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2010 Financial Growth Management Strategy for Your Veterinary Practice

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  • 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. Contact Information
    Mark J. McGaunn, CPA/PFS, CFP®Managing MemberMcGaunn & Schwadron, CPA’s, LLC75 2nd, Avenue, Suite 425
    Needham Heights, MA 02494-2897main(781) 489-6651direct (781) 348-9227
    e-fax (781) 479-5985e-mailmark@mcgaunnschwadron.com
    web: www.mcgaunnschwadron.com.com
  • 3. Today’s Agenda
    Who to Blame
    Old Ways
    Basic Ways
    Key Performance Indicators
    Practice Dashboards
    Balanced Scorecards
    Financial Strength Index
  • 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.
    2ndschool-Leaderswho say, “Now that we have the number, what proactive ideas can we implement based on it?”
  • 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.
    Great strides in information collection and distribution, but
    Significant improvements in decision-making value still not realized.
  • 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. 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. 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. Reporting Basics
    You have to know the basics. The 3 financial reports used to monitor an organization’s financial health are:
    Income statement-lists revenue, expenses, and residual net income for period of time,
    Cash flow statement-tracks operational, investing, and financing cash flows
    Balance sheet-indicates veterinary practice’s degree of solvency & ownership equity
  • 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. 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. 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. 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. 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. Helpful Hint…
    BEFORE printing out financial statements to review:
    Make sure all deposits, checks, and credit card charges have been entered to month end, and
    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. 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. AAHA Chart of AccountsBalance 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. AAHA Chart of AccountsIncome 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. KPI - Dentistry
  • 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. 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. 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:
    profit per full-time employee equivalent (FTE) &
    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. Do Homework Before Move?
    Client moved to new practice building in 2007-staffed up for expected demand
    89%
    49%
    ROL
    68%
  • 35. Other Uncommon Metrics
    Avg. Unit Cost per Visit
    Avg. Occupancy Cost per Visit
    Actual Profit Per Active Client (not avg.)
    Convert Numbers
    to Ratios
    Examine
    Numbers
    Calculate Financial Impact
    Of Negative Variances
    Observe
    Trends
    Compare to
    Benchmarks
  • 36.
  • 37. Boring But Effective
  • 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. 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. Practice Cockpit Indicator
    Remember, it's that 15-year strategic financial plan that serves as both the:
    foundation for financial decision making
    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. 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:
    The practice’s major critical success factors should be included.
    Comments should be used where necessary to assist in interpreting the information.
  • 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. Visual Symbols
  • 44. Practice Cockpit Indicator
  • 45. Balanced Scorecard
    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.
  • 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. 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. 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. 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. 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. 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:
    Learning and growth perspective
    Veterinary practice process perspective
    Customer perspective
    Financial perspective
  • 52. Scorecard Framework
  • 53. Practice Vision & Strategy
    Financial Perspective
    Compensation
    Strategy
    Revenue
    Strategy
    Productivity
    Strategy
    Customer Perspective
    Pet Need
    Solutions
    Operational
    Excellence
    Client
    Education
    Internal Process Perspective
    Marketing
    Drive
    Operations
    Efficiency
    Innovation
    Employee Growth Perspective
    Technology
    Infrastructure
    Employee
    Competencies
    Responsibility
    Scorecard Review
    Balanced Scorecard Elements
    Business Vision & Strategy
    Strategic Themes
    Four Business Perspectives
    For each Perspective there are:
    Objectives
    Measures
    Targets
    Initiatives
  • 54. Balanced Scorecard
    Blank Strategy Map
    How success in achieving strategy will be measured and tracked.
    Statement of what strategy to achieve and what’s critical to its success.
    Level of performance needed.
    Key action programs required to achieve objectives.
    Strategic Theme:
    Financial Performance
    Objectives
    Measurement
    Target
    Initiative
    Customer Satisfaction
    Process Improvement
    Employee Satisfaction
  • 55. Customer Perspective
  • 56. Internal Processes Perspective
  • 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. 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. 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. 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. 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]
  • 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. 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. Thank You!
    谢谢
    Merci
    Danke Schon
    Grazie
    ありがとう
    당신을감사하십시오
    Obrigado
    Gracias
  • 65. Contact Information
    Mark J. McGaunn, CPA/PFS, CFP®Managing MemberMcGaunn & Schwadron, CPA’s, LLC75 2nd, Avenue, Suite 425
    Needham Heights, MA 02494-2897main(781) 489-6651direct (781) 348-9227
    e-fax (781) 479-5985e-mailmark@mcgaunnschwadron.com
    web: www.mcgaunnschwadron.com.com