Robert T. Coffey, D.V.M. – Robert practiced large animal veterinary medicine for over 40 years. During the last 15 years of active practice he did the practice and financial management for a 6 veterinarian large animal practice in west central Nebraska. During this period the practice experienced double digit growth in 10 of the 12 years through detailed financial management and marketing. Robert is a consultant for the Larimer SBDC and LBDC programs; working with established businesses.
Throughout my 42+ year career I’ve ridden the financial roller coaster to great heights and hung on and buckled up for those instantaneous, shocking dives to the bottom. Success was always sweet but those not so good “learning experiences” left their mark – and usually with some financial pain. What always amazed me is that those shocking dives to the bottom seemed to happen at warp speed, or at least that’s the way it felt at the time. Looking back over the years it is evident that those doomsday financial warning signs were always present; I just didn’t know or didn’t heed the warnings.
As a consultant with the Loveland Business Development Center and Larimer SBDC, my focus is on financial management consulting with both fairly new and established companies. Alas! Déjà vu! It’s been like reliving 42+ years of business in a time warp, but this time around I can see the financial warning signs very clearly – in advance of disaster! And to my amazement, very little has changed over the years. The basics of financial management are still the same, and for the most part, pretty simple. To have this opportunity to share one’s life experiences, and hopefully help area businesses improve their financial management, is truly a treasure.
1.) Recognize the value in retaining a qualified Certified Public Accountant (CPA) and use them as a financial management resource, not just to do your tax returns. I had the same CPA for 38 years. When I bought my first Tandy 1000 desktop computer in 1984 (yes, I am that old!) he urged me to try a new DOS accounting software package that did everything: invoicing, payables, inventory, financial reports, etc. Quite the software in that age! I hated it! But he took the time to help me set it up properly, keep the data current, and over time taught me how to read and value financial reports. And by the way, I paid him for his expertise!
2.) Review your financial reports on a monthly basis. Learn what they can tell you about your business, historically and currently. The two main reports are the Profit & Loss Statement (P/L) and the Balance Sheet. Besides the wide array of reports you can generate from this data there are also several crucial financial ratios that come from these reports. Track this information over time. The established trends can reveal a lot of what might be coming down the road. A company showing a decent Net on the Profit & Loss Statement is not necessarily a profitable company. The Balance Sheet may be a mess.
The “Power of 1”: Something as simple as tracking the Current Ratio (Total Current Assets / Total Current Liabilities from the Balance Sheet) can warn you about where your company is headed. As the ratio approaches “1” it indicates you may be running out of cash and not able to pay your bills. This warning trend can be illustrated months in advance if you just open your eyes and look for it! This allows for the time necessary to determine “why” and correct the cash flow problem.
3.) Know how to price your services and products so that you make a profit. This isn’t rocket science, it’s just a matter of math. Time and again I’ve asked business owners how they established their prices and a common response is “10% less than my competitors”!
If you know your true costs of business operations, the Gross Margin required to cover those costs, and the desired Net for a particular service or product, you can establish your price. This allows you to evaluate where that price is in relationship to others in your industry and locale and whether or not you should even offer the product or service.
The math is simple (from the P/L Statement):
Income (Sales) – Cost of Goods Sold (COGS) = Gross Margin(GM) – SG&A Expenses = Net
If you have historical data for your business, or readily available industry data, you only need to know one variable to establish the price.
Example: Average Business/Industry Data from the P/L
Sales (=x) 100%
COGS 55% of x
SG&A 30% of x
Net 15% of x
If the COGS for the Product/Service is $10.00 then the math is:
x = $10.00 / 0.55 = $18.18 minimum retail sale price
$18.18 * 0.30 = $5.45 allocated to SG&A operational expenses
$18.18 * 0.15 = $2.73 in Net
$10.00 + $5.45 + $2.73 = $18.18 minimum retail sale price
If you can charge more for the product/service, that’s great. If you have to sell the product/service for $15.00 to be competitive, maybe you should reconsider as you are potentially losing ($0.45) on every sale.
4.) Employee retention and understanding the Cost of Employment is critical as payroll expenses can be >1/3 of all SG&A expenses. Hire good employees! Keep good employees! They’ll strengthen your business. Instill in them their responsibility to the business and realize your own responsibility to be a top notch employer. Employee turnover is expensive to a business.
I’ve been a guest lecturer to the 3rd year veterinary students at Colorado State University. One of the topics has been “The Business of Veterinary Medicine”. In that lecture I go through the math of the Cost of Employment to hire a recent graduate into a large animal veterinary practice. They’re flabbergasted when their $75,000 yearly salary actually costs the business >$110,000 per year (wages, payroll taxes, benefits). And totally unbelievable to them that the employee needs to generate just north of $395,000 in yearly sales to cover all expenses and give a reasonable 4-5% Return on Investment to the employer. This process usually takes 12-24 months for the new employee to be contributing significant revenues to the business. Therefore, there can be a substantial financial loss to the business if the employee decides to leave the business after a year. Communicating sound business principals and being a top notch employer and helping employees succeed is important.
5.) Utilizing a yearly Budget provides an essential road map to business success. Years ago I never had much need for road maps or for stopping and asking perfect strangers for directions. I always figured the road went somewhere and I could stumble my way to my destination! Having that attitude in business is a sure path to disaster.
A yearly Budget is nothing more than a business financial road map. Somewhat tedious and painful to initially establish using the Profit & Loss Statement line items and going through them month by month. But once it’s done, it’s done until the next year. Even if some of the figures are educated guesses, or just a plain “throw a dart at the numbers board”, it leads to a bottom line Net for the year. Simply stated, if I meet the Budget numbers (or better) I can assure the projected bottom line Net. If I deviate and detour from those numbers in a negative way, I can immediately start the analysis and conversation as to “why” and institute corrective actions. Pretty reassuring to reduce and minimize the uncertainties in business.
The last and maybe the most important factor for business success is taking care of your customer. That’s a whole other chapter.