Managing teams and labor costs during the pandemic and a few years afterward was a blur. Revenue grew, new patients arrived, wellness visits were scheduled weeks out, and team members wilted under the pressure. The goal was more about surviving than thriving. Practice leaders threw money at the challenges (often rightfully so) to ensure their staffs were appropriately compensated and remained on the job.
In contrast, new-client counts are declining at many practices today. Patient visits are flat or down slightly. At some clinics, non-DVM labor costs are increasing faster than revenue for the first time in several years.
The sky is not falling, but slower growth requires a sharper focus on managing teams and labor costs.
You should always set a labor cost goal, basing it on the mix of services performed and products sold. While national metrics and benchmarks are a great place to start, a veterinary practice with above-average sales of products such as pet food and parasite preventives should have a higher cost of goods sold and lower labor costs. On the other hand, a practice with significant boarding and grooming revenue will have a lower COGS and higher labor costs.
In my most recent Money Matters article [go.navc.com/COGS-TVB], I discussed using COGS Theory to set goals for the cost of goods sold.
The Rule of 45
A highly profitable veterinary practice has a combined COGS and staff labor cost of under 45% of revenue. For this calculation, staff labor cost is gross compensation to non-DVM employees. It does not include employee benefits or the employer portion of payroll taxes.
If the COGS goal for your practice is 24% of revenue and your staff labor cost is higher than 21% of revenue, your practice is not highly profitable. Take a moment to combine the two percentages on your profit and loss statement. If they total less than 45%, excellent. If they are more than 45% and both your COGS and staff labor costs exceed their respective goals, the issue is likely pricing, discounting or missed charges. That discovery signals a revenue problem, and revenue is what you must improve before you drill down on your COGS or staff labor cost.
I’ll now focus on what to do when your staff labor cost is too high and you ruled out revenue as the cause.
Pay Your People
Historically, staff labor costs are too high when you employ too many people or overpay them. However, some practice owners have learned over the past five years that they are underpaying their top employees.
One of the biggest mistakes I see owners make is not identifying and financially rewarding their superstars. When labor costs are too high, employers forgo raises or give minimal hikes because “That is all our practice can afford.” That decision often leads to the best team members seeking employment elsewhere.
Think about which of your team members are fantastic to work with and vital to delivering exceptional patient and client care. Replacing them with people you’ll need to find, hire and train is incredibly expensive. Investing in your superstars is far less costly than losing them.
The founding partner of the consulting firm where I work had a saying that has stuck with me. It’s this: “If a team member does not deserve an annual raise, should they be on your team?” That’s a fair question. Managing people is one of the most challenging and stressful areas of practice ownership. It is why tremendous practice managers are worth their weight in gold.
Do not ignore underperforming employees and hope they will improve or leave. Hope is not a plan. Instead, grade all team members at least annually on these two factors: attitude and aptitude. Set the rubric for technical ability as best fits your practice and get as detailed as you want. If every team member gets an A-plus in attitude and aptitude, congratulations. If not, ask yourself, “Can they get to that level?” Many technical skills (aptitude) can be learned, but softer skills like communication and attitude can be altered in the short term but are difficult to improve permanently.
I hear practice owners lament an employee’s toxic attitude and conclude, “But she’s a really good tech.” Technical skills are easier to measure than attitude, which puts far more weight on aptitude than attitude.
Ignore a toxic employee’s impact on team morale at your peril. If you remove that person, watch your team rally and grow.
Your Weakest Links
Look through your practice’s Google reviews. Has a specific employee received negative feedback multiple times while your practice glows in other reviews? If so, why is that person on your team? When labor costs are too high, you must take decisive action when one or more team members grade poorly.
If you identified a problem employee, your superstars did, too. When they notice you accept mediocrity or worse, they question whether you value their efforts. By not addressing poor performance, practice owners risk losing outstanding team members. Don’t be that practice owner.
Supervisor Overload
A common indicator of practices with high labor costs is administrative creep. When half of your team members have “manager,” “supervisor” or “lead” in a job title, you might have too many people leading and not enough working.
Sharing the management burden among strong team members is not inherently a bad idea. Problems occur when you don’t set expectations for how much time they should spend on management duties versus working on the floor. At that point, you’re left with overlapping efforts, reduced efficiency and the feeling of being understaffed.
Have your patient appointment slots risen from 15 to 20 minutes before COVID to 30 minutes or longer now? If the change works well and your staff labor cost is at or under your goal, great. Hopefully, your team is making better recommendations to pet owners and achieving greater compliance.
If your practice’s staff labor costs have marched steadily higher over the past few years, reduced patient capacity might be the issue. Less revenue combined with static or increased costs is not a successful financial strategy.
Look for ways to make your practice more efficient and improve capacity. For example, you might consider AI solutions for scheduling appointments, recording medical notes during exams and improving client communication.
Don’t accept higher labor costs as an inescapable given. Instead, lead and invest in your team. Your practice will be better for it.
‘HOW ARE WE DOING?’
According to a 2025 Veterinary Hospital Managers Association survey, 65% of respondents said their practices generate monthly financial reports, such as profit and loss statements and balance sheets. Thirteen percent do it weekly and 15% quarterly.