Nick Chuff, DVM, Dipl. ABVP, likes to evaluate new plans — whether it is adding a new service or buying a piece of equipment — on paper. “A good plan is extremely important because if a plan isn’t feasible on paper, it will never work in reality,” Chuff says.
One of the techniques Chuff, of German Flatts Veterinary Clinic, Ilion, N.Y., uses to evaluate new plans or significant purchases is partial budgeting. Partial budgeting can be used to evaluate how a change or addition to the practice will increase or decrease revenue, and increase or decrease expenses. Chuff says he has used partial budgeting for both his practice and his clients’ businesses.
“For clients, it was used to determine the feasibility of using a new product, building a new facility versus remodeling an existing facility, or making a management change,” he explains. “In our practice, it was used to evaluate offering a new service or the purchase of a new piece of equipment.” In his mixed-animal practice, Chuff says they recently applied the partial budgeting principles to help decide whether to replace their aging x-ray unit with a conventional versus a digital unit.
“In the past it was used to evaluate adding additional services such as nutritional consultation or a quality milk program to our dairy practice,” he adds. “A partial budget was used by making assumptions of the changes in revenues versus expenses and a breakeven analysis was projected. Monitoring was done through spreadsheets to evaluate the results.” Chuff cautions that all decisions are not made on revenue and expense changes alone because services/equipment are often added to generate client dependence or to be competitive with neighboring businesses.
Fixed versus variable costs
Chuff’s practice uses an enterprise type of accounting system so they are able to keep an accounting of the time and money that goes into a new service. “Our practice manager is terrific with spreadsheets and is able to look at individual revenues and expenses. It is extremely valuable to measure if a service is doing what you projected it to do.”
One of the keys in partial budgeting and in identifying revenues and expenses is looking at fixed versus variable costs. Fixed costs don’t vary with the number of units sold or number of procedures performed. You can look at fixed costs even as startup costs. Variable costs do vary based on the number of units or procedures.
In a webinar from the American Association of Bovine Practitioners (AABP), offering embryo transfer (ET) services was used as a specific example on how to use partial budgeting to evaluate the feasibility of this new service. In the ET example, fixed costs would be education/training to learn ET and costs of the practice such as materials needed, computers, software, buildings, taxes, vehicles and perhaps another permanent employee. Variable costs would be supplies, medicines, animals (for training), drugs, syringes or labor that is only employed when doing these procedures. You need to keep track of fixed and variable costs and categorize them appropriately.
In Chuff’s case, when looking at the feasibility of purchasing a digital x-ray unit, he looked at how variable expenses would be decreased (DE) due to decreased/no chemicals, decreased/no film cost, decreased labor costs and time to expose/develop film and retake film, and decreased storage costs. Increased variable expenses (IE) were cloud storage fees for digital x-rays once the practice’s onsite storage was filled.
Increased revenue (IR) when evaluating a digital x-ray unit included the assumption that more x-rays would be taken due to the ease and decreased labor. Chuff says there was no estimated decreased revenue (DR) for the digital x-ray unit. To come up with the net change that this new system would provide, Chuff’s partial budgeting equation was: (IR + DE) – (DR + IE) = net change.
Once costs are identified, a breakeven analysis can be performed which looks at costs versus revenues, so you can determine at what point you’ll break even on a new service and then increase revenues from there.
The ET example in the AABP webinar breaks down the fixed costs for the service (equipment, training and supplies) in dollar amounts, the variable expenses for an average flush, and the cost of lost calls for the practice as a result of spending time on ET services instead. That is balanced with the price the practice will charge for fees to perform the service. The resulting “breakeven algebra” to determine the number of procedures needed to break even is: N = TFC ÷ (P - VC).
N = number of ET procedures performed
TFC = total fixed costs
P = price or revenue per procedure
VC = variable costs
At Chuff’s practice, his breakeven analysis for the digital x-ray unit looked like this:
TFC = cost of the digital x-ray unit including finance charges
P = fees for x-rays
VC from the assumptions above.
Chuff notes that this same analysis needed to be done for a conventional x-ray unit and compared to the digital x-ray unit.
Create a timetable
Well-thought-out new services or equipment purchases don’t usually happen overnight. It’s important to also plan and schedule a timetable along with looking at costs and revenues. In the ET example, a timetable was created from initial training to the point of offering services, covering a several-week span that included attending training seminars, purchasing equipment, developing skills and finally beginning to offer the services to clients.
Chuff’s x-ray-unit purchase decision was quicker because he says the old x-ray machine was rapidly becoming unusable. “We had already been considering the purchase and had visited other hospitals to see their units and contacted the radiology department at Cornell to get their opinion,” Chuff explains. “The x-ray company had a fantastic year-end deal with favorable tax consequences with zero percent financing if paid off over 24 months, as well as removal and disposal of the old x-ray machine.” The whole process took less than six weeks including installation and one-day training.
You can also create a timetable by numbering each task that needs to be accomplished and adding a proposed start and end date for each task (such as getting training and continuing education). Scheduling can help you be realistic about a timetable as well as keep you on track with training, purchases and fine-tuning skills.
Whether it’s a new service or an equipment purchase, the project, no matter how carefully planned, may not have taken into consideration factors that either were unknown at the time of conception or have changed since the project was first begun, Chuff says. Periodic evaluation of the project may indicate that it needs to be postponed or abandoned due to changing circumstances. This may allow available resources to be used for more viable projects.
“The project needs to be doable,” Chuff says. “Most of us want to provide everything for our clients both to ensure client dependence and the viability of their businesses and our practice. However, to be successful the new service needs to be a win/win for our clients and our practices. Careful polling of our clients and potential clients and really listening to what they want and need is critical. Then we need to obtain the best current data by using internal and industry benchmarks in order to get the best possible budget figures. Finally, we need to re-examine and add to these as the project progresses.”
You can use partial budgeting to look at existing services to judge their profitability, but Chuff acknowledges this is where many fall short. “It takes time and discipline to revisit existing services, especially when you already feel that they are profitable. This is where an outside consultant may be valuable. If it is done internally someone has to own the project. Having an unbiased expert review services may be more feasible.”
From paper towels to spreadsheets
Chuff says practitioners don’t need to be afraid to try partial budgeting. “It doesn’t have to be complicated, and I’ve often done an initial assessment on a paper towel over the bulk tank,” he says. A simple partial budget (such as whether or not to use a product such as rBST on a dairy) is one of the simplest to do since there are no fixed expenses involved, he adds. All that needs to be considered are changes in variable revenues and expenses.
“Since perfection is the enemy of completion, it is better to use a rudimentary partial budget to get a rough idea if a product/service is even feasible,” he concludes. “As you get more adept, you can tackle larger projects and include a breakeven analysis using fixed expenses as well. Finally, remember that there are often intangible reasons for adding some new services other than increased revenue/decreased expenses.”
You can find out more about partial budgeting, creating timetables and looking at metrics of success in the 27-minute webinar “Developing a Partial Budget,” developed by the AABP Veterinary Practice Sustainability Committee. AABP members can access this webinar for free by logging in at aabp.org, then click on Resources and Webinar Series. Non-members wishing to view the webinar can find it online at the Kansas State University Beef Cattle Institute website at animalcaretraining.org/vps. For non-members, the cost is $50 per webinar.
Part 3 of this series will focus on marketing your value proposition.