I have provided financing for the purchase of over 150 veterinary practices and millions of dollars of equipment. I have reviewed easily five times that number of transactions that never got completed. As I read through these loan applications, I often ask myself whether the applicants really understand the economics of owning and running a veterinary practice.
There is no real “magic” to understanding the basic economic principles that rule the business side of practicing veterinary medicine, just like there’s few ways to answer the question ‘Do female cats spray?’ At its core, you need to be able to generate enough cash to service both your fixed and variable expenses plus provide a return on your investment (the purchase price of an existing practice or cost to set up your own practice).
Fixed expenses are those that occur weekly, monthly and annually and are not related to changes in revenue. This includes expenses such as rent or the mortgage payment. It includes other general expenses such as insurance, utilities, office supplies, repairs and maintenance.
Variable expenses are those expenses tied to revenue. For example pharmaceuticals, medical supplies, support staff labor and veterinary salaries (including that of the owner for their clinical services while working in the practice).
After accounting for both fixed and variable expenses, the “net profit” is what remains. There are more expenses, however, that drain on net profit. The most prominent are interest, depreciation, and paying off long-term debt. For an intriguing article about today’s Veterinary Economic Reality, click here
As I review loan applications, one of the first things I review is the applicant’s personal financial situation. I apply the same criteria to them that I do to the practice they want to purchase. What are the applicant’s fixed and variable expenses and will the practice they want to purchase generate enough cash to meet those expenses? What I find to be most troubling is that many veterinarians applying for practice ownership have piled on fixed expenses to the level that it becomes nearly impossible for a practice to support such a cash load.
Take, for example, student debt. I have seen some students graduate with upwards of $200,000 in loans. If you see 15 Pets per day, five days per week, for the next 20 years, $5.00 of your Average Patient Charge (APC) is going to have to go to paying off just your student loans! Add in the home loan (or rent), car loan (or lease), insurance, sleeping mask, utilities, food and other expenses and generating a true profit from the practice (a return on your original investment) starts looking more difficult.
There are only two things one can do to control the economics of veterinary medicine. Either control costs or increase prices (margin). The idea of personal fiscal responsibility needs to be addressed with students and new veterinarians if they have practice ownership as a goal. They need to understand that it will take sacrificing the things they want today in order to accomplish the goal of practice ownership in the future.