Financial statements: What the heck do I do with them? (Proceedings)


Financial statements: What the heck do I do with them? (Proceedings)

May 01, 2011

Understanding profitability in a veterinary hospital can be like understanding a Chinese puzzle. Defining profitability can be confusing based upon the entity type. Corporations pay wages to owners which in part can represent a part of the profits earned by the practice. Partnerships can pay guaranteed payments which can also represent a payment for part of the profits. Sole proprietorships report net income before any payment to the veterinarian for the performance of veterinary services and management functions so for these types of entities, net income is the amount earned before wages or guaranteed payments paid to the owner veterinarian.

For practices to make a good comparison of themselves to other benchmarks, the best way to measure financial profitability is to look at what the practice makes before any payment to the owners for wages or guaranteed payments. This way, no matter what type of entity is being looked at, the starting place for the measurement of profit is the same. So for corporate practices add wages to the net income and for partnerships add guaranteed payments to net income as illustrated below:

To determine true profitability in a practice or as it can be otherwise defined; return on Investment (ROI), a computation must be made to compute the true worth of the veterinarian's time for the performance of veterinary services and management duties. To do so, the practice must make sure it is tracking the owner(s) veterinarian's production. So, for all doctors paid by the hospital, it is important to define production whether the veterinarian is paid on this basis or not. Production is provided to a doctor for all services and products a doctor provides a client in the exam room and also is provided credit for the oversight of dental cases and the actual performance of surgery whether they are the doctor who recommended it or not. In addition, they are also provided credit if they need to read a chart and order a lab test or radiograph but are not provided credit for prescription refills.

In addition, owners should pay themselves a management fee of anywhere between 1% and 4% depending on the level of others performing management duties in the hospital. An owner who provides all management functions would pay themselves 4% while those who have a hospital manager or administrator would pay themselves 1%. It is strongly recommended that owners consider this type of pay arrangement for themselves in order to look at true profitability of the hospital.

If they also own the practice real estate and pay rent to themselves, they need to pay rent of a reasonable fair market value. How do you determine fair market value? The same way real estate appraisers do. They look at a fair return on investment for the ownership of the real estate. In today's market anywhere between 8% and 10% of the fair market value of the real estate is considered a fair return on investment.