Being a veterinary professional is about more than cuddling cute animals (although that part is wonderful). It’s also about running a business. Of critical importance is the need to keep an eye on your financial statements. If you don’t, you’ll miss out on crucial insights that could mean the difference between building a valuable asset and simply making a living.
Think of financial statements as a reflection of your clinic’s health status. They’re packed with numbers that explain how your practice is doing fiscally.
Financial statements can be confusing, even intimidating, until you become comfortable reading them. You’ll want to focus on the profit and loss statement, balance sheet and cash-flow report. While the cash-flow report is optional — my CPA friends might disagree — consider finding another accountant if yours doesn’t deliver a balance sheet or says you don’t need one. If you want a loan to buy equipment or remodel your clinic, a lender will likely request a balance sheet to determine your ability to manage debt.
While lenders use balance sheets to gauge creditworthiness, your objective differs. Use yours to determine how much cash earns little to no interest in bank accounts. Do you need that much ready cash, or could you invest in a certificate of deposit or money market account? Also, do your loan balances decrease every month? If not, did you miss a payment? More likely, someone mistakenly recorded the full payment or the principal and interest on the P&L. While the interest expense belongs on the P&L, the principal should appear on the balance sheet. If you took out a new loan, do you see it there, and is the amount correct? While the balance sheet isn’t exciting, if the numbers are wrong, your P&L is wrong, too.
Before you review a P&L statement, add a column showing each expense as a percentage of gross fees. It will help you identify whether your cost-control efforts are making a difference.
If you don’t have much experience looking at financials, start with a two-month comparison, like June versus July. The most critical question is, “Do the differences make sense?” If you can’t explain conflicting numbers, investigate them immediately. Reconciling last month’s figures is much easier if you do it now instead of in six months.
That said, costs will be higher when your practice is busier. After all, you’ll run more laboratory tests, and your team will consume more medications, vaccines and sutures. Your payroll will be higher, too, reflecting additional staff hours and higher production bonuses for your doctors. As a percentage of gross fees, those amounts should be relatively stable. If they aren’t, you must investigate.
Expenses like facility and equipment rent, insurance, and telephone charges shouldn’t change much throughout the year. Other expenses with normal monthly fluctuations are utilities, professional dues and office supplies. On the other hand, continuing education and travel expenses can vary depending on when conference registration fees are paid and flights and hotels are booked.
Do four things once you understand your clinic’s financial position.
1. Manage Cash Flow
Have you ever had a month where cash poured in but you barely stayed afloat the following month? Perhaps that’s because your bank balance was low and your accountant said you owed income taxes because you made so much profit. That’s why cash-flow management is a big deal.
You already know which months are busy or slower and when the business is ordinarily short on cash. Regularly reviewing your financial statements helps you recognize cash-flow patterns. By understanding the fluctuations, practice owners and managers can work to optimize cash flow, such as by timing large purchases or adjusting payment terms with suppliers.
2. Avoid Debt Drama
You rely on financing whenever you need it. Whether it’s a loan for new imagining equipment, an expansion project or a line of credit to tide you over during slow periods, debt can be a business lifesaver. But debt should be used wisely. If you review your balance sheet every month, you should see the loan totals falling gradually. By keeping an eye on your financial statements, you can see exactly how much you owe and ensure you’re not taking on excessive debt.
3. Weather Financial Storms
Working in a veterinary practice isn’t always rainbows and unicorns. Economic downturns, global pandemics, you name it — plenty of unfortunate events can disrupt your plans. However, if you monitor financial statements, you’ll be better prepared when your most productive doctor goes on maternity leave or a competitor opens across the street. Whether you need to modify your clinic’s hours, beef up your cash savings or create a new revenue stream, having a solid grasp on your finances gives you the flexibility to adapt and thrive, no matter what.
4. Make Smarter Decisions
Regularly reviewing financial statements provides the information you need to evaluate your business decisions. Is the new marketing campaign paying off? Yes? No? Maybe? For the answer, check the numbers. Are you thinking about adding a service or hiring more staff members? Your financial statements can help you weigh the pros and cons.
Arm yourself with the information you need to steer your business in the right direction. Spending money whenever you want is easy but can lead to costly mistakes and missed opportunities.
Being a successful practice owner or manager isn’t just about treating animals. It’s about running a business, too. If you want a healthy practice, you must monitor the financials and know their meaning. Managing cash flow, monitoring debt obligations, navigating economic uncertainty and making smarter financial decisions are indispensable. Reading financial statements isn’t exciting, but they are the key to your clinic’s profitability and valuation.
OTHER TIPS
Timely information is critical to a veterinary practice’s financial health. Review all month-end statements within three weeks. If you keep the books in-house, examine them once someone reconciles the credit card statement. Looking at 3-month-old information doesn’t help you make decisions about tomorrow. If your accountant can’t meet deadlines, find someone who can.
HOT OFF THE PRESSES
Money Matters columnist Leslie A. Mamalis co-authored the newly released book The Profitable Vet. She teamed up with five other veterinary management professionals: Nancy Dewitz, Sherry L. Everhart and Drs. Dick Goebel, Karen E. Felsted and David F. McCormick. The Profitable Vet is available in paperback and e-book.