How many times have you asked questions such as, “Does it pay for us to continue to sell drugs to clients?” or “How does our profit generated from routine veterinary services compare with the profit from embryo transfer?” Looking at many sets of bookkeeping systems for the answers will leave you as perplexed as when you started. That is because many accountants who help set up the chart of accounts have as their end goal minimizing taxes and assume that income is bad and expense (depreciation in particular) is good. This mindset is a sharp contrast from a management accounting mindset where expense is bad and income is good. Management accounting utilizes an accrual-adjusted basis of accounting to analyze the production cycle and to “match” income with expenses incurred. One tool for those interested in using management accounting to maximize income is enterprise analysis.
At a recent AABP Veterinary Practice Sustainability Committee meeting, one of the proposals discussed was to start enterprise analysis in our practices. Enterprise analysis is similar to profit-center management but should be distinguished from cost-center management where only costs are considered or income analysis where only income is considered. Profit-center management is equivalent to running an independent business because a profit-center business unit or department is treated as a distinct entity, enabling revenues and expenses to be determined and its profitability to be measured. Usually different profit centers are separated for accounting purposes so management can follow how much profit each center makes and compare their relative efficiency and profit.
Enterprise analysis for the purpose of this article involves defining significant areas of your practice that require significant expense or generate significant income. In a mixed-animal practice it may start out as an effort to define the profitability of the companion-animal work compared to cow-calf or dairy. Cow-calf or dairy practice enterprises may include routine services, drugs and supply dispensing, laboratory fees and embryo transfer and IVF.
There are a number of reasons for implementing enterprise analysis:
• Define areas of profit where added resources may lead to additional profit.
• Find areas of risk where expenses possibly need to be curtailed or the price schedule needs to be tweaked to bring it back in line.
•Define new business opportunities.
• Aid in accurately communicating the expenses that are included in a monthly veterinary clinic invoice.
Your clients will understand better what they are paying for when they receive their invoices. One misconception clients often have is that the majority of their veterinary bill is for services. This may be the case; however, it may also be that the majority of their veterinary bill is related to drug purchases.
There are degrees of complexity to which this process can be taken. Often it may be a matter of separating the expenses of the clinic and assigning them to various profit centers and likewise generating a list of incomes for various profit centers. Systems such as DVM Manager allow you to easily generate reports of income. However, where expenses are tracked in QuickBooks, and no forethought was given about profit centers at the origination of the chart of accounts, it may be a challenge to get the needed data for analysis. Sometimes it may involve a change in the entry of data into the bookkeeping system.
Some practices may do enterprise analysis using in-house bookkeeping. Others may divide the business into three or four enterprises, establish a separate bookkeeping system for each and actually invoice the client for each enterprise. In these cases it may be possible to have the clients issue one check for all enterprises, or it may be necessary to have separate checks issued for each enterprise. Some clients may be annoyed at having to write multiple checks, but many will appreciate the advantages of being able to assign expenses to different accounts rather than one “veterinary medicine and supplies” account. Separate invoices requiring separate checks help them in their allocation of veterinary-related expenses and may aid in their effort to do their own enterprise analysis. Steps to establishing enterprise analysis include:
• Look at the present sources of income for your practice.
• List defined expenses and incomes and establish a chart of accounts that assigns them to each enterprise.
•Some expenses, especially fixed expenses such as insurance, utility, property taxes and general management salaries may need to be divided and allocated to various enterprises. How this is done will vary from system to system.
•Consult an accountant who will help you establish a functional management accounting system, as opposed to someone focused on tax accounting.