How to Finally Understand KPIs

Most of us would rather get a tooth pulled with no Novocaine than read through financial reports sent by a CPA.

Understanding those boring reports is, however, critical to the health of your practice and the quality of your retirement.

We asked Jason Coppens, a small animal practice consultant, located in Grand Rapids, MI, to simplify the very few numbers you should truly pay attention to.

 

Why is it so important for practice owners and managers to focus on financials?

 

Most practice owners and practice managers wear multiple hats. In addition to their actual job, there are fires to put out, daily challenges, staffing issues, client concerns, things to fix etc. So it’s easy to get lost in the weeds.

In that context, who wants to read a 20-page long, dry and boring list of dollar amounts logged in a profit and loss statement (P & L) sent by their CPA?

How are they supposed to decipher those numbers, analyze them and put them to good use?

They need to translate the data to answer questions such as: Are we going in the right direction? Are things getting better or worse? What underlying problems exist? What problems might be coming up? Are we addressing those issues?

There are critical questions that a true business owner should be asking – and answering.

Yet because they’re overwhelmed by day-to-day operations, practice owners and managers often file the P & L away and forget about it.

It’s no better than knowing your pet has a tumor, ignoring it and allowing it to grow bigger and bigger.

Jason Coppens’ solution to this all-too-common situation is to focus on only 5 numbers to get an instant bird’s eye view of where you are, make sure you’re still heading in the right direction, and making progress towards your goals.

 

So what are those magical 5 numbers?

 

Those numbers are called KPIs – Key Performance Indicators. These 5 tell you the minimum information you need to know to understand the health of your practice.

Think about it as the minimum required amount of bloodwork to understand the health of a patient.

It seems that many CPAs favor quantity vs. quality of data, and most people on the receiving end don’t know where to find the few numbers that are relevant.

Now, Jason Coppens didn’t invent KPIs of course. Most advisors suggest ranges, which can vary quite a bit.

No wonder colleagues are confused.

So in order to simplify everything, he came up with the “five 20s.”

These are 5 KPIs that should be around 20% of revenue.

Now, to be fair, he also looks at a 6th number, which everybody understands: the practice revenue.

 

What are your five KPIs?

 

Jason Coppens: “The first one is net profit. I would love to see profits of at least 20%. Now, few practices get there, but that’s a very healthy goal.

Between 15 to 20% is still healthy. Under 15%, and especially under 10%, would be concerning to me, and requires a hard look at why that number is so low.

After all, profits drive the resale value of a practice. So if the owner wants to retire comfortably, profit should be maximized. It has nothing to do with greed. It has to do with making an entire life of hard work worth it.

The very best practices I consult with have reached 30 and one even 40% profit!”

 

Beyond 20% profit, what are the other KPIs?

 

Jason Coppens: “I look at two other KPIs on the wage side and there’s two on the expense side.

On the wage side, we have staff wages and DVM wages.

On the expense side, there are COGS and all remaining expenses.”

 

 

OK, let’s start with payroll

 

Jason Coppens: “Keep in mind that I only look at payroll for our next KPIs. I don’t include benefits or the various taxes. However, payroll includes all staff and doctors, including associates, partners, owner etc.

Typically, the DVM expense is a bit lower than the staff expense, but to simplify we can shoot for 20% in each category.

And then you can play with those numbers once you have a good grip on them. So for example, DVM wages are usually closer to 18%, and that allows staff wages to comfortably be around 22%.

If both were 22%, the extra 4% would have to come from somewhere else. That’s basic math. The money will have to come out of another KPI, and hopefully not out of net profits!”

 

How can you keep staff expenses at 20% in this economy?

 

Jason Coppens: “That’s definitely a challenge right now. Remember, my five 20% are merely guidelines. They are a way to finally remember these numbers.

Once you understand them, you can tweak those numbers.

So if you live in a very expensive area, or a very competitive area, your staff and doctor wages may be above 20%, and that’s OK. It doesn’t mean you’re running your practice poorly.

If you don’t want these generous wages to come out of profit however, there aren’t 50 ways to reconcile the math.

Either you need to increase revenue, or you need to lower other KPIs.

Since we don’t like to dip into profits, then the only other option is to lower one of both other KPIs, those on the expense side.”

Here are examples from our interview with Jason Coppens:

•  You can get there by managing your inventory well and not carrying 27 antibiotics, 53 eye ointments and 72 flea and tick products.
•  You can negotiate better terms and lower costs with virtually all vendors.
•  You can join a buying group.
•  You can increase your overall efficiency.
•  You can raise prices, especially in a high-inflation environment.
•  You can increase compliance.
•  You can increase your average transaction fees – ethically of course.
•  You can improve the quality of the medicine you provide by offering your “A” plan, rather than assuming what a pet owner can afford.
•  You can make sure doctors only do what they should do, while nurses do everything they can legally do so you can see more appointments in the same amount of time by leveraging your team.
• You can improve customer service and the customer experience, so you’re not just “the vet down the road”, but the vet clients love and recognize for providing premium care.

 

 

What’s the 1st KPI on the expense side?

 

Jason Coppens: “The first one is Cost of Goods, abbreviated as COGS.

COGS include drugs, supplies, lab expenses (in house and outside), pet food, supplements and other over-the-counter products etc.

Even though I’ve seen COGS as low as 15%, I like to see them at a maximum of 20%.”

 

And what’s the 2nd KPI on the expense side?

 

Jason Coppens: “The 5th and last KPI can be called adjusted expenses.

This is everything that isn’t wages or COGS.

They include rent, insurance, accounting fees, advertising, merchant fees, cleaning, IT & computer expenses, dues, business vehicle, subscriptions, office supplies, postage, repairs, maintenance, travel, utilities (including internet, phone, trash etc.).

This is the easiest one to balloon to extravagant levels, but I like to see it under 20% as well.

Since several of the costs are fixed and don’t increase as the number of appointments do, you can lower this area by increasing revenue.”

 

Bottom line: if you focus on these 5 simple KPIs, and you keep them at or around 20%, your practice will be in very good shape.

Incidentally, a healthy balance sheet typically means that your team is well paid, your patients and clients are well taken care of, and your retirement will be a very happy one…

 

Phil Zeltzman, DVM, DACVS, CVJ, Fear Free Certified