Australian Veterinary Practice Management Association

Brisbane May 2010 PRACTICE MANAGEMENT WORKSHOP

If you can't measure it – you can't manage it! Thomas E Catanzaro KEY PRACTICE INDICATORS (KPIs) Charting Your Fiscal Management

Supporting AVPMA 2010

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IF YOU CAN'T MEASURE IT – YOU CAN'T MANAGE IT!

THOMAS E CATANZARO

If you can't (or won't) measure it, you can't manage it!

Chart #1 – Percent change in gross income

Chart #2 – Total income versus total operational expenses

CHART #3 – Management health

Chart #4 – Number of transactions per month

Chart #5 – New clients per month

Chart #6 – Value of average transaction

Chart #7A – Drugs and medical supplies as percentage of gross

Chart #7B – Nutritional marketing efficiency

Chart #8 – Percent gross paid to non-veterinarian staff monthly

Chart #9 – Monthly cost of veterinarian(s) (salaries and draws)

Chart #10 – Patient advocacy factor

Dinner bell chart

Other charting and computations that can be done

Other charting and computations that can be done annually

CHART – Current Ratio

CHART – Quick Ratio

CHART – Profitability Ratio

CHART – Times Interest Earned

Tabular Data – Income Statement and Operational Data

Compute – Inventory turnover

Compute – Return on equity ratio

Compute – Accounts receivable position

Comparing to national norms

Potential with new ava veterinary chart of accounts

Supporting AVPMA 2010

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Australian Veterinary Practice Management Association

Occupational Health and Safety

The AVPMA OHS package is designed in partnership with members to meet the real world challenges of workplace safety in your practice.

Having a workplace safety program is a legislative requirement for every employer and shouldn’t be ignored.

The AVPMA package includes:

OHS program documentation for your state

Policies and procedures

An OHS risk assessment for veterinary practices

Program implementation guide

Support materials like checklists, guidelines, forms and templates

Order your manual today! complete the order form at the AVPMA conference table

or email avpma@ava.com.au

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PRACTICE MANAGEMENT STREAM BRISBANE 2010

With the generous support of

Hill’s Pet Nutrition

The Australian Veterinary Practice

Management Association is proud to present

Thomas E. Catanzaro DVM, MHA, FACHE

Diplomate, American College of Healthcare Executives Hospital Director, Veterinary Health Centres, University of Adelaide

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KEY PRACTICE INDICATORS (KPIs) Charting Your Fiscal Management

Thomas E. Catanzaro, DVM, MHA, FACHE

Diplomate, American College of Healthcare Executives Hospital Director, Veterinary Health Centres, University of Adelaide

If you can't (or won't) measure it, you can't manage it! Dr Tom Cat

When consulting, tracking Key Practice Indicators (KPIs) includes fiscal charting, but does not stop there if we want to make a difference for the practice. The traditional GROSS TURNOVER or AVERAGE CLIENT TRANSACTION does not tell you one iota about the net income (the only thing an owner can spend at EOM), or which programs are driving more net income, or even what programs are being ignored that could drive more net income. Tracking procedures is one method for a practice manager to keep a pulse on the activities of the practice compared to the commitment to the practice’s specific and written Standards of Care (SOC), especially in wellness areas, where the difference is most often just in the provider’s narrative. As a consultant, I never recommend managing by the bottom line dollars only (gross sales or ‘turnover’ and average client transaction do not tell us anything about the net, or about client return rates). Clients are the top line and the staff generally believes they are there to serve the clients. Do not disappoint them. The charting recommended here is "tip of iceberg" management and provides key "signs" of problems which allow more rapid leadership response to prevent a problem BEFORE it goes out of proportion. This balance between client-centred service and net centred liquidity is the "art" of practice management. In the Signature Series monograph, Profit Centre Management, in the Tool Kit, is an Excel

spread sheet (www.vin.com). As a consultant, the procedure tab is most significant, followed by the fiscal tab. With the Procedure Tab, outpatient visits are reported as WELLNESS CONSULTS (www.npwm.com) as well as OUTPATIENT CONSULTS (in a team-based practice, the Nurse consults are added to the outpatient visits). Outpatient visits usually account for about 70% of the transactions in a mature companion animal practice. Inpatient visits is a summation of dentistry, surgery, X-ray and IV patients, usually accounting for about 15% in a mature companion animal practice. Anesthesia procedures should match or exceed dental + desex surgery + other surgery; hospitalization days should exceed anaesthesia procedures, while IOFs should match anaesthesia procedures. Challenge here is linkages – first 30 minutes of anaesthesia is minimum, and goes into anaesthesia count, while after 30 minutes the timer counts minutes and there is a per minute charge after 30 minutes, but does not add to the anaesthesia count. The fiscal tab has a growth computation, and also tracks cost of drugs sold. If the drugs have not been split out for nutrition and medical supplies, this factor is disguised from management measurements. The nutritional sales requires a true cost of food sold, since the margin is so small, so ending inventory (which should match beginning inventory)

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is entered so nutritional purchases can be adjusted based on inventory changes. Rent and ROI are combined, since many practices blend these two owner draws, and we do want to track this number. It is my experience that often the budget does not match the Fiscal Tab, since the budget usually comes from the practice’s monthly P&L and the Fiscal tab comes from the veterinary software (not right, but a common challenge). The Procedures Tab chart and the Fiscal Data Tab chart automatically provide a dozen dots a month needed to "keep the pulse," each providing a critical set of data for the practice, which becomes ‘information’ when compared to other data points in the spread sheets. At a minimum, when starting, the charts provided should be plotted for the previous twelve months, so changes from same month the previous year will be seen immediately. These two charts can be compared to the cash budget or other computer-driven income reports. It should be obvious that the more interrelationships (cause-and-effect) that can be identified, the easier it will be to initiate changes. In the Signature Series monographs (www.vin.com), the diskette (in Excel) which drives all the charts from the program-based budget is in the monograph titled, Profit Centre Management. A brief description of the charts and some of their interrelationships follow: CHART #1 – PERCENT CHANGE IN GROSS INCOME – reflects the financial statement gross of the reported month divided by the same month the previous year to get the percent change. An average of the medical CPI plus six percent is the desired growth for a mature practice. This chart can be affected by a great or poor showing the previous year, so please ensure that you understand why last year's gross occurred before making any major management decisions. This chart also shows you the trend for the year, so it has an impact of fee schedule and program decision making. The trend relationship with the patient advocacy or average transaction fee can lead to interesting discoveries. CHART #2 – TOTAL INCOME VERSUS TOTAL OPERATIONAL EXPENSES – is strictly the figures reported on the financial income (profit and loss) statement each month in each of these categories (before Balance Sheet monies/expenses). The use of different colours for each factor can be substituted for the "O" and "X" entries, but please label the line at one margin for clarity. The space between the lines is more important for day-to-day operations, while the peak and valley trend can be affected by cash accounting techniques, bonuses, major expenditures, or even seasonal changes. Spikes in drug company payments, or three pay period months, can have a major impact on this chart. Comparing this chart to the number of transactions, the cost of carrying an increasing level of drugs and/or medical supplies, or the number of new clients often reveals an interesting relationship of cause-and-effect. CHART #3 – MANAGEMENT HEALTH – is simply the total expenses of the income statement, less rent, ROI, and veterinarian monies (these three elements are the greatest variables between practices and therefore cannot be included for a "standard"). As a percentage of revenues, for general companion animal practices un Australia, this line needs to stay below the 50 percent level any month, and below 48 percent any quarter. Specialist have a higher FEE level, so their costs on this chart could be 35-45% more often. Mixed animal and food animal practices will often have a lower overhead expense percentage since their staff costs are generally lower. While most practices start

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their tracking and find themselves somewhere over the 60 percent level, the well managed, mature, companion animal practices generally stay within the 45 to 48 percent range. We do have a couple practices which stay below 40 percent. CHART #4 – NUMBER OF TRANSACTIONS PER MONTH – this is simply the total number of receipts written, regardless of product, service, or number of pets. It is a very useful instrument to determine client relations driven workload, as well as a useful tool to assess other charts in this set, such as the number of new clients or the cash flow relationships. A reasonably balanced mixed animal practice would push its outcall doctors at 250 to 300 transactions per month per doctor, while companion animal practices start to push the linear-style doctors into excessive hours at about 350 to 450 transactions per month per doctor. We have had practitioners push themselves at 1000 transactions per month rate (solo doctor), but that was why we were called into the practice. The new associate allowed us to reduce the owner to almost 800 transactions per month while increasing his client contact time by 50 percent. In a multi-tasking technique training (mt3) program, it is not uncommon to drive 650-850 transactions per doctor in a less than 40 hour week environment - this is allowed by leveraging the doctor’s time with staff healthcare delivery (another book available for free download from the VIN Library). CHART #5 – NEW CLIENTS PER MONTH – reflects the real client numbers as kept by the client relations staff or computer of non-active/new clients (o) who have accessed care that month, with a subset plotted of the number who were referred (x) by other clients. A mature, quality, companion animal practice should see about 10 percent of its TOTAL transactions being new clients (about 30-35 new clients per doctor per month), and about 60 percent of the new clients coming from satisfied client referral. Just plotting this data often changes the attitudes of the staff, since measured items become management concerns. This chart should be compared to total cash flow and transactions per month to get a real understanding of the new client impact. CHART #6 – VALUE OF AVERAGE TRANSACTION – is the financial statement gross income in real dollars divided by the total number of receipts written in the same reporting period as the financial statement. While this figure is often published nationally by management associations and journals, the data used to determine the real dollar amount varied by the submitting practice. This factor does not reflect the visits per client per year, nor does it reflect the man-hours per transaction. All of these affect net. When evaluating your practice's trend, compare this chart to the patient advocacy chart trend, the number of transactions chart, and payroll hours per transaction to better understand where you stand. CHART #7A – DRUGS AND MEDICAL SUPPLIES AS PERCENTAGE OF GROSS – can be done by actual inventory, or by computation, as long as there is consistency within the reporting methods. In Australia, the habit of combining all drugs and medical supplies into a single category steals this management tool from the practice. As a practice example, when items are removed for in-house use or they are durable medical equipment which have been expensed at purchase, they need to be deleted from the resale inventory computation and transferred to hospitalization/nursing care accounts (this can be done by clipboard annotation, and transferred at the end of each month [TBA]). Many practices that are on a cash basis only report the invoice items paid. This will

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cause a peak and valley effect that must be annotated for clarity, especially since it affects other charts in this set. Cyclic ordering at greater than 30-day intervals should also be annotated so that peaks and valleys are explained. This chart needs to exclude nutritional sales when they exceed three percent of the value. The goal of 10 to 14 percent for well-managed and balanced-program companion animal practices, and can be lessened with technician management or increased by neglect. CHART #7B – NUTRITIONAL MARKETING EFFICIENCY – needs to be tracked when the sales value exceeds three percent since the profit margin is so much lower than drugs and biologicals. In most practices, the initial charting reflects loss of revenue, generally due to in-house usage and personal use habits. This is another case when the "clipboard transfers" are especially important at the end of each month. Since this product line lends itself to management by nutritional counsellors, it is important they have ownership in the success of this chart. CHART #8 – PERCENT GROSS PAID TO NON-VETERINARIAN STAFF MONTHLY – is the total financial statement personnel compensation dollars, excluding staff benefits and contracted healthcare labour. The goal of 19 - 20 percent is based on the average staff, but when the staff is used as veterinary extenders (doing things to free the veterinarian), we see this figure moving up to 21 to 24 percent in the progressive practices. CHART #9 – MONTHLY COST OF VETERINARIAN(s) (salaries and draws) – is the salary, draws, and other doctor monies (not routine benefits or ROI) as reflected for veterinarians on the financial statement. Most practices attempt to target 20 - 23 percent for this compensation factor. If the owner is not drawing a healthcare salary, please establish a clinical salary which approximates 22-23 percent of his/her personal production. Any return on investment (ROI), rent, or management fees should not be included. The adjusted owner income (AOI) worksheet is available for personal information, and should not be considered part of the IRS or practice fiscal management database. CHART #10 – PATIENT ADVOCACY FACTOR – is the gross income per month divided by some annualized factor (eg one of the annual vaccinations) done in the same month. This chart is only applicable to the given practice since we use "practice philosophy-specific" pieces of information because they are readily available. The data elements must be validated for: cyclic nature of client compliance and species mix within the practice (these two factors can be revealed with the medical record audit tools provided earlier), local requirements for the frequency of rabies vaccination, and validity of numbers of rabies vaccinations. An internal control to track the rabies vaccine is to check inventory to certificates to tags on a monthly basis. To better understand the interrelationship of patient advocacy to practice trends, consider that this chart's trend will increase as the same client/patient returns multiple times per year for smaller purchases, as will the number of transactions, but the average transaction fee would likely remain level or go down for the same period. DINNER BELL CHART – this is a team recognition system – we often use a month chart that has the gross sales on the vertical margin and appointment days horizontally. The monthly budget line is drawn with zero on the start of the month and the goal on the last appointment day of the month. Each day’s sales are posted in an accumulated fashion (eg day one at $3420 sales, and day 2 at $4040 sales gives you a dot at $7460

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above day two). IF the dot is above the budget line, the team is doing well, and if it stays below the budget line for 5 days, the Standards of Care compliance is reviewed by doctor, followed by mentoring and coaching as needed. When the end of the month arrives, 15% of anything OVER the goal point is provided the staff for their end of month party (hint to tight wad owners – anything over the goal point is pure net, and unexpected, and you are keeping 85%, so quit trying to negotiate a down-scaling when the team is really humming alone). The staff coordinators decide on when and where the celebration will be (hopefully within the first week). Small wins may be ice cream at Cold Rock, while large wins may be sunset cruise dinners for staff and their significant other (ensuring it stays within the 15% over-ride). OTHER CHARTING AND COMPUTATIONS THAT CAN BE DONE

The ability to graphically look at specific trends lends a leadership emphasis, since it is perceived as a form of management, by both the person who does it and those who observe it. A few additional examples of operational ratios, just to stretch your imagination, include specific relationships which can be "titled" for management purposes, such as: Client Turnover Rate: Active Clients/Period New clients/Period Client Visitation Rate: Transactions/Period Active Clients at End of Period Anesthesia Balance Efficiency: Income from of Surgeries & Dentals in Period Income from Anesthesia in Period Doctors Diagnostic Dilemma Drug Sales : Diagnostic Sales

The monthly tracking of each veterinarian's pharmacy sales compared to their diagnostic sales (X-ray, lab, ECG, etc.) is far more indicative of quality care than tracking each doctor’s Average Client Transaction. Good quality companion animal practices average 1:1, some bird practices are 1:2, and some food animal practices are 1:0.25. Each practice has its own ratio. What is yours? The cost of Isoflurane, in a semi-open circuit system, is estimated to cost about six dollars per hour, according to the manufacturer and its consultants, so to compare income to expense is not always appropriate. By looking at the relationship between income centres which have a linked usage, it is often easy to see areas where either better tracking (eg timing anaesthesia and charging in ten minute increments) or fee increases should be occurring. These types of relationships and others could be graphed on charts similar to the original ten or put into linear tables (columns and rows). There are practices which chart procedures and others that chart costs or expenses. Procedures will tell you more about workload and practice productivity than a dollar amount, which is affected by discounts and fee increases. The item being tracked should come from already available data outputs within your facility, which will also tell you what frequency is available for posting. Since this data is best maintained by the staff, make the frequency and task match the information availability. It could be tracked each month, each quarter, semi-annually, or even just annually.

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OTHER CHARTING AND COMPUTATIONS THAT CAN BE DONE ANNUALLY CHART – Current Ratio – is simply the current assets divided by the current debt, as reflected in the monthly financial report. It supposedly is more helpful to evaluate the safety of the fiscal position of a practice than the total dollars of working capital available (current assets - current liabilities), but can be affected by the accounting techniques. As such, we generally use this chart only for acquisition, disposition, loans, or annual evaluation of practice trends. A ratio over two is the preferred position at all times. CHART – Quick Ratio – is the current assets less inventory (called quick assets) divided by the current liabilities (debt). Some banks prefer this ratio when looking at acquisition, disposition, or loans so we again prefer it as an annual practice trend indicator. CHART – Profitability Ratio – is the net income divided by sales, which gives us a percentage which normally varies between 3 and 15 percent after owner’s ROI is deducted. Since the net income is greatly affected by the accounting techniques, this again is generally used only as an annual practice trend evaluation. CHART – Times Interest Earned – is the earnings before interest and taxes divided by the interest. This indicates to the banker that the loan interest is covered. As such, this is another useful tool for annual evaluation of practice trends, but not too useful at a greater frequency. TABULAR DATA – Income Statement and Operational Data – the two tabular charts (rows and columns) are offered to assist in the charting as well as to see real dollar/activity trends. If these charts are completed first from the income statement (profit and loss) and activity records, then the charting often becomes easier.

The income statement data is pretty self-explanatory, except "NUTR" stands for "nutritional", not "neuter". When "salaries" are recorded, draws should also be included. Benefits are a practice dependent decision, but please be consistent. Postage has traditionally been an indicator of mail-based outreach programs to existing clients, so we request this factor be monitored. Some accountants include it with advertising, so that is why the combination, but I would recommend postage be a specific line item so it can be easily monitored by "the boss."

The operational data chart gives some hard number data. This may be the most painful chart of the set; it reflects Programs and Procedures in numbers, not dollars, which means it reflects what clients were told as “needs”. The "number of specific type vaccinations" is an annualisation factor, so if you are in a two-or three-year vaccine community, use a different annual adult animal activity. When we look at number of IOFs per surgery, number of ECGs per elderly animal, the number of inpatients compared to outpatients, or even just the number of dentals or X-rays per number of outpatients, relationships emerge which reflect on the quality of care being offered. A practice's delivery rate should not be compared to any other practice, but the delivery rate is a consistent indicator of the healthcare philosophy within a practice. It is the practice's philosophy of care which drives the activity numbers, no one else affects the number of procedures.

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COMPUTE – INVENTORY TURNOVER – Inventory turnover is simply sales divided by inventory. It implies that all sales are the result of conversion of inventory to cash, which is not always the case in veterinary practices, but it is close enough for a practice to use when comparing to itself. Since a practice's cash position is greatly affected by the number of times a profit is made, we would prefer to know annually the INVENTORY TURNOVER RATE (target is eight to ten times per year):

yearly inventory expense value of inventory on hand

COMPUTE – RETURN ON EQUITY RATIO – If we assume that the ownership does not take excess salaries and charges a fair rent, and that all other "perks" are within legal and reasonable limits, then we can calculate the RETURN ON EQUITY RATIO. These are a lot of "ifs", but if they are appropriate, this ratio should reflect a 35 percent-plus annual investment return:

net income equity

COMPUTE – ACCOUNTS RECEIVABLE POSITION – In evaluating the Accounts Receivable position of the practice on an annual basis, the following computation should show a downward trend, below the acceptable practice budget median:

Net Client Accounts Receivable Net Client Service Revenue

365 COMPARING TO NATIONAL NORMS Sets of "national norms" are published by associations and journals, in case you need reinforcement to believe what you were told previously. Specifically, if you use National Averages, you are using MEDIOCRITY for your benchmark – the best of the worst, or the worst of the best . . . neither is a desired position for any practice owner with pride in performance. We do not recommend that you change your practice management because of variance(s) from the norms stated within these survey reports. Rather, change your practice style, or philosophy, to reach the goals that are within (but stretch) your personal comfort zone (eg 10 percent improvement for a specific line item over the same month previous year). Draw lines on the charts for the next twelve months to reflect your goals, then work toward beating those goals on a monthly basis. POTENTIAL WITH NEW AVA VETERINARY CHART OF ACCOUNTS The great news is that the AVA/AVPMA has launched a Veterinary Chart of Accounts, the first step in being able to compare practices in a realistic manner, regardless of veterinary software in use. Let’s share an example:

Practice A reports $3900 in dental income last month, while Practice B reported $4000 in the same period – almost alike, right?

Practice A actually did 12 dental cases, all with extractions last month (requires a doctor), while Practice B did 25 dental cleaning last month, all done by staff (they also has 16 oral surgeries, but they were not reported as dental prophys).

Also, Practice A has 300 transactions, while Practice B 400 transactions.

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Let’s assess the comparisons now:

Practice A did 4 oral surgery dentals per 100 transactions, while practice B also did 4 oral surgery dentals per 100 transactions.

Practice A did not do any early dental cleanings, while Practice B did 6+ per 100 transactions.

Dental veterinary specialists tell us that 85% of all adult animals need some form of dental care.

We asked what the system was, and Practice B had the OPN scoring each mouth (0 to 4+) during the asymmetry exam, while Practice A left it to the doctors to decide when a dental was needed. Practice B also gained $6400 from their oral surgery cases, as well as the $4000 from the dental cleanings by staff. Practice A thinks they are doing well, while Practice B sees a lot of lost potential. Practice A cannot spare it’s doctors to do dental cleanings . . . Practice B is going back and train it’s doctors how to deliver “two yes options” to the OPN Dental Grades other than zero – they believe sending an animal home with red gums (pain) or bad breath (cascading bacteria) is NOT good medicine. Want a follow-up example?

Funny thing, practice A has very little for nutritional sales, while Practice B has over 6% of the gross in nutritional sales monthly, since they track the number of nutritional referrals by doctors to nurse nutritional advisors. Nurses follow cases with at least one weigh-in or follow-up consult per month, some more often (tracked by the computer).

Practice B is reporting over 900 kg lost monthly by the pets enrolled in their Fat Burner program – they have a chart with total KG lost over their nutritional corner in their client reception, and the nurse nutritional advisors change it with each pet weigh-in at recheck.

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Australian Veterinary Practice Management Association

Annual Conference 2010

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Australian Veterinary Practice Management Association A Special Interest Group of the Australian Veterinary Association

ABN 63 008 522 852

Member Benefits Award representation

Copies of all relevant industrial awards

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Interaction with stakeholders from the professional and affiliated associations

Document kit containing draft employment contracts

Member discounts for UNE Partnership/AIRC – Practice Management Courses, Crampton Consulting Group’s SkillsShot on line program and Business Financials Boot Camp

General advice on management issues to employers and managers

Quarterly issues of the newsletters

Access to practice management tools

Free copy of AVPMA proceedings from AVA Annual Conference

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First Aid – member discounts

Access to the members’ only area of the AVPMA Website.

Australian Veterinary Practice Management Association

Unit 40, 6 Herbert Street St Leonards NSW 2065 Phone: 02 9431 5010 Fax: 02 9437 9068

Email: avpma@ava.com.au Web: www.avpma.com.au

VISION

To promote and improve management within the veterinary industry.

MISSION STATEMENT

To enhance quality of life in Australian Veterinary Practices by enabling AVPMA members to develop personal skills in veterinary practice management

and by providing resources and networks that enhance veterinary practice management through knowledge sharing and knowledge creation and through the

fostering of relationships and personal support that comes from belonging to the association.