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How to Better Manage Your Veterinary Practice Finances

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    How to Better Manage Your Veterinary Practice Finances How to Better Manage Your Veterinary Practice Finances Presentation Transcript

    • Mark J. McGaunn, CPA/PFS, CFP®President
      MJM Financial Advisors, LLC114 Turnpike Road, Suite 107Westborough, MA 01581-2861 phone: (978) 405-3133e-fax: (978) 776-2609e-mail: mark@mjmfa.com
      web: www.mjmfa.com
      New Ways to Manage Your Veterinary Practice with Financials
    • Today’s Agenda
      Who to Blame
      Old Ways
      Basic Ways
      Key Performance Indicators
      Practice Dashboards
      Balanced Scorecards
      Financial Strength Index
    • 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 more successful school led by Leaders who say, “Now that we have the number, what proactive ideas can we implement based on it?”
    • Lots of Responsibility
      Veterinary practice owners and managers responsible for tracking projects, initiatives, clinical outcomes, policies, and procedures.
      Data “deluge” causes owners to lose focus and fail to keep strategic thinking aligned with their veterinary practice's long-term vision.
      Great strides in information collection and distribution, but
      Significant improvements in decision-making value of that information not realized.
    • Bad Tech Solutions Not Better…
      Technology often just simply delivers more, irrelevant or inappropriate data quicker.
      Great practices demand timely, relevant data.
      Jack Welch, former General Electric CEO, had worldwide operating results delivered to his desk by day 5 of each month.
      Much smaller businesses have trouble with 30 days.
    • 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?”
    • 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.
      Your financial statements are key diagnostic tools for managing the veterinary practice, tracking revenues and expenses, identifying financial problems, and ultimately increasing everyone’s compensation.
    • 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 specified period of time,
      Cash flow statement-tracks operational, investing, and financing cash flows, and
      Balance sheet-indicates veterinary practice’s degree of solvency and ownership equity
    • 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 those practices where inventory a material income-producing factor.
    • Income Statements (P&L)
      Of the three financial statements, P&L most adept and flexible device for monitoring practice’s financial health.
      Most practices should review P&L review these at least monthly.
      In addition to reporting patient income, employee costs, and overhead (office and medical expenses), income statements can even breakout incremental costs for various ancillary services (QuickBooks class system).
    • Comparisons & Budgets?
      Income statements augmented by footnotes can explain to practice owners major deviations in revenue and expenses compared to 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.
    • Cost Structures
      When studying your costs, remember that there are two general categories: fixed or variable.
      Fixed costs remain the same regardless of volume. They include rent, insurance and utilities.
      Variable costs, such as medical supplies, fluctuate with volume.
    • 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.
    • 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!
    • 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 to practice comparison easier.
      It is not necessary for you to re-create the wheel in your endeavors of practice-to-practice uniformity.
    • 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
    • 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)
    • Benchmarking
      Measurement 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.
    • 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?
    • Your Primary Competition Is..,
      What relevant benchmarking data are available to assess performance?
      Comparative benchmarking data are crucial to the success of any reporting systems.
      Ideally, a practice should have some comparative reference points to evaluate how it is doing with respect to its primary competitor-itself.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • KPI - Dentistry
    • 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.
    • 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.)
    • 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
    • Do Homework Before Move?
      Client moved to new practice building in 2005-staffed up for expected demand
      89%
      49%
      ROL
      68%
    • 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
    • Boring But Effective
    • 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 allow you to effectively communicate your philosophy to your entire practice.
      Low cost, strategic approach enables you to translate a practice’s vision and strategy into implementation.
    • 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
    • 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.
    • 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.
    • Dashboard Keys
      Measures should be compared to targets and benchmarks.
      Focus on looking at and explaining variances from both targets and benchmarks.
      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 constitutes an important function in well-designed Dashboards.
    • Visual Symbols
    • Practice Cockpit Indicator
    • 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.
    • 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.
    • 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 and non-financial measures of your practice,
      its leading and lagging indicators,
      employee and patient satisfaction, and
      short- and long-term strategy.
    • 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 an attempt to enhance the value of information and to exploit IT capability to deliver true value to decision makers.
      Perfect for situations such as lack of focus or direction, a new strategy, or a need to achieve practice alignment to a common vision.
    • 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.
    • 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.
    • 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
    • Scorecard Framework
    • Link Measures to Strategy
    • 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
    • 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
    • Customer Perspective
    • Internal Processes Perspective
    • The Result!
      Developing KPIs, Balanced Scorecards & Dashboards to measure and evaluate performance can pinpoint successes or problems in a veterinary practice.
      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, Ont.) for her Balanced Scorecard expertise!
    • Financial Strength Index (FSI)
      Simple measure of overall human hospital financial health is the Financial Strength Index (FSI).
      Composite measure of 4 critical dimensions that collectively determine hospital financial health.
      FSI implies that 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.
    • 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 (accumulated depreciation percentage)
    • 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.
    • Other FSI Factors
      Liquidity. High-FSI hospitals had better liquidity, evidenced by 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.
    • In Closing
      Seek help from CPA or practice management consultant
      Decide if you want number crunching or “big” picture analysis.
      Set short- and long-term goals for success and growth.
      Well-developed financial plans help merge strategy and financial capability.
      Management’s mantra-"anticipation, attention, analysis, and action."
      Financial performance-currency of an effective competitor. 
    • Thank You!
      谢谢
      Merci
      Danke Schon
      Grazie
      ありがとう
      당신을감사하십시오
      Obrigado
      Gracias
    • Contact Information
      Mark J. McGaunn, CPA/PFS, CFP®President
      MJM Financial Advisors, LLC114 Turnpike Road, Suite 107Westborough, MA 01581-2861phone: (978) 405-3133e-fax: (978) 776-2609e-mail: mark@mjmfa.com
      web: www.mjmfa.com