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. 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, 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.
I read your blog with great interest, especially since I am a recent graduate with nearly $300,000 in student loans. Unfortunately, many of my classmates are in the same boat with $275,000 plus in loan obligations. And this is not unusual in today’s world for new graduates.
August 31st, 2009 at 8:47 amAs a non-traditional student with a family, rental prices and the necessity of a car are fixed costs that are difficult to avoid. And, believe me, no one in our household is driving anything with less than 170,000 miles on it, or living on lakefront property. In our situation at least, I don’t see any way to make significant reductions in costs of living.
In my mind, underpaying new graduates is one of the biggest things I see as a detriment to the profession. A full-time salary of $35-45,000/year, which are still being offered in this day and age does not constitute a fair salary for someone with as much training and education as it takes to be a veterinarian, regardless of “how little” one really knows about practice and the on-the-job training required…and even if its in some remote place like Balta, Montana. Maybe a single person with no additional financial obligations can get by with this salary, but that’s it. I watch the practice I work for give handouts to every rescue group and financially strapped individual with a sick dog that comes through the door and its no wonder that veterinarians don’t get paid what they deserve. Maybe fiscal responsibility should be a goal of those who already own a practice so they can reward their staff and employees for their contributions.
From what I see, the new graduate has few options to overcome this debt load before death or retirement, and the options are to eventually consider practice ownership or specialization. Your comment about an APC charge for education is valid, and frankly, practices should consider the cost of their associates education/student loan burden when they hire them, which really should be factored into professional fees in some form and passed back to the veterinarian. Maybe change in the industry shouldn’t just be shoved on new graduates or aspiring practice owners but those who already have practices in charging fair market value for their services, rewarding their employees with fair and adequate compensation. In this era of of bailouts and stimulus packages, maybe someone in the industry should actually ask why the Veterinary Medical Resource Act has yet to be funded, which is intended to help graduates with student loan burden in exchange for servicing rural areas or areas where veterinary service needs are not being met. There should be programs in rural areas that through local funds should help with student loans/business start-up funds if they do not have adequate veterinary services. Kansas has started their own program for K-State grads to help meet the veterinary needs of their rural producers. I see the rising cost of a veterinary education and the lack of opportunities/available seats a problem in the industry. For a person who dreams of becoming a veterinarian, taking on high debt load to accomplish this goal is sometimes the only way to do it, especially since they aren’t handing out “Go to Vet School Free” cards when you send out applications. I understand what you are driving at with your cash flow critique, but it really is a conundrum. How do you get the education without taking on the debt, but how do you pay for the education and work successfully as a veterinarian without making enough money? Fiscal responsibility doesn’t have to start with students and new graduates. These are problems the leaders in the industry should be taking on. Until they do, you will see a lot more cash strapped new graduates trying to find a way to make more money by exploring such hallowed ground as practice ownership. Don’t be alarmed.