Profit is the Driver

Examining the impact of profit on a practice, and its people

The veterinary industry has gained the attention of professional investors for one reason, and one reason only. Profits. Investors will invest in assets and businesses that have a history of generating profits (also known as earnings) consistently. And in fact, the value of the business is most often determined by placing a value on the historic and projected profits that have been generated. Thus, if a veterinary practice does not have a demonstrated history of generating profits, it has very little to no value.

In an era when seemingly half of our political class rants against companies making profits, we need to look closely at the impact of companies making profits versus not. The impact can be seen readily in veterinary medicine, as those practices that are managed well and achieve significant earnings consistently also make the best customers for companies who serve them.  And everyone affiliated with a profitable practice is typically better off than the people affiliated with an unprofitable practice.

Profit is the driver for most financial opportunities in veterinary medicine, as it is in other businesses. Let’s look at the impact of profit on a practice and its people, and conversely, let’s look at practices that are not profitable and the impact of that as well.

What is profit?

According to Investopedia, “Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.”

Therefore, by its definition, any increase in expenses, costs, or taxes will reduce profit, unless other adjustments are made to the business. Those profits are then available to reinvest into the business to be used for such things as compensation increases, hiring additional workers, purchasing new equipment, or building or acquiring new facilities. In addition, profits are available to distribute to shareholders or owners or to remain for future cash reserves in the business. This excess cash flow, or profit, is what is attractive to an investor of a business. Their objective is to see the business grow, generate more profits, potentially higher dividend distributions, and as a result, to see an increase in the value of their ownership stake in the business.

Profit is directly tied to the value of a business. In veterinary medicine, generally, practices are valued by placing some multiple of earnings (profits) on the practice. A decade ago, most practices were valued at approximately five times earnings (profits). More recently, those multiples have climbed to high single digits and even double digits for some of larger practices, or groups of practices that are highly profitable. In general, veterinary practice earnings can range from 0% of revenue to 30% of revenue, depending upon the quality of the management of the practice. On average, most would likely fall in the 7% to 15% of revenue range, with those that are managed more closely generating earnings of 20% of revenue or higher.

While some media and politicians like to denigrate business owners for generating profits, we need to remember that profit is crucial to the success of business owners, to their employees, to the customers of the business, and any other business that supports or does business with it. Readily available profits (earnings) translate into opportunities for everyone involved. More and better jobs, reinvestment into the business, and other opportunities all come from the availability of profits. Without profits, nobody who is affiliated with the business will experience significant opportunity.

Helping practices become more profitable

If you are affiliated with the veterinary industry, and if you have the ability to help a veterinary practice to become more profitable, doing so will help you accomplish your objectives as well. How might you help practices be more profitable? Here are some of the biggest opportunities:

• Help them optimize their labor costs. Labor is the biggest cost for a veterinary practice, and it is one of the most challenging areas to manage.
• Improve inventory management and controls. Inventory is the second-largest expense in a veterinary practice, and yet 70% of veterinary practices fail to secure their inventory.
• Help them manage margins and set fees appropriately, and adjust them to maintain margins at all times.

In summary, if you want to improve your opportunities when dealing with veterinary practices, help them become more profitable. Profit is the driver of all other opportunities for practice owners, employees, businesses that support them, and even to customers of practices in achieving optimal care for their animals.