Heights, MA 02494-2897 main (781) 489-6651 direct (781) 348-9227 e-fax (781) 479-5985 e-mail mark@mcgaunnschwadron.com web: www.mcgaunnschwadron.com.com
  3. 3. Today’s Agenda • Who to Blame • Old Ways • Basic Ways • Key Performance Indicators • Practice Dashboards • Balanced Scorecards • Financial Strength Index
  4. 4. The Great Number Deluge How healthcare organizations use financial data greatly affects current and future operational and financial performance. Two schools of thought: • 1st school-Managers ask, “What’s the number?” If bad, they ask “Whose fault?” Organization’s focus only on bottom line. • 2nd school-Leaders who say, “Now that we have the number, what proactive ideas can we implement based on it?”
  5. 5. Lots of Responsibility Practice owners and managers responsible for tracking projects, initiatives, clinical outcomes, policies & procedures. Data “deluge” -owners lose focus, fail to keep strategic thinking aligned with practice's long- term vision. 1. Great strides in information collection and distribution, but 2. Significant improvements in decision-making value still not realized.
  6. 6. Bad Tech Solutions Not Better… • Technology often just delivers more irrelevant or inappropriate data quicker. • Great practices demand timely, relevant data. • Jack Welch, former General Electric CEO, had worldwide operating results by day 5 of each month. • Veterinary practices have trouble with 30 days.
  7. 7. Use Your Data • Knowing how to read financial statements and understand the information within them is often the difference between prosperity and just getting by. • Time-honored question asked by every healthcare professional is: “Are we making money?”
  8. 8. Know Your Stuff • Veterinarians who don't carefully read such financial outcomes measurements run risks much as they would in failing to read medical outcomes carefully. • Financial statements are key diagnostic tools for managing the veterinary practice, tracking revenues and expenses, identifying financial problems, and ultimately increasing everyone’s compensation.
  9. 9. Reporting Basics You have to know the basics. The 3 financial reports used to monitor an organization’s financial health are: 1. Income statement-lists revenue, expenses, and residual net income for period of time, 2. Cash flow statement-tracks operational, investing, and financing cash flows 3. Balance sheet-indicates veterinary practice’s degree of solvency & ownership equity
  10. 10. Basis of Accounting • Most healthcare-practice CPA's utilize "cash basis" method of accounting. Cash basis shows what’s been collected and what’s been paid. • “Accrual basis” presents income that’s earned (not necessarily collected) and expenses incurred (not necessarily paid). • Both relevant for tax purposes. Accrual basis must be used for practices where inventory is a material income-producing factor.
  11. 11. Income Statements (P&L) • Of the 3 financial reports, P&L most flexible device for monitoring practice’s financial health. • Practices should review P&L at least monthly. • P&L reports patient income, employee costs, and overhead • Can even breakout incremental costs for various ancillary services (QuickBooks class system).
  12. 12. Comparisons & Budgets? • Income statements augmented by footnotes can explain to practice owners major deviations in revenue and expense vs. previous periods. • Checking against a well laid out budget (that already incorporates these timing issues) can show that no extraordinary management is needed. • Budgets are not meant to be punitive tools.
  13. 13. Cost Structures 2 general cost categories: • Fixed costs remain the same regardless of volume (rent, insurance and utilities) • Variable costs, such as medical supplies, fluctuate with volume.
  14. 14. Variable Costs Recognize, however, that variable costs vary differently. • i.e. medical supplies have a close relationship to volume, but staffing may vary in steps. • Important to recognize in budgeting, as well as in developing strategy.
  15. 15. Helpful Hint… BEFORE printing out financial statements to review: 1. Make sure all deposits, checks, and credit card charges have been entered to month end, and 2. Make sure all checking and credit card accounts have been reconciled Then print out reports and use for analysis! And it won’t mess with your tax planning!
  16. 16. Simple QuickBooks Format • You should modify your QuickBooks® chart of accounts to incorporate the AAHA chart of accounts format. No longer sold in healthcare version. • Makes practice financials LOGICAL.
  17. 17. AAHA Chart of Accounts Balance Sheet • Assets-Current, Fixed & Other (100 Series) • Liabilities-Current, Long-term (200 Series) • Equity (300 Series) -Corporations (C or S) -Equity for Partnerships or LLC’s -Proprietor’s Capital (Sole Proprietorship) -Administrative Costs
  18. 18. AAHA Chart of Accounts Income Statement • Income (400 Series) • Cost of Goods Sold (500 Series) • Operating Expenses (600 and 700 Series) -Staff Expenses -Occupancy Costs -Equipment Expenses -Administrative Costs • Other Income & Expenses (800 Series) • Income Taxes (900 Series)
  19. 19. Benchmarking Management must incorporate key factors in developing measures that: • Extend throughout entire practice.. • Tie into practice overall strategic plan. • Have consensus as to relevant and appropriate factors. • Based on both internal and external factors. • Empower employees, not stifle them. • Allow systematic review, and • Encompass each operating division in a veterinary practice.
  20. 20. Benchmarking • Franchisors have utilized benchmarks to highlight financial strengths and weaknesses in store-to- store and intra-store measurements. • True progressives utilize intra-entity benchmarking and metrics to measure their progress (if already > average). • Financial metrics are typically only a component. • Customer Service s/b measured in all aspects. • How can we be cutting edge?
  21. 21. Your Primary Competition Is.., • Relevant benchmarking data available to assess performance? • Comparative benchmarking data crucial to reporting system success. • Ideally, practices should have some comparative reference points to evaluate how it is doing with respect to its primary competitor-itself.
  22. 22. Key Performance Indicators • Quantifiable measurements that reflect the critical success factors of an organization. • They reveal a high-level snapshot of a practice’s financial and operational status.
  23. 23. KPI • Before Key Performance Indicators are selected, vital to identify what the practice’s goals are, which are in turn dependent upon its mission and owners. • KPIs act as a measure of progress towards these goals. • Whatever they may be, KPIs must be critical to the success of the practice.
  24. 24. KPI • Application of Key Performance Indicators provides practice owners with a high-level, real-time view of the progress of a practice. • Combination of reports, spreadsheets and charts. • Revenue figures, trends, or any long-term consideration which may be essential in gauging the health of the practice. • Should not only reflect the organizational goals but also be quantifiable.
  25. 25. KPI • To be valuable it must be accurately defined and measured. • A KPI may meet the criteria of reflecting the organizational goal, which may for instance pertain to being the most popular company. • However, since a company’s popularity can not be measured or compared to others, therefore the KPI would be useless.
  26. 26. KPI • Considerations regarding how a KPI is to be measured should also be established in advance. • Definitions as to exactly how the indicator is to be calculated and whether it is to be measured in dollar amounts or units should also be specified. • Moreover, it is imperative that the organization then sticks to these definitions from year to year in order to allow for annual comparisons.
  27. 27. Potential KPI’s Indicators can include: • financial viability • clinical outcomes • patient safety • quality of care • marketing and development • internal veterinary practice procedures; and • employee, patient, and DVM satisfaction.
  28. 28. Underlying Principles • The process of converting raw or numerical tabular data into a graphical depiction is known as “data visualization”. • One of the main goals of data visualization is to support decision-making through the use of properly designed graphical representations of information.
  29. 29. Visual Trends Inspire • For most operations managers, trending data and exceptions to those trends are much easier to understand when they are presented visually. • Information presented in a visual format allows decision-makers faster perception of patterns or problems that they may not have anticipated. • Ultimately, they can make valuable conclusions more readily.
  30. 30. KPI - Dentistry 0 50 100 150 200 250 300 350 NumberofVisits Month Patient Visits vs. Dental Screenings
  31. 31. People Factor Common approach to measuring financial performance basically little change from capital- intensive operating styles of 20th-century industrial companies. Old model doesn’t sufficiently account for the contributions of talented, highly motivated employees that more often than not, are the new basic source of integral practice wealth. Somehow, the component of “people” seems lost in the healthcare practice equation.
  32. 32. Other Industries Global management consultant McKinsey & Company reports since 1997 30 largest worldwide companies (market cap) have seen their profits per employee rise dramatically. 5 year reward system trend in leading US financial planning firms now centered on fixed-based structures, leading away from variable-based because return on labor statistics were a wild card (IA Mag.)
  33. 33. Practices can redesign their own internal financial performance approach and set goals for an intrinsic return on intangibles by also incorporating greater attention to both: 1. profit per full-time employee equivalent (FTE) & 2. the number of FTE employees rather than placing an intense focus on profits, returns on invested capital (ROIC), and return on equity (ROE). New Practice Metrics
  34. 34. Do Homework Before Move? 0 100000 200000 300000 400000 500000 600000 700000 800000 900000 1000000 2006 2007 2008 Practice Profit Owner Payroll Staff Payroll 89% 68% 49%ROL Client moved to new practice building in 2007-staffed up for expected demand
  35. 35. Other Uncommon Metrics • Avg. Unit Cost per Visit • Avg. Occupancy Cost per Visit • Actual Profit Per Active Client (not avg.) Calculate Financial Impact Of Negative Variances Examine Numbers Convert Numbers to Ratios Observe Trends Compare to Benchmarks
  36. 36. Examine Numbers Convert Numbers to Ratios Observe Trends Compare w/ Internal Benchmarks Calculate Financial Impact
  37. 37. Boring But Effective April 1-8 April 9-16 April 17-24 Pt. Visits 225 211 185 Surgeries 21 16 11 Payroll $10,492 $11,212 $10,222 Checking Balance $6,122 $18,225 $9,887 Complaints 4 2 0 New Patients 7 11 8
  38. 38. Presenting Dashboard Data • "Dashboard" reporting used more in all industries to keep owners and managers focused on critical areas that affect overall performance of the organization. • Dashboards effectively communicate your philosophy to your entire practice. • Low cost, strategic approach enables translation of practice’s vision and strategy into implementation.
  39. 39. • Can create visually interactive financial scorecards to help you monitor both your key financial and non-financial metrics and ratios. • Help employees at all levels monitor individual performances and align their performance against practice goals. • Instill a culture of responsibility and accountability for results. Dashboards
  40. 40. Practice Cockpit Indicator Remember, it's that 15-year strategic financial plan that serves as both the: 1. foundation for financial decision making 2. framework against which we measure our financial performance. We suggest developing a “one-sheeter” Dashboard to organize pertinent practice information to be reported on a minimum monthly, and preferably weekly, basis.
  41. 41. Developing a Dashboard Keep it concise and easy to use. Report can be a combination of line and bar graphs, run charts, instrument gauges, and diagrams. A well-drawn Dashboard has basic guidelines: 1. The practice’s major critical success factors should be included. 2. Comments should be used where necessary to assist in interpreting the information.
  42. 42. Dashboard Keys • Measures should be compared to targets. • Look at and explain variances from targets. • Use trend analysis so readers can visually see long-term patterns. • Clear definitions should be published. • Visual appeal shouldn’t be a “bonus”. • Proper use of color important function in well- designed Dashboards.
  43. 43. Visual Symbols
  44. 44. 0 10 20 30 40 50 60 70 80 90 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Percentage of patients utilizing our pharmacy service . Goal: 80% 0 10 20 30 40 50 60 70 80 90 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Percentage of patients who are compliant with dentistry recommendations. Goal: 85% 0 10 20 30 40 50 60 70 80 90 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average time in minutes from patient check-in to check-out. Goal: 45 min. 0 20 40 60 80 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Percentage of patients who report being delighted with care provided. Goal: 95% 4 5 5 6 6 8 5 7 9 9 11 9 0 2 4 6 8 10 12 14 16 18 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Number of Surgical Cases per Day 0 20 40 60 80 100 Dr. Dewey Dr. Cheatem Dr.Howe Dr. Shep Percentage of patients who saw their veterinarian at last appointment. Goal: 90% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $65 $62 $58 $0 $10 $20 $30 $40 $50 $60 $70 $80 Baseline Current Goal Overhead Cost per Visit 0 1 2 3 4 5 6 7 8 Our Practice Goal FTE staff members per FTE veterinarian 0 10 20 30 40 50 60 70 80 90 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Percentage of staff who recommend our practice as a great place to work. Goal: 100% Practice Cockpit Indicator
  45. 45. As healthcare financial leaders, we can perform key management tasks to assist in the application and analysis of financial data: • Get it right. • Get it soon. • Make it useful. • Get it to decision makers. • Make active decisions with the data. Balanced Scorecard
  46. 46. Balanced Scorecard • Robert Kaplan and David Norton developed in 1997. • Process integrated strategy execution, performance management, and facilitated organization learning. • Kaplan argued traditional benchmarking based on production and financial indicators provided limited insight into business’s key strategies and that comparisons were generally made to the average of a group of practices.
  47. 47. Balanced Scorecard Balanced Scorecard approach helps practices develop primary goals directly from a mission statement, practice vision, and defined critical business strategies to implement all 3. Approach takes a pulse of: – financial & non-financial measures of practice, – its leading and lagging indicators, – employee and patient satisfaction, and – short- and long-term strategy.
  48. 48. Balanced Scorecard • Kaplan utilizes a strategy map (Scorecard) to develop a practice’s key strategies. • Shows cause and effect linkages between various parts of strategy. • Represents attempt to enhance value of information and exploit IT capability to deliver true value to decision makers. • Perfect for situations with lack of focus or direction, a new strategy, or need to achieve practice alignment to a common vision.
  49. 49. How Scorecards Help? Balanced Scorecards state that: • Reporting should be available on those key performance indicators truly affecting veterinary practice performance, and • Data is irrelevant if it cannot be utilized to improve veterinary practice performance.
  50. 50. Show Concepts Clearly Balanced Scorecards present data in a visual format, allowing both a: • High level review of goal attainment and • Drill down ability to monitor status against predetermined practice objectives. You can incorporate your “15 year” strategic plan to everyday practice operations management.
  51. 51. The Four Views Balanced Scorecards suggest we view a practice from 4 perspectives, and develop metrics, collect data, and analyze it relative to each perspective: 1. Learning and growth perspective 2. Veterinary practice process perspective 3. Customer perspective 4. Financial perspective
  52. 52. Scorecard Framework
  53. 53. Scorecard Review Balanced Scorecard Elements Business Vision & Strategy Strategic Themes Four Business Perspectives For each Perspective there are: Objectives Measures Targets Initiatives Financial Perspective Customer Perspective Internal Process Perspective Employee Growth Perspective Revenue Strategy Productivity Strategy Compensation Strategy Operational Excellence Pet Need Solutions Client Education Operations Efficiency Marketing DriveInnovation Employee Competencies Technology Infrastructure Responsibility Practice Vision & Strategy
  54. 54. Blank Strategy Map Balanced Scorecard Strategic Theme: Process Improvement Customer Satisfaction Financial Performance Employee Satisfaction Objectives Measurement Target Initiative Statement of what strategy to achieve and what’s critical to its success. How success in achieving strategy will be measured and tracked. Level of performance needed. Key action programs required to achieve objectives.
  55. 55. Customer Perspective Objective Key Performance Measure Target Initiatives Encourage patient owner compliance with AAHA dental screening recommendations over current 30% standard Percentage of patients compliant with semi-annual screenings and recommendations 100% DVM recommended follow through (PMR review) Compliance Year 1-45% Year 2-60% Year 3-75% -Implement PetCare TV® & dental education in waiting areas -Document!!! -Develop staff communication plan (DVM, tech, kennel, recept., other) & training
  56. 56. Internal Processes Perspective Objective Key Performance Measures Target Initiatives Develop diagnostic and therapy protocols for practice to ensure consistent medical treatment and care # of Protocols Written # of Missed Charges Found on Random Charge Audits 80% of all practice visits covered by formal written protocol Target Coverage Month 1= 20% Month 2-9=60% Month 10-12=80% -Functional areas responsible for part of each protocol -Training!!! -Develop staff communication plan (DVM, tech, kennel, recept., other) & training
  57. 57. The Result! KPIs, Balanced Scorecards & Dashboards measure and evaluate performance and pinpoint veterinary practice successes or problems. Saves valuable energy and efforts on coming to such conclusions. Practice owners can rely on that information about practice operations and performance in order to act correctly and make good decisions. A special thanks to Elizabeth Bellavance, DVM (Camlachie, Ontario) for her Balanced Scorecard expertise!
  58. 58. Financial Strength Index (FSI) • Simple measure of human hospital financial health. • Composite measure of 4 critical dimensions that collectively determine hospital financial health. • FSI implies hospitals with large profits, great liquidity, low debt, and newer physical facilities are in excellent financial condition. • Conversely, hospitals with poor profitability, low levels of liquidity, heavy debt, and aging physical plants are in poor financial condition. • I’ve seen it in action.
  59. 59. FSI In a study of human hospitals, four key drivers of financial strength were: • profit (total margin), • liquidity (days cash on hand), • financial leverage (debt to total assets), and • age of physical facilities (accum. depr. %)
  60. 60. FSI Critical Key Factor is… Profitability strongest relationship to financial strength. • High-FSI hospitals had greater mix of surgical patients. • Pricing far more important than cost control as a driver of financial strength. • High-FSI hospital fees on avg. 13% higher but costs that were only 2 % lower than those of low-FSI hospitals.
  61. 61. FSI Calculation FSI = [(Total Margin - 4.0) / 4.0] + [(Days Cash on Hand - 50) / 50] + [(50 - Debt Financing Percent) / 50] + [(9.0 - Average Age of Plant) / 9.0] FSI Score Financial Health >3 Excellent 0 - 3 Good -2 to 0 Fair <- 2 Poor
  62. 62. Other FSI Factors • Liquidity. High-FSI hospitals had better liquidity, higher values for cash on hand. • Financial leverage. High-FSI hospitals had lower debt. • Age of facilities. High-FSI hospitals had significantly newer facilities and greater rates of investment.
  63. 63. In Closing • Seek help from CPA or veterinary consultant • Decide -number crunching or “big” picture ? • Set short- and long-term goals for success. • Well-developed financial plans merge strategy and financial capability. • Management mantra-"anticipation, attention, analysis, and action." • Financial performance-currency of an effective competitor.
  64. 64. Thank You! 谢谢 Merci Danke Schon Grazie ありがとう 당신을 감사하십시오 Obrigado Gracias
  65. 65. Contact Information Mark J. McGaunn, CPA/PFS, CFP® Managing Member McGaunn & Schwadron, CPA’s, LLC 75 2nd, Avenue, Suite 425 Needham Heights, MA 02494-2897 main (781) 489-6651 direct (781) 348-9227 e-fax (781) 479-5985 e-mail mark@mcgaunnschwadron.com web: www.mcgaunnschwadron.com.com